Retail COFINA holders are being shortchanged, investment manager says

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Retail holders of Puerto Rico Sales Tax Financing Corp. (COFINA) bonds are getting about 3% less than the initially expected recoveries in the COFINA restructuring, BlueList Partners President Glenn Ryhanych said.

In February, COFINA swapped new bonds for old ones in the biggest municipal debt restructuring in U.S. history, in which about $17.6 billion of COFINA bond par value became about $12 billion in new COFINA paper.


Owners of senior COFINA bonds were supposed to get the restructured claim, accrued interest prior to the May 2017 petition for bankruptcy, and the accrued interest from the settlement date in August 2018 to the effective date of Feb. 1, 2019. This would amount to getting $96,250 on a $100,000 claim, Ryhanych said. BlueList manages municipal bond funds for investors, with portfolios that include substantial COFINA holdings.

Retail holders are getting about 3% less than this as well as 3% less than the expected recoveries on subordinate COFINA bonds, he said.

The problem stems from the decision to round all individual claims down to the nearest $1,000 value. If a person owned several COFINA CUSIPs, then each CUSIP also was rounded down. For example, if someone owned $50,000 of senior bonds and $50,000 of subordinate bonds, the initial math would multiply the senior figure by .93 and the subordinate figure by .564.

However, the holder wouldn’t have claims of $45,500 and $28,200 respectively, or a total of $73,700. Instead, they would have claims of $45,000 and $28,000, or a total of $73,000. Then the accrued interest was added to the rounded-down number.

The rounded-down cash is being distributed proportionate to how large a holding investors have. But since the initial round down is disproportionately hitting small holders and holders of many CUSIPs, the distribution is an unfair fix of the problem, Ryhanych said.

The large hedge funds that negotiated the restructuring deal deliberately put it together to benefit large holders like themselves over small holders, Ryhanych said. “You really have to work hard to put together such a disaster,” he said.

Ryhanych is in contact with many COFINA holders who are upset. He is urging holders to contact the Securities and Exchange Commission, Financial Industry Regulatory Authority, and Municipal Securities Rulemaking Board to complain about this aspect of the deal.

The SEC declined to comment as to whether it was looking into this issue. The Ad Hoc Group of Senior Bondholders, which helped to negotiate the deal, also declined to comment.

At least two sets of parties have filed notice of their intent to appeal the COFINA restructuring to the U.S. Court of Appeals for the First Circuit.

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PROMESA Revenue bonds Sales tax Puerto Rico Sales Tax Financing Corp (COFINA) Puerto Rico
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