A revised order for the Puerto Rico Sales Tax Financing Corp. (COFINA) bonds makes clear that those who were involved in their issue may still be legally liable for any illegalities in their issuance.
The order releases from liability members of Puerto Rico’s government since Jan. 1, 2017, the date that Gov. Ricardo Rosselló assumed office, making clear that members of government before that can be held liable for illegalities in the original issuance.
“Financial advisors, investment bankers, underwriters, attorneys, accountants, agents [involved with COFINA issuances] and professionals of commonwealth and COFINA,” would still be legally liable for illegalities they engaged in with regards to COFINA.
As a practical matter taking action against any of these individuals or parties may be difficult because of statutes of limitations.
Attorneys for the Puerto Rico Oversight Board filed the proposed order and findings of fact for the COFINA plan of adjustment and for the COFINA settlement on Monday. COFINA Title III bankruptcy Judge Laura Taylor Swain ordered the attorneys to create them at the COFINA hearing on Thursday.
Swain may sign them or seek additional changes.
The board revised version also eliminates wording that the new bonds “maintain available tax exemption.”
The IRS notified Swain in late December that it wished to file an objection to the proposed COFINA restructuring. It asked for an indefinite postponement of the deadline for filing an objection until the federal government was reopened, saying that it didn’t have the legal staffing to file the objection at that point. In response, Swain extended the deadline by two days to Jan. 4.
The deletion of the tax exemption words adds to concerns about whether the new bonds would retain the tax exemption.
In the proposed new order for the Commonwealth-COFINA, which reduces the amount of the sales and use tax revenue going to COFINA by nearly half from what it had been, a new paragraph 13 allows bondholders to contest how Puerto Rico’s government uses the COFINA sales and use tax revenue. In other words, they are free to argue it should be used to pay, for example, Puerto Rico’s general obligation bonds.
At Thursday’s hearing Swain expressed concern that the proposed COFINA documents, which she was to sign, seemingly would make her rule on Puerto Rico law or even alter the Puerto Rico Constitution. In a new addition, paragraph 119 of the proposed findings of fact states, “Legislation of the Commonwealth is presumed to be valid if enacted by the Legislative Assembly of Puerto Rico and signed into law by the Governor.” It cites a Puerto Rico case saying that “laws are presumed to be constitutional.”
Chapman Strategic Advisors Managing Director James Spiotto said of the COFINA deal, "It looks like this is going forward, no doubt."
In another legal development concerning Puerto Rico debt, on Monday the board extended the deadline for a group of major general obligation holders to object to procedures for handling the board’s attempt to invalidate GO bonds issued in 2012 and 2014.
Originally, the board sought the deadline to be set for Monday, Jan. 21. The board has now accepted a new deadline of Friday, Jan. 25. The deadline is for the Ad Hoc Group of General Obligation Bondholders, Ad Hoc Group of Constitutional Bondholders, Assured Guaranty Corp., Assured Guaranty Municipal Corp., and funds and accounts managed by OppenheimerFunds.
