Now, that federal judge Laura Taylor Swain approved the agreement, the Fiscal Agency and Financial Advisory Authority (FAFAA) intends to implement the plan for the Sales Tax Financing Corporation (COFINA) this month.

Meanwhile, both the government and the Board told El Nuevo Día that they have resumed conversations with several bondholders, expecting to reach further cuts on the island´s debt.

However, all signs indicate that the relief brought by the approval of the COFINA adjustment plan would not change the Board´s demands to further budget cuts.

This, because COFINA plan benefits were already included in the fiscal plan certified by the Board last October.

COFINA plan is underway

According to Christian Sobrino Vega, FAFAA executive director, Swain´s decision on COFINA plan calls for a series of steps and processes that the government must advance and that will affect both bondholders and the government.

For Sobrino Vega, the first step will be to complete the bond exchange process with COFINA bondholders.

 The official explained that COFINA bondholders, including on-island ones, will receive a notice –either directly or through brokerage firms- informing that the documents that prove bonds ownership will be replaced by new certifications with the value approved in the adjustment plan.

 As stated in the plan that Swain approved, COFINA´s current debt totals about $17 billion. This debt, according to the agreement, with be exchanged through the issue of two types of bonds.

The first group are bonds that pay an average interest rate of 4.79 percent and through this instrument, about $9,119 billion will be issued.

The second group to be issued, already in COFINA before Swain´s decision, will be Capital Appreciation Bonds (CABs)

These bonds pay gains as a lump sum at maturity. At first, they will issue CABs for $2,901 billion.

Both alternatives represent a cut of about $6 billion in COFINA´s debt. However, according to the agreement, when the total of CABs by 2051 is calculated, they will be close to $10,743 billion.

 After 40 years, always according to the plan approved in Court, COFINA bondholder would receive $32,3 billion in principal and interests. During the same period, revenues for the Sales and Use Tax (SUT) related to the adjustment plan should total about $75,5 billion as stated in COFINA fiscal plan. 

Under the new COFINA structure, the difference between senior and subordinated bondholders does no longer exist, but in exchanging current bonds, that difference in COFINA bonds value will remain. While “seniors” will recover approximately 93 percent for each dollar, subordinated bondholders will get about 55 percent.

Once the bond exchange process is completed, COFINA bondholders may start receiving the first releases this very quarter, said Sobrino Vega.

The first payments will come out from COFINA custodian bank New York Mellon Bank. However, those funds, estimated at $1,2 billion by mid-2018, will not reach all bondholders since about $332 million will be used to pay lawyers and others involved in the process as well as to pay senior bondholders who would get, at least, $619 million.

Once they have complied with bondholders, Sobrino Vega said that the government can use the money it will retain as part of the agreement.

The agreement Swain approved is based on a mechanism the judge suggested which included agents representing the parties. Bettina M. Whyte, who represented COFINA and the government, and the Unsecured Creditors Committee (UCC) seeking to avoid a multi-million dollar litigation, agreed to divide SUT revenues instead of fighting over its ownership.

The benefit was already included in the Fiscal Plan

 This way, through the plan approved by Swain, each SUT dollar previously committed to COFINA is now divided at a rate of 53 and 46 percent between the public corporation and the government.

According to the Board, this will annually bring about $456 million to the Treasury that would add to the portion of the tax that the General Fund already receives.

Edward Zayas, a spokesperson for the Board, told El Nuevo Día that the Board had already included the impact of the COFINA adjustment plan when they certified new economic and fiscal projections last October.

So, for the Board, the benefit of the COFINA plan was already included in the fiscal map that the Ricardo Rosselló Nevares administration must follow.

And that benefit, that Rosselló Nevares said should be used for health care, education and public safety, among other services, was also included in the projections that the Board presented the government last week, when the entity sent the governor the schedules for the process of developing fiscal plans for 2020 and also stated that General Fund spending should not exceed $8,020 billion.

The Board also decided that the government would have $2,541 billion to cover other expenses. However, the Board explained to this newspaper, that figure already includes the $456 billion from the COFINA agreement.

 Zayas said that Puerto Rico still needs further structural reforms to reach growth and added that the Fiscal Plan clearly defines how to resize the government.

 This way, the Board made it clear that cuts imposed to the government still remain, despite the milestone that the COFINA agreement represents and that joinsthe voluntary agreement in the Government Development Bank (GDB) last year.

According to the goals the Board set for fiscal year 2019-2020, cuts for next fiscal year might be even harder than those approved last October.

This fiscal year, according to the Board, the government must achieve savings for $629 million and as from next July, they should reach $1,622 billion.

The General Fund has a new cap that represents a reduction of $158 million -not considering the health reform payment- compared to last October.

Sobrino Vega stressed that they have been consistent since the beginning of 2018. Improvements in economy should be reflected in reducing the austerity measures imposed to the government, he said and added that they are waiting for the Board to take action to identify which actions they will take.

When El Nuevo Día asked which measures will be taken to avoid that the $456 million will go directly to pay bondholders, Sobrino Vega said the administration considers investing a good part of that in education and public safety services.

 “Investing in education and public safety services will also benefit bondholders in the long run,” said the official.

A failed solution

 Although Swain described the COFINA plan as a key instrument for the government to take the path of financial recovery, she said that the plan approved is the solution to a legal dispute.

For Swain, “the issues that previously cast a cloud on the structure are being resolved through the Plan, rather than through “all or nothing” litigation.”

 Yesterday, while the Board and the government welcomed the judge´s decision as a milestone for the island´s financial recovery, those who have to face the effects of the plan did not look at it the same way.

This newspaper found out that in New York some COFINA bondholders are pondering the possibility to resort to the First Court of Appeals. That appellate court has ruled in favor of bondholders and has repealed Swain´s decision on Title III cases on four occasions.

 Meanwhile, the Center for Popular Democracy (CPD), Hedge Clippers, the Citizens Front for the Debt Audit, Dignity Campaign, VAMOS and Puerto Rico´s Citizens for Debt Audit questioned the decision.

They released a joint statement questioning that Swain did not answer to important issues regarding the legality of that debt, looking for an easy way out to avoid litigation and benefiting only bondholders at the expense of a painful future of an island in a reconstruction process. 

Eva Prados, from the Citizens Front for the Debt Audit, said that the judge´s decision only confirms that neither PROMESA nor the Board are the right tools to guarantee a debt restructuring process for the people of Puerto Rico and added that “this does not end here, now there will be more significant adjustment plans and we have to be ready to resist such abuses.”

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