May 2018 Press Release:
PUERTO RICO’S TWO MAIN CREDITORS PROPOSED SETTLEMENT LEAVES MANY UNSETTLED
Puerto Rico bankruptcy prompts infighting between creditors, oversight board, and government agents and instrumentalities; A proposed settlement negotiated on Sunday creates new alliances and concessions as senior COFINA bondholders and GO creditors agree to split a reduced pot, but at junior COFINA creditors’ expense.
In the latest twist in the ongoing saga of Puerto Rico’s supervised and litigious financial restructuring, two of the Commonwealth’s largest creditors have filed a proposed settlement plan with the court. The non-binding settlement framework was made with the Federal District Court for the Southern District of New York on Monday and, if implemented, would reduce Puerto Rico’s total debt obligation by $10 billion.
However, not all of the Commonwealth’s creditors and their representatives are pleased with the proposal. Creditors who did not participate in the negotiations claim that it heavily favors the general obligation (GO) creditors and senior COFINA bondholders who crafted the plan. (COFINA is the acronym for the Puerto Rico Sales Tax Financing Corporation, the entity assigned ownership of Puerto Rico’s sales and use tax (SUT) revenue.)
As written, the plan would distribute a portion of existing and future SUT revenue pledged for the payment of COFINA debt to holders of Puerto Rico’s general obligation and other debts instead. The framework of the settlement would allow senior COFINA bondholders to recoup most of their money, while cutting junior holder’s take by more than half. Mark D. Elliott, of Elliott Asset Management, an investment advisor who represents both senior and subordinate COFINA bondholders says the deal represents a clear conflict of interest on the part of the participants and provides COFINA creditors with an outcome that is only slightly better than a worst-case scenario.
“COFINA was specifically created as a separate entity so that Puerto Rico could obtain access to capital at a time when it was otherwise unable to do so. The promise and pledge of sales and use tax revenue was the incentive used to induce CONFINA junior and senior bondholders to purchase those bonds. To now take that pledged revenue and distribute it to non-COFINA bondholders negates the security we were promised. The senior COFINA bondholders are using revenue that should go to junior COFINA bondholders to pay off the GO creditors in order to get them to back this plan,” says Elliott.
The Federal Oversight and Management Board (FOMB) tasked with supervising Puerto Rico’s economic recovery has objected to the proposal as well, but for entirely different reasons. Despite the fact that a resolution of the issues affecting Puerto Rico’s two largest creditors, COFINA and GO, would help substantially to move the restructuring process forward and put Puerto Rico back on sound financial footing, FOMB rejected the proposed settlement calling it “completely unaffordable.”
Meanwhile, the Puerto Rico Fiscal Agency and Financial Advisory Authority (FAFAA) weighed in with its own objections releasing a statement stating that the proposal’s “debt service requirements are not sustainable in light of Puerto Rico’s projected fiscal and economic situation.” Neither FOMB or FAFAA were participants in the settlement negotiations.
In a further complication, underlying legal issues may render these two debtor representatives’ objections moot. Both AAFAF and FOMB failed to acknowledge in their responses that the question of whether Puerto Rico has any ownership of or right to use monies collected by COFINA for debt repayment of any kind has yet to be resolved. This very issue is currently under advisement Federal District Court Judge Laura Taylor Swain as is the legality of COFINA’s very existence.
On April 10, 2018 a hearing was held in which multiple parties argued for and against the legitimacy of COFINA’s claim of sole ownership of the SUT funds and the legality under Puerto Rico’s constitution of the COFINA funding structure. Pursuant to an order issued by Judge Swain in May of 2017, more than $8 million in collected sales tax revenue is being held trust pending the outcome of these ownership disputes. In a May 9, 2018 hearing, several creditor and debtor representatives appeared before Judge Swain again to argue the merits of asking Puerto Rico’s Supreme Court to resolve the questions of COFINA’s legality and the ownership of the SUT funds.
A ruling upholding COFINA legality and its sole ownership of the sales and tax revenue would prevent Puerto Rico from taking this property to pay its general obligation or other debts.
This, says Elliott, would be a true victory for investors and property owners everywhere. He states, “Without laws that protect the government from taking private property whenever they claim a need, no one’s rights are secure. The U.S. Constitution provides us with that protection. That Puerto Rico is in dire financial trouble is terrible. But, that doesn’t mean that the governor or a fiscal board can take money that belongs to private citizens to fix their mess.”
Elliott believes that the outcome of the legal issues raised in this record-breaking municipal bankruptcy have the potential to affect not only COFINA investors but the reliable functioning of the capital markets. He invites COFINA investors and other interested parties to contact him at EAM’s Boston headquarters at (857)990-6077.
About Elliott Asset Management:
Elliott Asset Management is a Boston-based financial advisory firm providing financial guidance and investment management services to qualified individual and institutional investors. 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.”
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 PROMEA, 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 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 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 https://tinyurl.com/Notice-of-Correspondence
Commonwealth-COFINA Joint Proposed Settlement: Executive Summary https://media.noticel.com/o2com-noti-media-us-east-1/document_dev/2018/05/14/Exhibit%20B%20%E2%80%93%20Materials%20Shared%20With%20OB%20AAFAF_1526302684225_11476197_ver1.0.pdf
Response to Joint Settlement Proposal from Commonwealth-COFINA Creditors http://www.foronoticioso.com/fn/response-to-joint-settlement-proposal-from-commonwealth-cofina-creditors/