Bondholders should start to receive payment within a few weeks, following the approval on Monday of the plan of adjustment for the Puerto Rico Sales Tax Financing Corp. (COFINA) and settlement between the territory and COFINA, analysts said.
Puerto Rico Title III bankruptcy Judge Laura Taylor Swain approved the biggest debt restructuring in U.S. municipal history, affecting $17.6 billion in debt, more than 18 months after COFINA filed for court supervised restructuring. With the prospect of a successful appeal considered unlikely, an estimated $1.6 billion held by the trustee is due to be distributed to holders of various classes of COFINA debt.
Analysts said that while appeals of Swain’s decision may be filed, the filings are unlikely to delay the advance of the deal by more than a few weeks.
“It’s pretty rare for bankruptcy orders to be appealed and rare for them to be successful,” one observer said.
Puerto Rico attorney John Mudd said he thought there would be appeals.
Municipal bankruptcy expert James Spiotto said if there was an appeal, participants probably have a 10 day window in which to do so. The appeal would be first made to Swain and, if rejected, to the Court of Appeals for the First Circuit.
Appellants would probably request a stay in the roll-out of the deal. However, even if a judge was inclined to entertain an appeal and issue a stay, the judge would probably require a bond from the appellants in case their appeal failed. The bond would cover potential damages to the finances of all parties if the appeal fails. A judge may think an appeal might potentially hurt parties not only directly but also but by delaying the process of restructuring the rest of the debt.
Since the COFINA deal affects so much money, the bond associated with any stay would also likely be large, Spiotto said. This could make it difficult to achieve a stay.
If there is no stay and the deal gets carried out, an appellant would have a hard time undoing it, Spiotto said. Courts will see it as a done deal.
“Generally, it is an uphill battle to stay [a bankruptcy deal] especially when significant dollars are affected,” Spiotto said. A stay’s potential impact on restructuring other Puerto Rico debt categories would add to the difficulty of getting a stay from a court.
The approval of the deal is “a major milestone for Puerto Rico," said Matt Rodrigue, the COFINA Seniors chief debt negotiator. "It paves the way to restoring access to the capital markets, which is one of the goals of the Puerto Rico Oversight, Management, and Economic Stability Act. And it provides for recoveries to bondholders, including local bondholders, who will start receiving payments again.” Rodrigue is managing director at Miller Buckfire.
Council on Foreign Relations Senior Fellow Brad Setser was less positive: “The COFINA deal commits around $1 billion a year, once the payments fully step up, to one group of Puerto Rico’s creditors. That inevitably will have consequences for the resources available to other groups of creditors. After a few years payments on new COFINA alone, measured by debt service to own revenue, will be higher than the total debt payments of an average state.”
Setser said it was important that Puerto Rico emerges from the restructuring process with a sustainable amount of debt and that the COFINA deal makes this more difficult to achieve.
“We are still skeptical about the ability of the island to service debt over the long term,” echoed John Ceffalio, AllianceBernstein analyst.
After the consummation of the deal there is likely to be a considerable amount of buying and selling of the new bonds for the first few weeks, said Matt Fabian, partner in Municipal Market Analytics. This may lead to higher yields on the secondary market for other bonds.
“Investors buying the new COFINAs will have to be agile enough to get out of those securities when PR’s finances begin to look shaky again or if another storm hits,” Fabian said in an email. “The next restructuring will likely be harsher as far as recovery value.”
S&P Global Ratings released a statement saying, “An evaluation of a new COFINA bond issue and structure would begin with an assessment of the general creditworthiness of Puerto Rico.” S&P said that fiscal stress and economic decline in Puerto Rico is at the center of Puerto Rico’s trajectory through the bankruptcy. For assessing the new bonds these factors will be more important bonds than their legal structures.
“The lesson of COFINA is that if a central government fails, investors can lose principal in dedicated tax bonds even if they have coverage,” said John Ceffalio, analyst at AllianceBernstein.
Axios Advisors Managing Partner Triet Nguyen said, “The tacit support [by Swain] for the securitized structure represented by COFINA should be a welcome development for a municipal market that has been transitioning away from full faith and credit GO pledges and toward dedicated revenue pledges with perfected liens.”
Evercore Wealth Management Director of Municipal Research Howard Cure asked, “After completing the large COFINA restructuring, will there be a movement to force a cram-down to the GO holders in order to expedite settlement for the remaining liabilities?”
Assuming there is no appeal, the deal would probably be put into action in the next few weeks, Spiotto said.
There is currently $1.6 billion being held by the COFINA trustee, according to a knowledgeable source. If the deal would go forward, most of this would be distributed to holders of COFINA seniors, subordinates, and particularly to the parties that negotiated the deal. A small portion of the money would be held back to be used towards the July 1, 2019 coupon payment.
Swain in her order and memorandums concerning the settlement said the risks of continuing litigation were significant and the settlement was reasonable and so it was better to settle, Spiotto said. The objectors failed to show the plan didn’t meet the requirements for confirmation.
The fact that the deal was negotiated and that the majority of bondholders supported it was key to getting Swain to support it, Spiotto said.
