José Carrión III (semisquare-x3)
José Carrión III. (AP)

When the Board rejected the allegations of the Bank of New York Mellon (BNY Mellon) - regarding the process that gave way to the adjustment plan of the Sales Tax Financing Corporation (Cofina, Spanish acronym) – the fiscal entity admitted that the funds that will be used to compensate about twenty investment funds for participating in the negotiations do not necessarily belong to that public corporation.

This is part of the Board´s response to the objections filed against the disclosure statement in the Cofina renegotiation process. This agreement was endorsed by the court overseeing Title III cases last Tuesday, laying the foundations for bondholders to vote on the deal that will restructure about $16,7 billion of Cofina debt. 

The Plan Support Agreement (PSA) for Cofina provides paying investment funds and municipal insurers who were part of the negotiation, about $ 332 million in consummation costs. This, in exchange for not opposing the adjustment plan that would cut 28 percent of the principal owed in Cofina.

Although last Tuesday, BNY Mellon withdrew its objections to the disclosure statement, the reply of the Board about the agreement to renegotiate the debt payable with the Sales and Use Tax (SUT) clarifies several of the assumptions that resulted in Cofina adjustment plan. Whether Cofina's adjustment plan is in the bondholders "best interests", as required by PROMESA, will be discussed at a hearing chaired by Swain on January 16.

According to the Board, the objection (BNY Mellon) simply assumes that consummation costs are being paid out of funds that constitute the shared collateral of bondholders, but this is inaccurate.

The Board stated that the funds to pay for consummation costs (of the agreement) could be owned by the central government (there is a litigation on this same issue) or the funds could be other Cofina property in the case there is a decision regarding the fact that the alleged secured interest of bondholders in such funds is not perfect or avoidable.

These statements reveal that the federal entity, the government, the agents and the investment funds that participated in the negotiation preferred to distribute the SUT portion among themselves before Swain decided whether the debt issued by that public corporation is legitimate  and if the tax collections belong to the public corporation or the General Fund.

According to the PSA, the portion of the SUT will be distributed between Cofina, the 53.65 percent of the tax, and the remaining 46.35 percent will go to the General Fund. This arose from an agreement between the Committee of Unsecured Creditors (UCC) and the agent who represented Cofina in the negotiations, Bettina M. Whyte.

The Kobre & Kim report

In that sense, unless there is any change in Title III processes, Swain´s decision helps the structure of Cofina, as a vehicle of secured debt, to remain intact. This, despite the fact that in the investigation commissioned by the Board, Kobre & Kim found that from the beginning, there were doubts on the structure of Cofina and the legislation that established that the SUT is not part of the available resources of the General Fund.

There were so many doubts regarding these issues that one of the law firms that advised Puerto Rico on bond issues for years - Sidley Austin LLP - refused to issue a legal opinion that validated the structure of Cofina, says the report by Kobre & Kim. This, because Puerto Rico lacks a mechanism to examine bond issuances before selling them to the municipal market.

Now that the dispute over the SUT seems to be a thing of the past, the structure of Cofina is asserted with the bill that was recently approved and that endorses the agreement between the Board and Cofina bondholders.

Yesterday, the House Speaker, Carlos "Johnny" Méndez, said that Swain's endorsement to the disclosure statement  "is an important recognition of the steps taken by the legislative assembly to help relieve the public debt and restore the credibility of the government".

"Judge Swain's decision validates our work and sends a message to all branches of government: we are going to comply with them, but always thinking of the people first," said Méndez.

On the other hand, Governor Ricardo Rosselló highlighted that the Cofina agreement would bring about $ 400 million in additional collections to the General Fund.

But immediately, he warned that he will fight any attempt by the Board to cut more benefits to pensioners. This, as a result of an error in the estimates associated with pension payments.

He added that although they recognized those errors, if the action will affect the people, then they should fire all those advisers, “who are paid to do a job and what they say is that they will reduce pensions."

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