Puerto Rico Cofina bondholders exchange restructuring counter-offers

By Caroline Salls

Pittsburgh, June 29 – The Puerto Rico Sales Tax Financing Corp.’s (Cofina) released a statement Friday regarding its ongoing efforts to forge consensus around an agreement that would implement the agreement in principle reached by the agents for the Commonwealth of Puerto Rico and Cofina into a confirmable plan of adjustment.

“Our group, which in the aggregate holds more than $4 billion in Cofina senior and subordinate bonds, is committed to achieving a confirmable plan of adjustment consistent with the court-appointed agents’ agreement that will restart payments for Cofina bondholders and restore Puerto Rico’s access to the capital markets in a timely manner,” the coalition said in a news release.

“We seek a compromise that respects the relative priorities under the bond resolution while permitting Cofina subordinate bondholders to immediately resume receiving coupon payments through new bonds that have the same relative rights and priorities as the new bonds received by Cofina senior bondholders.

“If achievable, this outcome will be extremely beneficial for on-island and mainland holders that relied on Cofina for safety and income. The sooner a deal can be reached among Cofina’s stakeholders to present to the Financial Oversight and Management Board, the sooner the commonwealth can also benefit from this cost-saving debt restructuring and accelerate its economic recovery.”

Subordinate bondholders

The coalition said GoldenTree Asset Management, OppenheimerFunds, Goldman Sachs Asset Management, UBS Family of Funds and First Puerto Rico Family of Funds made a restructuring counter-proposal to the terms of an agreement in principle between the Cofina bond agent and the commonwealth’s agent.

The subordinate bondholders’ proposal calls for a 5% tax-exempt interest rate for new Cofina bonds.

The cash held at the Bank of New York Mellon would be paid out under the proposal as post-petition tax-exempt interest, with roughly two-thirds going to subordinate bondholders and one-third to senior bondholders.

Senior and subordinate bondholders would receive the same new bonds in different ratios.

Future cash flows would be split 55% for senior bondholders and 45% to subordinate bondholders.

Senior bondholders would receive new bonds equal to 90% of the pre-petition claim, and subordinate bondholders would receive new bonds equal to 62% of the pre-petition claim.

Cofina bondholders would receive a deficiency note from the Commonwealth of Puerto Rico to recoup losses, contingent on the future financial performance of the commonwealth.

Senior bondholders’ offer

The coalition, excluding GoldenTree Asset Management, which participated as a subordinate bondholder, with the support of National Public Finance Corp. and Ambac Assurance Corp. counter-proposed a 5 3/8% tax-exempt interest rate for new Cofina bonds.

Under the senior bondholders’ proposal, the cash at the Bank of New York Mellon would be distributed among senior and subordinate bondholders.

Senior bondholders would receive new bonds equal to 100% of the pre-petition claim, which would equate to 92.8% on the post-petition claim as of Sept. 30.

Subordinate bondholders would receive the identical bonds as seniors in an amount equal to 45.7% of the pre-petition claim.

The coalition said no agreement was reached among all of the parties, and no further counteroffers were made between the senior and subordinate groups.

Agreement response

In a separate release, mutual funds and institutions, including OppenheimerFunds, the First Puerto Rico Family of Funds and the UBS Family of Funds, who are original par holders of Puerto Rico’s Cofina bonds, made their own statement on the agreement in principle between the Cofina bond agent and the commonwealth agent.

“We have always had confidence in the Cofina structure, having invested in it since its inception in 2006. While we believe that the recent agreement in principle...does not reflect the strengths of the Cofina structure and our strong chances of winning any litigation challenges to the Cofina structure, we attempted to sit down with certain other investors in Cofina debt to see if we could develop a consensual resolution of the reduced cash flow to Cofina that would arise from the...agreement in principle,” the release said.

“We believe the distribution of the reduced cash flow to Cofina among senior and subordinated Cofina bondholders under our proposal more fairly compensates for the disproportionate burden borne by subordinated Cofina bondholders and increases the likelihood of a confirmable plan of adjustment for Cofina.

“Our proposal would also provide much-needed tax exempt income to Cofina investors, many of whom reside within Puerto Rico and depend on such income, and it is accordingly supported by multiple on-island mutual fund families as well as large mainland financial institutions.”

The Commonwealth of Puerto Rico announced its Title III petition filing on May 3, 2017. The case number is 17-03283.

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