Background Information Regarding The COFINA Bond Dispute
This information was originally included as background material accompanying EAM’s May 2018 press release regarding the initial COFINA bond settlement negotiations. For the text of that press release and other resources, see the links at the bottom of this page.
Why was there ever any doubt that the sales tax revenue stream would be used to pay COFINA bonds?
Because among Puerto Rico’s many creditors is another group of bondholders who claimed a right to the money under Puerto Rico’s constitution. This group, referred to as general obligation or GO bondholders, claimed that a constitutional provision giving them first dibs on all available resources meant that they were entitled to the sales tax revenue despite the fact that the Puerto Rico legislature specifically assigned this revenue to COFINA and its debt service.
The GO bondholders weren’t the only one casting longing eyes on one Puerto Rico’s most reliable sources of revenue though. The Federal Oversight Board appointed under PROMESA, the act enabling Puerto Rico to seek the bankruptcy-like Title III restructuring, sought to undo the Commonwealth’s years-long agreement with COFINA bondholders and funnel the sales tax revenue into the general fund to be used as the board saw fit.
The dispute over the legitimacy of COFINA’s bond offerings and the ownership of sales tax revenue has even caused a split between seemingly aligned parties as COFINA’s agent for the Title III proceeding, Bettina Whyte filed a motion for certification with the court asking that five questions regarding the constitutionality of the COFINA debt be handled by Puerto Rico’s Supreme Court. This motion was filed against the orders of the Financial Oversight and Management Board, who appointed Whyte.
While there is no doubt that Puerto Rico and its people have many immediate needs and every available resource should be employed to meet those needs, to remain a viable government, the Financial Management and Review Board is also tasked with ensuring that Puerto Rico has access to the capital necessary to fund future economic growth and stability.
Affirming the validity of the COFINA instrumentality and its debt structuring demonstrates Puerto Rico’s commitment to honoring its obligations. And, holders of COFINA bonds who invested in the Commonwealth’s future will see their faith repaid.
The Title III Restructuring
A May 2017 report by the American Bankruptcy Institute concludes with the observation, “It is difficult to exaggerate the novelty, complexity, and size of the Puerto Rico restructuring under PROMESA. It is without historical precedent….”
Puerto Rico was facing a financial crisis before September 2017’s Hurricane Maria devastated the territory. In June of 2016, the U.S. Congress took action to rein in Puerto Rico’s economy, passing the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). This law provided for the appointment of a Financial Oversight and Management Board (FOMB) tasked with the supervision of Puerto Rico’s fiscal planning.
The board was also enabled under Title III of PROMESA to initiate a municipal bankruptcy proceeding on behalf of the territory and its instrumentalities. In May of 2017, FOMB separately filed voluntary petitions under Title III for both the Commonwealth of Puerto Rico and COFINA.
Throughout the remainder of 2017, multiple stakeholders negotiated and jockeyed for position. Various legal pleadings were filed challenging nearly every step in the process. General obligation bondholders and COFINA bondholders sit in the number one and two positions for the total debt owed, with claims worth $18 billion and $17 billion respectively. This total represents nearly half of Puerto Rico’s total debt obligation. Further adding to the animosity between these two classes of creditors, is the fact that Judge Swain ordered all COFINA bond principal and interest payments to be held in trust until the matter is resolved.
Documents and Resources
Notice of Correspondence Received By The Court- Letter from Mark D. Elliott
Commonwealth-COFINA Joint Proposed Settlement: Executive Summary
Oversight Board States Terms of GO-COFINA Creditor Proposal Are Unaffordable, Do Not Align With Certified Fiscal Plan
Response to Joint Settlement Proposal from Commonwealth-COFINA Creditors
EAM Press Release in Response to COFINA Settlement Meeting–May 2018
EAM Press Release Commenting on Proposed COFINA Bond Settlement–September 2018