The trustee for Puerto Rico Sales Tax Financing Corp., or COFINA, declared a default, prompting a group holding senior COFINA bonds to call for a halt on payments on the issuer's subordinate bonds.
The bond trustee, Bank of New York Mellon, sent a notice to COFINA on May 4 that the bonds were in technical default in at least three ways.
On Wednesday, the COFINA Seniors Coalition responded by saying that it saluted the bank’s actions, but believed that events of default have “long been in existence. ... These events trigger the complete stoppage of payments to COFINA subordinate bonds and strict prioritization of payments to senior bonds. This ensures that no – or minimal – losses are borne by the highest-rated bonds issued by Puerto Rico since its recession began more than a decade ago.”
About $7.6 billion of COFINA Seniors and $9.7 billion of COFINA Subordinates are outstanding.
The bank declined to comment. The Fiscal Agency and Financial Advisory Authority, which handles press questions about COFINA, didn’t respond to a request for comment.
Both types of COFINA bonds have been paid on time since the start of the debt crisis. Moody’s Investors Service has said there is adequate money on hand with COFINA to pay debt service through the end of the fiscal year, June 30.
According to the bank’s May 4 letter, the bank is most concerned with Puerto Rico’s Fiscal Plan Compliance Law, Act 24. The law’s chapter six would divert sales tax revenues to the commonwealth’s general fund in violation of a 2007 COFINA resolution and thus the bank says the law is a default.
The bond resolution also requires COFINA to defend the pledge of sales tax to the trustee, which hasn’t happened -- another default according to the bank.
The bank noted that on May 1 bond insurer Ambac Assurance Corp. notified COFINA of these defaults. If the COFINA defaults are not remedied before May 31, they will become “Events of Default.”
On May 1 the bank demanded that COFINA explain what actions it will take to defend pledge of sales tax revenues to it. Its failure to respond is an additional default, the bank said.
Since then things have become bleaker for holders of COFINA bonds. On May 4 the Puerto Rico Oversight Board certified a Title III filing for COFINA, affirming that its bonds would be subject to a court-supervised restructuring.
A group of COFINA Senior holders who filed suit against the bank in its trustee role April 12, Whitebox Advisors LLL, sent a letter on April 30 outlining some of its positions.
Writing as Whitebox’s counsel, Daniel Fliman of Kasowitz Benson Torres LLP said the threat to the bonds was “immediate because starting on July 1, 2017, a mere 62 days from now, as now allowed by the Compliance Law, insufficient pledged sales and use tax revenues will flow to COFINA and to the trustee, thus triggering payment defaults – to compound to the long list of existing Events of Default. If the trustee fails to act, these consequences all rest on its shoulders.”