September 9, 2018 Press Release:
Not Everyone is Cheering the Confina Bond Settlement: One Junior Bondholder Speaks Out
Investment advisor Mark D. Elliott says the agreement reached amid conflicts of interest, complicity, and allegations of fraud seeks to use funds pledged to junior bondholders to pay off settlement holdouts.
On August 8, the Financial Oversight Management Board for Puerto Rico announced that a settlement had been reached with Cofina bondholders that would allow the debt to be restructured and reduce Puerto Rico’s debt burden by 32%. Subsequently, it was announced that a final restructuring agreement would be filed with the federal court overseeing Puerto Rico’s municipal bankruptcy by October 15, 2018. The August 8 announcement and its follow-up were met with approval by Wall Street investors. Shares of several Cofina and Puerto Rico general obligation (GO) bond insurers rose on the news.
But should Wall Street be cheering what amounts to an agreement to allow a government to take back pledged securities? Cofina junior-subordinated bondholder Mark D. Elliott says no. In a letter to Judge Swain, who is overseeing the Cofina-related litigation, he writes that “the pledging of the SUT [Sales Use Tax] as security was validly done and those assets cannot be reached by GO bondholders.” Elliott adds that any SUT revenue should go to either junior or senior bondholders, not unsecured creditors.
As to the proposed settlement, Elliott questions why senior bondholders’ should recover over 90% while junior bondholders would receive just 56.4% when there are adequate SUT funds available for every tranche to receive 100%. Perhaps, he notes, this grossly disproportionate treatment results from the fact that the supposed junior bondholder representatives who negotiated the deal stand to gain more by selling off their junior brethren than by standing with them. Most of the creditors present at the negotiation table hold more than one type of Puerto Rico debt. For these creditors, taking funds out of the pockets of junior Cofina bondholders merely means that the money will shift to their senior bond or GO pockets. The proposed settlement, Elliott adds, is not only inequitable but disproportionately impacts individual investors who hold junior Cofina bonds–many of whom are unsophisticated investors who selected the junior Cofina bonds as a secured, fixed-income investment option.
The bond industry prides itself on maintaining order not found in the equities markets. A settlement that allows debtors to claw back securities when it suits them sets an unattractive and unsustainable precedent. Will such perfidy be allowed to stand?
About Elliott Asset Management:
Elliott Asset Management is a Boston-based financial advisory firm providing financial guidance and investment management services to qualified individuals. Founder Mark Elliott has been a consistent advocate for the rights of all classes of COFINA bondholders throughout the restructuring process. In an October 2017, letter regarding the case which was entered into the court record, Elliott urged Judge Swain to swiftly resolve the questions raised by the parties and reach a resolution that upheld individual property rights and the rule of law. Elliott made clear that a swift outcome was best not only for creditors but for Puerto Rico’s financial future. “Without a sound long-term economic plan that makes sense and without manageable debt where bondholders can have faith in getting repaid then no free market investor will lend at “reasonable” (read “low”) rates to the Commonwealth.”
Background and Resources:
September 9, 2018 Press Release: