Revised COFINA disclosure is approved

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Bankruptcy Judge Laura Taylor Swain approved a Puerto Rico Sales Tax Financing Corp. (COFINA) restructuring disclosure statement, after it was revised to address some bondholders' complaints.

The action on Tuesday leaves two remaining significant hurdles before the COFINA deal is legally binding: a vote by bondholders and bond insurers and Swain’s approval of the plan of adjustment. Swain is overseeing the restructuring under the Title III bankruptcy provision of the Puerto Rico Oversight, Management and Economic Stability Act.

At Tuesday’s hearing Puerto Rico Oversight Board attorney Brian Rosen said that holders or insurers of more than $10 billion of the $17.7 billion outstanding have already indicated their approval.

While the COFINA restructuring deal says there are 10 credit classes related to the deal, some of these won’t receive a vote and others will be voted on by the relevant bond insurers. If only one of the classes votes in favor, the Oversight Board will have the option of asking Swain to approve the plan of adjustment.

Five parties filed objections to the disclosure statement prior to the hearing. At least three of the parties withdrew their objections to it after the Oversight Board's lawyers revised it to address their concerns. The two remaining parties were individual holders of subordinate COFINA bonds who represented themselves without the benefit of lawyers.

Puerto Rico credit unions had asked for an adversary proceeding they had filed to be mentioned in the disclosure. The board added it to the revised disclosure.

Lehman Brothers Holdings had said that the disclosure hadn’t addressed an obligation that it said COFINA had to it. The new disclosure adds language about Lehman’s claim. Sloan said he thought the board had “taken care of” Lehman’s objection.

Bank of New York Mellon, the COFINA bond trustee, said there should be more information about why the institutional holders who had negotiated the COFINA deal should be given an upfront payment of $332 million. The revised disclosure adds information on this.

At Tuesday’s hearing Sloan said the negotiating institutional holders had incurred at least $135 million in expenses since the COFINA bankruptcy petition had been filed. He also said they will have additional expenses in the coming months, until the COFINA plan of adjustment is approved. Swain is scheduled to consider this plan of adjustment at a hearing on Jan. 16.

As for the discrepancy between the $332 million payment and $135 million, the new disclosure points out that $200 million of this money, coming from money held in escrow, would gone to the institutional holders at the consummation of the deal in any case. That is because the deal specifies the escrow money is paid out upfront and the institutional holders and bond insurers who have been involved with negotiations hold or insure more than 56% of the total par outstanding.

Ad Hoc Group of Senior COFINA Bondholders attorney Susheel Kirpalani said that he is hearing from COFINA bondholders that the deal doesn’t provide them a reasonable payment. He also said that many associated with Puerto Rico’s government are saying the deal is too generous. He said this disagreement is the hallmark of a good deal.

Swain said she would consider substantive objections to the COFINA plan of adjustment at the January hearing.

Also on Tuesday, Oversight Board member Arthur Gonzalez published an opinion piece on the Morning Consult web site explaining the board’s support for the deal. “In this case, a litigated resolution represented a dangerous gamble,” he wrote. “The court would either find that COFINA and its bondholders own the island’s sales tax revenues, which would sharply reduce the funds available for other constituencies, or that the commonwealth had the right to claw them back.”

Gonzalez said the board decided to take a safer road of appointing fiduciaries to represent COFINA’s and the commonwealth’s interests. When these sides arrived at proposed settlement, the board chose to support it as the safest path.

At the hearing one of the two individual objecting bondholders spoke. Lawrence Dvores said that the mediation process that led to the COFINA deal was illegitimate because subordinate COFINA holders were not represented. Those negotiating the deal were “self-dealing” and dealt the subordinate holders a poor deal, he said.

The COFINA lawyer, who was one of the two key attorneys who negotiated the deal, was supposed represent the interests of the subordinate holders as well as the senior holders. While the institutional holders and bond insurers involved in negotiating the deal mainly had senior bonds, some of them also had subordinate bonds.

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