A bondholder group on Friday released proposed restructuring terms for the Puerto Rico Sales Tax Finance Corp. (COFINA) bonds, taking a step towards a confirmable plan of adjustment.

On June 7 a lawyer for COFINA said she had accepted a deal to get 46.35% less revenue going forward. On Friday the COFINA Senior Bondholders announced proposed ways of allotting this revenue between themselves and the subordinate holders.

Sean Burgess, Portfolio Manager at Cumberland Advisors

The subordinate group is proposing that new COFINA bonds be issued with a 5% tax-exempt interest rate, according to a statement from the COFINA Seniors. Cash held by the bond trustee since May 2017 would be paid out with about 67% going to the subordinate holders and the balance to the senior holders. Future cash flows would be split with 55% going to holders of the senior bonds and 45% to the subordinate holders.

The new bonds wouldn’t be callable. Senior bondholders would receive new bonds equal to 90% of their pre-bankruptcy claim and subordinate holders would receive bonds equal to 62% of their pre-petition claim.

Finally, COFINA holders would receive a deficiency note from Puerto Rico’s government to recoup losses. The note would be contingent on Puerto Rico’s future financial performance.

The senior bondholders said they are proposing that the new COFINA bonds have 5.375% interest rate. Senior bondholders would get bonds equal in value to 100% of the pre-bankruptcy claim. The subordinate bondholders would get bonds equal to 45.7% of the value of their pre-bankruptcy claim.

The new COFINA bonds would be subjected to a market test based on the yield to maturity being between 5% to 5.5%. Full call protection would be sought.

The cash held with the bond trustee would be distributed “ratably” among senior and subordinate bondholders. The new bonds would not retain recourse to Puerto Rico’s government, and there would be no deficiency note to cover losses.

“Since certain subordinate bondholders (e.g. Oppenheimer[Funds]) cannot remain restricted from trading indefinitely, the terms that have been discussed thus far for senior/sub recoveries needed to be cleansed in the public domain,” said a COFINA Seniors source in an email. The mutual funds are withdrawing from representing the COFINA subordinates for the time being.

“Both proposed structures represent a reasonable outcome for all parties, as it removes the relatively low risk that COFINA’s structure would be invalidated via the court, while also producing strong recoveries,” said Tim Travis, chief executive officer of T&T Capital Management in an email. T&T owns COFINA subordinate bonds and Puerto Rico general obligation bonds. It also has stakes in some bond insurers with Puerto Rico exposure.

“Subordinate COFINA creditors might have a bit of a gripe, but those bonds were trading below 10 cents in December, so this outcome would be far better than most expected,” Travis continued. “I believe the market is underestimating the benefit of these proposed deals to the GO bonds in that it opens up the potential for revenues that they did not have access to prior to any restructuring.”

Shaun Burgess, Cumberland Advisors Portfolio Manager, said that an allocation of revenues between seniors and subordinates found in a proposed June 18 deal “would not have gone anywhere on its own. It clearly favored senior bondholders so I view it as more the ‘opening salvo’ in inter-creditor negotiations.

“What is particularly interesting though are the counteroffers from subordinate and senior bondholders. There is not a huge divide between the two so I am optimistic an agreement can be reached that is somewhere in the middle. Based on the details we have so far I do think the subordinate bondholder’s counteroffer seems the most equitable on the surface especially as it relates to the haircuts general obligation bondholders may have to take.”

Cumberland owns insured Puerto Rican debt.

Golden Tree Asset Management, Oppenheimer Funds, Goldman Sachs Asset Management, UBS Family of Funds, and First Puerto Rico Family of Funds, have represented the COFINA subordinates.

The COFINA Senior Bondholders Coalition represented the COFINA Seniors interest. While GoldenTree is part of this coalition it only worked on the subordinate side in this negotiation.

All this discussion may prove irrelevant. On June 25 attorney John Mudd, in his Control Board Watch blog, wrote about a debate going on since June 14 among the parties in the Title III Puerto Rico bankruptcies.

“In essence, the [Unsecured Creditors Committee], COFINA Agent and COFINA bondholders want to make a deal only between them,” Mudd said. “A deal that cannot be challenged by the Commonwealth [of Puerto Rico] or the GO bondholders.

“That however, will not happen since these two parties have been very clear they want to participate and if their objections are not addressed, they will object to the settlement," Mudd continued. "[Title III Judge Laura] Swain will likely look askance at a settlement pertaining to the Sales and Use Tax that does not include the commonwealth or the GO’s. This will only delay the filing of the plan of adjustment for COFINA and the commonwealth.”

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