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PUERTO RICO Summary Judgement To Resolve Commonwealth-COFINA Dispute

Friday, Feb 23, 2018

Seema Balwada, CFA

Summary Judgement Hearing Scheduled For April 10… COFINA Bondholders Will Seek Puerto Rico Supreme Court Ruling If Necessary... Judge Swain Demonstrates She Intends To Uphold The Rule Of Law…

COFINA is the owner of Pledged Sales Tax revenues as a matter of law, that is the ruling sought by the COFINA, agent, mutual funds, bond insurers and individual bondholders in its Summary Judgement motion. The Commonwealth agent’s absurd claim for ownership of COFINA pledged revenue fails the plain text of Puerto Rico law and is nothing more than an ‘after the fact grievance’. In essence, the Commonwealth has taken the position that Puerto Rico lawmakers, governors, and advisors were all either mistaken or lying when they repeatedly assured investors for a decade that the Pledged Sales Tax belonged to COFINA and bondholders interests were secured. There is no genuine dispute as to who owns the pledged revenues transferred to COFINA. The COFINA bond structure is far from unique. For decades, U.S. state and local governments have employed similar tax-backed securitization structures to raise funds. Revenue-backed securitization is particularly crucial to Puerto Rico. A ruling on the Commonwealth-COFINA dispute will determine the Island’s access to much needed capital. It would be unprecedented for a Federal Court to rule that a Commonwealth statute (law) with enormous political and financial implications is invalid under the Commonwealth constitution, COFINA bondholders are asking the Court to stick to the letter of the law, pay all interest past due and future principal and interest when due. The information contained in this report was taken from court filings and other sources deemed reliable.

Summary Judgement Sought To Resolve Commonwealth-COFINA Dispute… COFINA bonds are not debts of the Commonwealth, but debt of COFINA. COFINA pledged revenue or its equivalent is property of COFINA. On February 21, 2018, the COFINA agent filed a motion that seeks a Federal Court ruling that the Pledged Sales Tax is owned by COFINA. No genuine dispute of fact exists based on the plain language of COFINA’s lawfully enacted enabling statutes that state the Pledged Sales Taxes are COFINA’s property. The COFINA agent shows ample evidence of ownership. On the contrary, the Commonwealth agents without any factual or legal basis are asking the Court for Commonwealth ownership of the Pledged Sales Tax. That would be an absurd and plainly inequitable result in light of the unambiguous language of the COFINA enabling legislation that created the law and the numerous assurances given to COFINA bondholders and others that COFINA owns the Pledged Sales Tax. The COFINA agent cited that the main difference between the COFINA bonds and the General Obligation (GO) bonds is in the security structure. COFINA bonds are secured by a dedicated revenue stream owned by COFINA while the GO bonds are backed only by the unsecured promise of the Commonwealth. This distinction allowed the Commonwealth to utilize the security of COFINA bonds to save over $1 billion in interest costs and raise over $16 billion in proceeds from COFINA bond issues. Based on their secured structure COFINA bonds are the most widely held Puerto Rico investment in Puerto Rico retiree and retail investor accounts. The Commonwealth also filed for a Summary Judgement on February 21. The COFINA bondholders court filing cites over 50 cases of law they found supporting the honoring of statutory liens and none that did not uphold a statutory lien. The Commonwealth court filing cites no case law that supports their position or disputes COFINA’s position.

COFINA Bondholders Point Out Ample Security Validations… In essence, the Commonwealth has taken the position that Puerto Rico lawmakers, governors, and advisors were all either mistaken or lying when they repeatedly assured investors for a decade that the Pledged Sales Tax belonged to COFINA. The February 21 court filing by COFINA Seniors Coalition Group, National Public Finance Guarantee and The Mutual Fund Group including Oppenheimer Funds and the COFINA agent points out to the Federal Court the numerousaffirmations of COFINA revenue and bond security. Since the creation of COFINA, the Commonwealth clearly affirmed to both GO and COFINA bondholders and prospective investors at each of the past 18 issuances/remarketing of GO bonds that the Pledged Sales Tax is owned by COFINA and cannot be used by the Commonwealth, not even to satisfy the Commonwealth’s obligations under the GO bonds. For over a decade, Puerto Rico’s Legislative Assembly repeatedly assured bondholders by reaffirming COFINA’s ownership of the Pledged Sales Tax. Three Puerto Rico Secretaries of Justice opined after reviewing the statute that ownership had been transferred to COFINA, these legal opinions hold value in Puerto Rico law. Rating agencies assigned the COFINA bonds the strongest credit ratings of any other Puerto Rico bond based on legislative statements and official legal opinions concluding that the COFINA bonds are “insulated from the Commonwealth’s broader budget and financial problems.” COFINA’s high ratings were in contrast to the substantially lower ratings issued to the Commonwealth’s GO bonds supported only by the Commonwealth’s promise to pay. A ruling must respect the law and legal bond structures which the PROMESA law tells Puerto Rico to respect.

COFINA Seniors Coalition Will Seek Puerto Rico Supreme Court Ruling if Necessary... COFINA bondholders will not stop short of asking for a Puerto Rico Supreme Court certification on the ownership of Pledged Sales Tax, should the Federal District Court fail to uphold COFINA’s ownership of Pledged Sales Tax. Any ruling placing purpose over text, if permissible at all, should be the prerogative of the Supreme Court of Puerto Rico. COFINA Seniors Coalition noted that any such ruling should be based on policy aspects of the COFINA enabling law and the Federal Court should not resolve disputed policy questions without certification from Puerto Rico’s highest Court. Contrary to the Commonwealth’s position, while the sales tax rate could be varied, the covenant forbids it from restraining the rights of COFINA to meet its agreement with bondholders or undermining any obligation or commitment of COFINA. COFINA bond Resolution provides that the Commonwealth cannot restrict the transfer of Pledged Sales Tax unless there are sufficient funds or equivalents to fulfil COFINA’s obligations to bondholders. COFINA bondholders will seek to have the COFINA structure and bondholders’ property rights affirmed by the Supreme Court of Puerto Rico or the United States, if necessary.

Judge Swain Intends to Uphold the Rule of Law… BTIG is a global financial services company specializing in institutional trading, investment banking and research. In a recent research report BTIG indicated the following:

BTIG has stated repeatedly that Puerto Rico’s Title III debt restructuring, the early portion of which was dominated by the Commonwealth, the Oversight Board, and their restructuring advisors, would begin to turn in favor of the creditors and insurers when it shifted from the initial frivolous posturing noise to the fact based judicial phase, which has more lasting consequences and is now beginning in earnest.

BTIG believes that Judge Swain has demonstrated that she intends to uphold the “rule of law” to the surprise of some observers. BTIG thinks a significant reason why most of the Commonwealth’s debt trades at severely distressed levels is because many investors cynically believe or have been told “rule of law” will be trampled in the debt restructuring. Swain’s actions have confirmed her reputation as a “four corners of the law” Judge who will aim to confine her rulings to the “letter of the law” rather than emotional appeals.

Puerto Rico’s Oversight Board has tried to run roughshod over the Island’s creditors in violation of the provisions laid out by PROMESA, the law enacted last June that stated clearly that Puerto Rico and the Oversight Board must respect liens. Judge Swain’s recent actions indicate that the Oversight Board has lost credibility from where she sits, and the rubber stamp the Oversight Board had sought will not be forthcoming.

BTIG continues to assert ultimate recoveries on Puerto Rico bonds secured by liens will dwarf the amounts offered by the Commonwealth in its revised Fiscal Plan, just as the recoveries realized in other municipal bankruptcies have been much larger than those that had been initially offered. Moreover, we think market realization is taking hold that such will also be the case in Puerto Rico. Recent events bode well for significant Puerto Rico bond price appreciation that lies ahead.

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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