The Oversight Board certified a Title III filing for the Puerto Rico Sales Tax Financing Corp., affirming that its $17.9 billion of revenue bonds will be subject to court supervised restructuring along with other territorial debt.

The Puerto Rico government made the request for the filing, board chairman José Carrión III said in a press statement.

“The expiration [on the night of May 1] of the stay against litigation provided by PROMESA makes COFINA vulnerable to lawsuits by its creditors,” the board said. The board put COFINA into Title III on Friday, two days after it placed Puerto Rico’s government into the bankruptcy-like process. Title III is part of the Puerto Rico Oversight, Management and Economic Stability Act that allows a restructuring of Puerto Rico’s debt.

Unlike many of Puerto Rico’s bonds since the summer of 2016, the COFINA bonds have continued to be paid on time. While some of Puerto Rico’s bonds have been paid from debt service reserves, the COFINA bonds have continued to be paid from Sales and Use Tax revenues flowing into the COFINA entity.

By comparison, Puerto Rico has missed payments on its general obligation bonds with its first default coming on July 1, 2016, when the commonwealth paid none of the $779 million due.

On May 1 COFINA released an annual report to the Electronic Municipal Marketplace website.

In the report COFINA said that the March 13 board certified fiscal plan, “assumes that the government will retain and use the revenues generated by the [Sales and Use Tax], including the pledged [Sales and Use Tax], to cover its operating expenses rather than service the corporation’s issued and outstanding debt.”

In response to the March 13 fiscal plan, “the corporation intends to continue to defend the lien established by the corporation resolution as required thereby.”

There are conflicting reports on whether Puerto Rico Oversight Board member Ana Matosantos believes the fiscal plan assumes impairment of COFINA bonds.
Ana Matosantos, Puerto Rico Oversight Board

On March 15 the Caribbean News website quoted board member Ana Matosantos as saying, “The certified fiscal plan proposes and assumes that [COFINA] funds, through the restructurings, become available to pay recurring expenses.”

At the time Matosantos told The Bond Buyer in an email that: “The commonwealth's certified fiscal plan reflects the necessary expenses. The law will determine whether COFINA or others are entitled to the tax revenues.”

That “law” will be Judge Laura Taylor Swain, who was appointed Friday to oversee the Title III case in the federal District Court for Puerto Rico. On Thursday Gov. Ricardo Rosselló said that PROMESA indicates that the judge cannot alter the total amount of debt the government will pay through fiscal year 2026 from that found in the certified fiscal plan. Two bond insurers have filed a complaint with the District Court for Puerto Rico asking it to declare the fiscal plan to be illegal, opening the way to greater payment of the debts.

On April 28 the Puerto Rico Fiscal Agency and Financial Advisory Authority released what had been a Puerto Rico proposal for a debt restructuring. This included similar reductions in payment for the holders of both COFINA senior and subordinate bonds.

In the offer, holders of either COFINA bond would have been offered to accept senior bonds equal to 39.3% of the par value of their holdings. They would also be entitled to “cash flow bonds” equal to 18.6% of the par value of the holding. The latter would only pay if the economy and government revenues performed better than the fiscal plan projects.

The new bonds would have 30 years maturities and would have coupons increasing to a 4.5% interest rate over the course of the first five years.

If the COFINA holders had rejected the offer, Puerto Rico would have given the COFINA senior holders $450 million in short-term notes, equivalent to 5.9% of the outstanding par value of the bonds, and have given the subordinate holders nothing.

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