The Board anticipates that the COFINA adjustment plan will be approved by March 2019. (semisquare-x3)
The Board anticipates that the COFINA adjustment plan will be approved by March 2019. (GFR Media)

Just days before the Financial Oversight and Management Board (FOMB) must present to Court the adjustment plan of the Sales Tax Financing Corporation (COFINA, Spanish acronym), La Fortaleza informed yesterday that Governor Ricardo Rosselló Nevares sent to the Legislature the bill to complete the renegotiation of the debt of that public corporation.

In a press release, it was indicated that the bill before the Legislature is consistent with the preliminary agreement signed by the Board, the government and some COFINA bondholders and that, among other things, would have the effect of redistributing between bondholders and the central government, the part of the Sales and Use Tax (SUT) committed to the payment of bonds.

In written statements, the governor stated that with this agreement, as they did with the debt of the Government Development Bank, they can recover the credibility that the last administration lost and caused the bankruptcy, in addition to the imposition of the Board.

According to the government, once the legislation is approved and the court validates COFINA’s adjustment plan, Puerto Rico would see a 32 percent reduction in its largest obligation for bonds and, in turn, the Treasury would see, on average, an additional $ 425 million each year.

The Board anticipates that the COFINA adjustment plan will be approved by March 2019.

The agreement between the Board, the government and some COFINA bondholders rests in turn, in a pact signed last summer by COFINA's agent, Bettina M. Whyte, and the Unsecured Creditors Committee (UCC), and that put an end to the dispute between the government and bondholders about the SUT. This agreement establishes that the pledged portion of the SUT (5.5 percent) will be distributed among bondholders of the public corporation, at a rate of 53.65 percent for the COFINA bondholders and 46.35 percent for the central government.

COFINA bondholders would modify their credit through the new redistribution of the SUT, recovering values close to par in the case of the main bondholders and over 50 cents in the case of the subordinated creditors.

As part of these negotiations, bondholders will distribute the funds accumulated in COFINA reserve accounts until last July. Meanwhile, the Board and the government agreed to pay to more than twenty funds that have sued the government for $ 332.7 million, in exchange to stop litigating. Such payment would come from COFINA reserve account and an unstated part of the central government, says the agreement.

On September 26, El Nuevo Día revealed that in order to complete the agreement in COFINA it was necessary to approve a bill with several conditions. Among these, the fact that the new successor entity of COFINA and the bonds exchanged will be ruled by the laws of New York and to formally establish the redistribution of the pledged portion of the SUT.

Likewise, the exchanged bonds will not have the right to acceleration and it is necessary to create a new board of directors for COFINA, whose members can be recommended by bondholders and insurers.

Although the Board and the government suggest that the agreement would favor Puerto Rico, this week, former Treasury adviser Antonio Weiss and economists Brad W. Setser and Desmond Lachman warned that the COFINA agreement will harm the island.

Experts warned that the agreement includes capital appreciation bonds, which implies accumulating compound interest to be paid at maturity and that the savings achieved in debt payment during the first years would double in the long run.

"If the government of Puerto Rico and the the Board created by Congress agree on similar terms with creditors who hold General Obligation bonds, it will only be a matter of time before the government is forced to default again or cut pension payments on which more than 325,000 workers depend," said Weiss, Setser and Lachmond.

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