Puerto Rico Sales Tax backed bonds continued their 2018 rally as a tentative agreement directs a large share of the pledged Sales Tax revenue to owners of COFINA bonds leaving bondholders facing smaller losses and in some cases less profit than many market participants previously anticipated. Details of the tentative pact between two court-appointed Agents states owners of COFINA bonds would get just over half of future pledged Sales Tax revenue. Currently COFINA bondholders have a Statutory Lien that entitles them to 100% of the pledged Sales Tax revenue. COFINA would also get all $1.2 billion that’s been frozen in a debt service account until the bankruptcy court decides who had a right to the money.
The tentative agreement between the Commonwealth Agent and the COFINA Agent directs some of Puerto Rico's future sales taxes to the Commonwealth and puts the U.S. Oversight Board in charge of whether the Commonwealth's share of the pledged revenues should be used to fund essential services or to pay General Obligation (GO) bondholders. If the tentative pact between the two court-appointed Agents is court approved and enacted, the Federal Oversight Board and not the Island's elected officials will decide the use of their share of the sales tax revenue and that would be the case even after the territory's bankruptcy ends.
The municipal bond industry is watching what is transpiring in the Commonwealth vs COFINA dispute. The COFINA bondholders purchased bonds that have a Statutory Lien on the first 5.50% of the revenue derived from the 11.50% COFINA sales tax, which adequately covers debt service on COFINA bonds. Historically holders of bonds that are unimpaired and secured by a Statutory Lien have received 100% of their interest and principal payments during a bankruptcy proceeding and have never been impaired in any way.
"PROMESA" appears to allow the involved parties and the Court to disregard a Statutory Lien and allow the parties to negotiate a haircut on bondholders. According to the proposed terms the unimpaired subordinate bondholders secured by a Statutory Lien are being asked to take a haircut, historically that has never happened. The deal is tentative as the major subordinate bondholders Oppenheimer, Goldman Sachs and Santander Bank along with the Puerto Rico government and bond insurers have yet to agree to the proposed terms.
COFINA bondholders would receive 53.65% instead of 100% of an established pledged Sales Tax Base Amount (PSTBA). The amount could recover for Senior bondholders around 100% and Subordinate bondholders around 40% of their principal. However, the market is telling a slightly different story as Senior bonds are trading around 84 (12/31/17 price around 37) and Subordinate bonds are trading around 42 (12/31/17 price around 10). In addition COFINA will receive the full $1.2 billion in back COFINA debt service owed to bondholders.
The Commonwealth would receive 46.35% of the PSTBA beginning 7/1/18 (they currently receive 0%). The Commonwealth's 46.35% share of the PSTBA would be received after COFINA receives its full 53.65%. Since the inception of the COFINA structure the Commonwealth explained the COFINA pledged revenues as Unavailable resources to the Commonwealth. It is difficult for many subordinate COFINA bondholders to understand the legality and fairness of this tentative proposal, many would prefer a court ruling on the legality of the Statutory Lien.
The above only represent the highlights of the Tentative Agreement if the agreement is approved by all parties and the Court as proposed, it should raise doubts on the security a Statutory Lien offers bondholders.
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
Let the bond specialists at GMS Group help you make the best investments so that you can meet your financial objectives! Contact us today for assistance or call 877-467-0070.