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Puerto Rico COFINA Agent, COFINA Bondholders and Mutual Funds Petition

Monday, Mar 05, 2018

Seema Balwada, CFA                                                      

COFINA Agent, COFINA Bondholders and Mutual Funds Petition the Federal Court to Seek Puerto Rico Supreme Court Certification of COFINA Law… U.S. Treasury Tells Puerto Rico No Fed Funds Without Collateral Puerto Rico Resident Commissioner to U.S. Congress Recommends Puerto Rico Pay Interest on its Debt January Puerto Rico Purchasing Managers Index (PMI) 58.5

The High Confidence of COFINA defendants is reflected in their recent court motion for the Puerto Rico Supreme Court to certify the COFINA bond structure. COFINA Agent's court motion states resolution of the Commonwealth-COFINA dispute hinges on Puerto Rico law questions. The Puerto Rico Supreme Court can answer whether Puerto Rico law transfers Puerto Rico sales tax revenue to Puerto Rico-created COFINA. The COFINA Agent, COFINA Seniors Coalition and mutual funds have asked Judge Swain to get a final authoritative answer from the highest court in Puerto Rico. The Commonwealth and the Oversight Board oppose the COFINA Agent's motion for certification of the COFINA law by the Puerto Rico Supreme Court. The law was validated by three different Puerto Rico Secretaries of Justice and received favorable legal opinions from several respected law firms. Both the COFINA Agent and the Commonwealth Agent have motioned the Federal Court for summary judgement in the Commonwealth-COFINA dispute. Judge Swain will hear summary judgement motions on April 10 and Puerto Rico Supreme Court certification motions on April 25. Commonwealth-COFINA dispute has far-reaching implications on the Island's access to capital. Without debt repayment, the Island will not gain access to capital markets, be it federal, municipal or private lenders. The U.S. Treasury has cut in half federal community disaster loan funding. The U.S. Treasury's tough stance is intended to bring Puerto Rico to honor its debt obligations. The Island's cognizant Resident Commissioner recommends repaying interest with surplus funds. Only by honoring liens and respecting pledged collateral can the Island revive capital access. Respecting revenue secured bond structures such as COFINA could not be of higher importance in today's municipal bond market.

Federal Court To Consider Puerto Rico Supreme Court Certification... The Puerto Rico Supreme Court may be asked to certify the Puerto Rico law that led to the creation of COFINA, the issuer of the Island's $16 billion COFINA bonds. The COFINA Agent, mutual funds and COFINA bondholders want to take their ownership claim of COFINA pledged sales tax to the Puerto Rico Supreme Court. Judge Laura Swain will consider COFINA bondholders request for the Puerto Rico Supreme Court certification on April 25. The Supreme Court of Puerto Rico is allowed to address any question certified by a federal court when the question involves Puerto Rican law. Legal issues controlling the Commonwealth-COFINA dispute are governed by Puerto Rican law and the Puerto Rico Constitution. Puerto Rico law questions listed by COFINA bondholders are directed towards the COFINA enabling legislation and COFINA's ownership of pledged sales tax. The sales tax was pledged by COFINA to pay back bondholders. The Commonwealth received a total of $16 billion of bond proceeds and now wants to take the sales tax pledged to repay the bondholders who lent the money. Puerto Rico must eventually realize you can't have your cake and eat it too. Puerto Rico's Oversight Board supported by Puerto Rico's fiscal agency weakly opposes the need for Puerto Rico Supreme Court certification. PROMESA is intended to preserve and enforce liens in effect prior to PROMESA, a clear intention of the U.S. Congress when they enacted PROMESA. The Oversight Board's low-key reasons opposing Supreme Court certifications are viewed as another delaying tactic. Judge Swain will hear summary judgement arguments on April 10 and arguments on Puerto Rico Supreme Court certification on April 25. Puerto Rico Supreme Court certification should be the final authoritative answer to resolve the Commonwealth-COFINA dispute which carries far-reaching implications on the Island's access to capital. COFINA defendant's appeal for Supreme Court certification signals their confidence for a COFINA favorable summary judgement.

No Federal Loan Without Lender Protection Collateral, U.S. Treasury Tells Island... It is becoming clear that without debt repayment, the Island will not gain access to any capital market, be it federal, municipal or private lenders. The U.S. Treasury is being strict with Puerto Rico's access to promised federal funds. Any federal loan must provide maximum protection for U.S. taxpayers, have detailed financial reporting and carry priming liens in favor of the U.S Treasury as granted to debtor-in-possession lenders. The Commonwealth has lost credibility with the U.S. Treasury. In January, the U.S. Treasury and FEMA sent Puerto Rico its cash balance policy for accessing a $4.7 billion Federal Community Disaster Loan program. This policy asked Puerto Rico to exhaust its own funds, in light of the previously not disclosed $6.875 billion cash in 800 Puerto Rico bank accounts unearthed upon Federal Court ordered discovery. On February 20, 2018, considering the discovered cash and adequate liquidity, the U.S. Treasury cut in half Community Disaster Loan funding to $2 billion. The U.S. Treasury has asked for collateral security such as unpledged sales tax or other revenue. Puerto Rico Resident Commissioner Jennifer Gonzalez recommended this week that Puerto Rico should consider beginning to repay debt with surplus funds, the commissioner believes, by making interest payments investors would begin to gain confidence in Puerto Rico. The U.S. Treasury's tough stance on federal capital access to the Island is intended to bring Puerto Rico to honor its debt obligations. 

Puerto Rico PMI hits 58.5, Belies Governor Crying Wolf... After four consecutive monthly increases Puerto Rico's Purchasing Managers Index (PMI) reached its highest level since 2015. At 58.5 in January the index has exceeded 50 for three months. The U.S. PMI for January was 59.1. The PMI is based on responses to questionnaires that are sent periodically to purchasing professionals and executives of the largest manufacturing companies. When the index is above 50 it suggests an expansion of the manufacturing sector with respect to the previous month, below 50 suggests a decline in economic activity. The Island's higher economic activity in the wake of hurricane Maria stems from many islanders returning and rebuilding. Puerto Rico is delaying its January general fund collections after mid-year general fund collections were promising. Opaque weekly government liquidity report shows $1.7 billion in cash balances and does not address $6.8 billion currently under forensic investigation. Governor Rossell continues to threaten liquidity shortfalls in protests to the U.S. Treasury. Contrary to the Governor crying wolf, the grassroots survey of manufacturers reveals a significant uptick.


IT IS NOT NECESSARY FOR PUERTO RICO BONDHOLDERS TO RESPOND TO A PUERTO RICO MAILING TO CREDITORS... The Commonwealth of Puerto Rico will be conducting a mailing to creditors of Puerto Rico to advise certain parties of the need to file Proof of Claims. GMS clients who hold Puerto Rico bonds will likely be receiving this package in the mail sometime within the next week. It is NOT necessary for individual bondholders to respond to the mailing or to file a claim on their own behalf. The Proof of Claim function will be undertaken by the bond trustees.

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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