Seema Balwada, CFA / October 27, 2017
Puerto Rico Sales Tax Bondholders Boost Their Bet
The Group of COFINA Bondholders Fighting the Puerto Rico Government in Court Over Sales Tax Revenue Increases Their Holdings of COFINA Bonds... A recent Wall Street Journal article stating mutual and hedge funds are throwing in the towel on Puerto Rico bonds is EXTREMELY MISLEADING FAKE NEWS.
Bloomberg has reported court documents indicate COFINA bondholders involved in the Puerto Rico vs COFINA bondholder court case have increased their wagers on the outcome of the case by snapping up more of the COFINA sales tax bonds that are at the center of the fight over the Island's sales tax revenue.
A coalition of firms that own COFINA sales tax backed debt, controls nearly $3.3 billion of the securities, according to court records made public Thursday evening. The group's stake has grown since August, when they disclosed about $3.2 billion in bonds. The increase came even as two smaller holders, which together had $172.3 million in senior COFINA bonds dropped out of the group. It is unclear from the filings whether the two smaller holders sold their holdings or due to costs quit the coalition, which was formed to share legal and other costs associated with the case.
Susheel Kirpalani, the lead lawyer for the COFINA group, declined to comment. Phone messages left by Bloomberg with the two smaller holders were not immediately returned. All but one of the twelve (12) member group added to their holdings, according to the latest disclosure. The disclosures show that the group is confident and not retreating from their investment in Puerto Rico's sales tax bonds even though the legitimacy of the debt is being challenged in court and prices of the bonds have tumbled on Trump's ill-informed Wipe out the debt statement. Even negative press after the Island was decimated by Hurricane Maria last month has not dampened COFINA bondholder confidence.
Hedge fund investors who hold general obligation (GO) bonds and their court appointed agent representing the Commonwealth claim that the COFINA debt violates Puerto Rico's constitutional GO debt limits. Disregarding various legal opinions, a statutory lien held by COFINA bondholders and the U.S. Constitution, the GO creditors claim rights to the sales tax revenue backing the COFINA bonds. Before Puerto Rico can determine how much and which of its debts it can cut, a judge must decide the court case over the status of the sales tax revenue. Whichever bondholder group wins that legal dispute will likely enjoy a significant recovery.
The case is In re Commonwealth of Puerto Rico, 17-03283, US. District Court, District of Puerto Rico (San Juan).
If you have any questions or desire updated information contact your GMS Account Executive. Information taken from sources deemed reliable. This update does not purport to include all available information
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