Holders of $3.6 billion of restructured COFINA bonds to be offered exchange

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Holders of $3.6 billion of Puerto Rico Sales Tax Financing Corp. (COFINA) restructured bonds will be given the opportunity to exchange them early this summer.

In February the restructuring of what had been $17.6 billion in COFINA bonds was done, following a deal reached between bondholder representatives and the Puerto Rico Oversight Board.

The original bonds were exchanged for four types of restructured COFINA bonds: $8.3 billion of Series 2019A-1 bonds, $3.6 billion of Series 2019A-2 bonds, $106 million of Series 2019B-1 bonds, and $45 million of Series 2019B-2 bonds.

While it was clear when the Series 2019A-1 and B-1 bonds were issued that they would be exempt from federal taxes, there was ambiguity about the Series A-2 and B-2 bonds. The board, COFINA, and some holders of the latter bonds entered into a Tax Exemption Implementation Agreement.

Since then the U.S. Internal Revenue Service issued a private letter saying the A-2 and B-2 bonds are tax-exempt. In this circumstance, the agreement specifies that COFINA will offer holders the opportunity to exchange the bonds for tax-exempt bonds with 25 basis points less interest. Unlike the existing bonds, the latter bonds will have an opinion from the Nixon Peabody legal firm that they are tax exempt. The opinion may help the new bonds trade at greater values than the existing bonds.

The IRS has informed COFINA that it will permit COFINA to offer the exchange bonds under the agreement’s terms.

COFINA will launch the exchange offer on or prior to May 31. COFINA will provide more information on that date. Holders of the Series A-2 and B-2 bonds will have 20 business days to opt for the exchange. COFINA expects to complete the exchange by about July 1.

The A-2 and B-2 bonds have maturities from 2040 to 2058. The offered exchange bonds’ coupons will be from 22.1 to 21.5 basis points less. The yields will be 25 basis points less with the difference from the coupon spreads explained by the bonds prices and their biannual payment schedule.

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PROMESA Puerto Rico Sales Tax Financing Corp (COFINA) Commonwealth of Puerto Rico Puerto Rico