Hedge Funds Said to Offer Puerto Rico Financing as Talks Begin

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Hedge funds that hold Puerto Rico’s sales-tax backed bonds said they’re willing to work with Governor Ricardo Rossello to restructure the island’s debt and provide needed cash to the island as it begins negotiations with creditors.

The statement Tuesday came after the group offered the island about $800 million in emergency financing, as creditors are vying for position as Puerto Rico begins negotiations aimed at cutting its $70 billion debt, according to a person familiar with the matter who spoke on the condition of anonymity because the negotiations are private.

A group holding Puerto Rico’s senior sales-tax debt, known as Cofina, that’s led by Tilden Park Capital Management LP, Merced Capital LP, Whitebox Advisors LLC and Goldentree Asset Management LP, proposed letting Puerto Rico access roughly $400 million in sales-tax revenue that has already been collected, the person said. The creditors would then purchase about $400 million in long-term sales-tax bonds at market rates as long as Puerto Rico doesn’t seek additional concessions from holders of Cofinas.

The moves underscores the push among bondholders to secure an upper-hand as Puerto Rico embarks on the biggest restructuring ever in the municipal-bond market, a process that will be overseen by a federal board installed to oversee its finances. While Puerto Rico has defaulted on a growing share of its debts, including general-obligation bonds, it has continued to cover payments due on the Cofinas.

That decision, made under the prior governor, triggered a conflict among creditors, as general-obligation bondholders claimed that directing money away from Puerto Rico’s budget to cover sales-tax debt payments violates the law. The island’s constitution states that general obligations must be repaid before other expenses, while Cofina creditors were promised a first claim to the sales-tax revenue.

The proposal extended by the hedge funds drew criticism from a group of general-obligation bondholders. Cofina bondholders “shamelessly propose a so-called deal to give less than 1% of it back to the commonwealth and keep 99% for themselves,” Andrew Rosenberg of Paul, Weiss, Rifkind, Wharton and Garrison, an adviser to the group, said in statement.

Puerto Rico sales-tax bonds due in 2036 traded Monday for an average of 67.2 cents on the dollar to yield 9.8 percent. General obligations that mature in 2035, among the island’s most active securities, traded for 71.5 cents on the dollar, according to data compiled by Bloomberg.

The Confina creditors said in the statement announcing their willingness to work with the governor that opposition from some other bondholders is "self-serving and built on deceptive half-truths."

"We implore even the most reluctant and litigious stakeholders to work constructively with the government of Puerto Rico and the oversight board during this crucial period," the statement said.

A spokesman for the federal fiscal board created to oversee the island’s finances declined to comment. The Wall Street Journal first reported the hedge fund offer late Monday.

The governor’s representative to the board, Elias Sanchez, said that the government has received no formal offer but that the proposal was discussed in meetings.

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