The judicial approval of the Plan of Adjustment of Puerto Rico Sales Tax Financing Corporation (COFINA) sends an important message about the capacity of Puerto Rico to address its debt problem, on the way to its economic recovery.
Reducing about a 25 percent of the Puerto Rican public debt, through this restructuring agreement, should motivate to reach consensus in the General Obligation Bonds (GOs) cases, as well as in the Electric Power Authority debt, among others.
To the extent that Puerto Rico crosses the negotiating threshold to swiftly resolve its debt, it should recover the confidence that will allow it to return to capital markets, sources of investment for development. This will strengthen job creation and essential services.
The COFINA Agreement represents more than $ 400 million annually that the government must wisely manage, in essential services such as health care, education and public safety. The deal also will provide for pensions payment for about 160,000 public retirees, a sector that must be protected.
The Cofina Agreement restructures 25 percent of the public debt, estimated at $ 72 billion, allows to avoid costly litigations and to concentrate on the GO´s debt negotiation, that totals $ 14 billion, and that of PREPA, close to $ 10 billion. For the Oversight Board, the plan reached with COFINA bondholders is critical component of the island´s debt restructuring, that “ when combined with the GO debt accounts for approximately 55% of the total Commonwealth bonded debt to be restructured.”
An important aspect of the agreement is the guarantee that of each Sales and Use Tax (SUT) dollar committed, 54 percent will go to COFINA bondholders and the rest to the General Fund. This will imply an increase for local public coffers, when compared to what they received before.
In approving the agreement, Judge Laura Taylor Swain addressed in detail the concerns of all the parties involved in the negotiation to issue documented fact and law statements. She acknowledged the impossibility to respond to all the claims over cuts in payments to bondholders, among other critical issues.
In that sense, the COFINA plan, the first concrete step in the Puerto Rican debt restructuring under PROMESA Title III, still poses challenges that must become opportunities.
For example, the government can think about a fair tax reform for individuals and companies that, in turn, will guarantee the revenues committed to COFINA´s debt restructuring, over the next 40 years. Similarly, it is important to encourage diversified economic activity to support parameters of income and tax design commitments to get Puerto Rico out of bankruptcy.
This advance in the debt restructuring process must go hand in hand with deep reforms that will contribute to public efficiency and facilitate business activity in the private sector.
The local government is also responsible for implementing strict controls for the use of other federal disaster relief funds to be released. The catastrophe caused 2,975 deaths and $ 100 billion in material losses. Due to the government´s insolvency, it is expected that the release of federal funds will boost economic growth.
The COFINA plan has opened the gateway to the full debt restructuring. Moving forward in this direction will determine Puerto Rico´s financial recovery and will place it as a competitive investment destination.