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Puerto Rico Bondholders Balk at Deal to Divide Sales Taxes

Updated on
  • Deal promises some sales-tax debt a full recovery, group says
  • Sales-tax bonds rallied after tentative pact was announced

Major Puerto Rico bondholders are balking at a tentative agreement that would steer to owners of sales-tax-backed debt a large chunk of the revenue they’ve been pledged, threatening to prolong a fight over one of the biggest issues in the island’s record-setting bankruptcy.

The so-called ad hoc group of general-obligation bondholders told a U.S. court it has objections to the potential deal that court-appointed agents for the commonwealth and the entity that sold Puerto Rico’s sales-tax debt, called Cofinas, released last week. The deal triggered a rally in the price of the Cofina bonds, which would be repaid first and receive more than half of the sales-tax receipts that were dedicated to repaying the securities.

That arrangement would give sales-tax investors at least $3 billion more than what they would have received in a potential agreement that general-obligation bondholders and Cofina investors struck last month, the ad hoc group said in court documents. It would allow senior-lien Cofinas to recover about 125 percent of the face amount of their bonds, according to the group.

“In its current form, the agreement in principle is a recipe for further litigation, not the constructive solution this case so urgently needs,” lawyers for the general-obligation group wrote in the court documents.

U.S. District Court Judge Laura Taylor Swain will hold off on ruling on the issue of who has ownership of the sales-tax revenue until at least Aug. 4 while the agents continue to negotiate the potential deal, according to a court document. Resolving the issue of the sales-tax receipts is central to determining how much investors can recover on the Cofina and general-obligation bonds. Combined, the two portions of debt account for about $35 billion of the more than $70 billion that the commonwealth owes.

To finalize the agent agreement, the bankruptcy court would need to include it as part of Cofina’s debt adjustment plan after a sufficient number of Cofina investors support it, according to court documents.

Prices on Cofinas have increased following the release of the agents’ deal while general obligation bonds have remained little changed. Senior Cofinas maturing in 2036 traded Tuesday at an average price of 82 cents on the dollar, up from about 68 cents before the agreement was released, data compiled by Bloomberg show. General obligations with an 8 percent coupon and maturing in 2035 changed hands Tuesday at an average price of 40.4 cents, similar to where they were trading last week.

As part of the agent agreement, Cofinas would receive all of the $1.2 billion of sales-tax revenue that’s sitting in a reserve account. Once sales-tax bondholders are repaid each year, revenue would then flow into an escrow account for the commonwealth to repay creditors, including general-obligation bondholders, and to cover essential services. A federal board that oversees Puerto Rico’s finances would determine what services are essential.

“Whether, and to what extent, the board’s unbounded view of essential services may justify compromising the claims of prepetition creditors is sure to be a hotly contested issue when this Court is asked to confirm a plan of adjustment for the commonwealth,” the ad hoc said in court documents.

The case is The Official Committee of Unsecured Creditors v. Bettina Whyte, as agent of, the Puerto Rico Sales Tax Corp., 17-257, U.S. District Court, District of Puerto Rico (San Juan)

(Updates with conditions to finalize the deal in the sixth paragraph.)
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