El Nuevo Día found out that while the Oversight Board and Governor Ricardo Rosselló Nevares argue over the implementation of the current fiscal year Budget, the federal entity is accelerating an adjustment plan for the Puerto Rico Sales Tax Financing Corporation (Cofina, Spanish acronym).
Three separate sources indicated that Board advisors are working on the Cofina adjustment plan in light of the initial agreement signed by those agents who were in charge of resolving the ownership of the Sales and Use Tax (SUT) collections.
The progress of that initial agreement - according to the files of PROMESA Title III cases - has already been included in the agenda of the general hearing to be held by Judge Laura Taylor Swain on July 25.
Sources state that the Board´s adjustment plan depends, firstly, on the fact that the Unsecured Creditors Committee (UCC) and the agent representing Cofina materialize the initial agreement. It will also depend on whether, at a later stage, bondholders and municipal insurers give their approval, and that this receives Swain´s authorization, as established in Title III.
But, also according to the sources, who requested anonymity, those conversations between UCC and Bettina M. Whyte, Cofina’s agent - encouraged by the mediation process ordered by Swain- have laid the foundations for the Board to work on Cofina's debt adjustment plan, and this could be ready by the end of the year.
According to Title III files, the Board as well as several groups of creditors and municipal insurers have endorsed the adoption of a process to separate SUT collections, as provided in the initial agreement between the UCC and Whyte.
A debt adjustment plan is a document endorsed by court and that establishes the treatment that different creditors will receive, in this case, the government or agencies such as Cofina. The plan provides for the cut of the principal that creditors would receive and their payment priority, as well as the mechanisms to be used to pay the obligation, once it is modified.
According to PROMESA, although the Puerto Rican government is the debtor (that owes bondholders, pensioners and contractors, among others), the Board is the entity authorized to submit in court an adjustment plan it considers reasonable.
A step forward
El Nuevo Día could not find out details of the offer the Board will make to Cofina bondholders, but if the federal entity is working on an adjustment plan for the public corporation, the Board´s move could be considered as the first step towards the restructuring of the debt under PROMESA Title III.
In addition, this adjustment plan could be the most significant, since Cofina's bonds represent the largest amount of the $ 69 billion total owed by Puerto Rico. According to the 2016 government's operational report - the most recent one published to date - until then, the current Cofina debt was about $ 17.322 billion and, of that figure, about $ 7.590 billion are principal bonds, and the rest are subordinated bonds.
"The details (of the agreement between the agents) are still being negotiated, and there is an ongoing mediation process," said Jorge Irizarry, executive director of the Bonistas del Patio (Backyard Bondholders) organization, claiming that he could not talk about the process led by Judge Barbara Houser and other judges that are part of the Title III cases mediation team.
Martha Kopacz and her firm Phoenix Management act as financial adviser to the mediation team. Meanwhile, the UCC acts as agent on behalf of the central government and Whyte represents Cofina.
According to the sources, although the government and the Board disagree on the budget, this does not seem to have diverted the work regarding Cofina. The Fiscal Agency and Financial Advisory Authority (FAFAA) is aware of the process followed by the Board and participates in the meetings held on the subject.
El Nuevo Día asked the Board and FAFAA for information about the adjustment plan being drafted, but neither of the entities commented.
According to Irizarry, although Bonistas del Patio was involved in the conversations convened by the mediation team, the group has not taken a specific position regarding Cofina, but he considers the initial agreement between the parties as a step forward.
Irizarry stressed that, once the Board submits the adjustment plan to court, bondholders - both those who hold principal bonds, or with higher priority than subordinates - have to vote for or against the document.
Irizarry explained that for that to happen it will be necessary that both types of bondholders reach a definitive agreement on how to distribute the SUT portion that agents have agreed upon.
"Under these circumstances, (the agreement) seems feasible, but the detail is how much seniors will get (main bondholders) and how much will go to subordinates, and if both groups will agree," Irizarry said.
At a press conference on June 29, the Board reported that it would recertify its fiscal plan and its own budget due to the failure of the agreement with Rosselló Nevares to repeal Law 80 of Unjust Dismissal, which gave way to the lawsuit that the governor filed against the federal entity last week.
But, in the same event, Natalie Jaresko, executive director of the Board, said that both documents would be amended to allocate resources to pay bondholders if there were any agreement to renegotiate the debt. The current budget does not contemplate the payment of that obligation.
That same day, in the morning, the Cofina Bondholders Coalition said that the mediation process between the different creditors of the public corporation continued its course, and disclosed the details of an offer and two oral counteroffers between main and subordinate Cofina creditors.
Although these proposals did not succeed, the offers exchanged by Cofina Bondholders Coalition with several subordinated bondholders rested on the initial agreement between the UCC and Whyte.
According to Irizarry, it is "favorable" that while the government and the Board are fighting over the budget, now, groups of creditors try to reach an agreement.
Before the dialogue within Cofina, the main bondholders of the public corporation reached an initial agreement with certain General Obligations bondholders (GOs) that did not materialize either.
"To date, neither the government nor the Board have objected to the agreement of the agents, and that is positive. When Cofina bondholders and GOs announced their agreement, FAFAA and the Board rejected it not even an hour later," Irizarry said.
A setback to the economy
According to Irizarry, the mood of bondholders to reach agreements, as well as the Board´s statements in the fiscal plan that part of the primary surplus in the government budget may be directed to debt payment together with Jaresko's recent expressions on the subject have contributed to a rebound in the prices of the island's bonds. She mentioned that certain Cofina bonds that were sold at up to 20 cents reached about 84 cents last week.
However, Irizarry admitted that the improvement in prices does not put money on the table of thousands of local investors.
Cofina bonds and many other government bonds paid interest to bondholders several times a year, and in the case of thousands of local middle-class savers, according to Irizarry, it was an income to supplement Social Security that, on occasions, was just about $ 1,000 per month. Since the 2016 default, bondholders have not seen a penny.
"Only the interest paid to locals represented about $ 1.2 billion a year. That is money that entered the economy and that represented approximately 2 percent of the gross product," Irizarry said, noting that, starting from the date of default, local savers have stopped receiving about $ 3 billion in interest.
Agreement between agents
The current SUT rate in Puerto Rico is 11.5 percent. Of that rate, 5.5 percent is committed to the payment of Cofina. According to Irizarry, that pledged portion of the SUT - and that would now be divided with the General Fund- if the agents' agreement advances, represents approximately $ 730 million in collections each year.
Among other things, the initial agreement between the UCC and Whyte provides for 53.65 percent of the pledged portion of the SUT to Cofina and the rest goes to the General Fund. The agreement would also allow Cofina bondholders to receive cash deposited at the Bank of New York Mellon (BNY Mellon), the custodian bank of Cofina's debt, and that as of this month, SUT collections for Cofina are deposited in a separate account aiming at completing the transaction.
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