[News] Puerto Rico - restructuring of the debt will bestow massive profits on vulture funds at the direct expense of Puerto Ricans
Anti-Imperialist News
news at freedomarchives.org
Tue Nov 20 14:30:59 EST 2018
/*Part 2 follows*/
https://news.littlesis.org/2018/11/19/the-cofina-agreement-part-1-the-first-40-years/
The COFINA Agreement, Part 1: The First 40 Year Plan
By Abner Dennis <https://news.littlesis.org/author/abner-dennis/> and
Kevin Connor <https://news.littlesis.org/author/kevin/>
November 19, 2018
------------------------------------------------------------------------
/This is the first installment of a two-part series on the COFINA debt
restructuring agreement for Puerto Rico. We will post the second part on
Tuesday, November 20th. You can read this article in Spanish here
<https://news.littlesis.org/2018/11/19/el-acuerdo-de-cofina-parte-1-el-primer-plan-de-40-anos/>./
A major deal around the restructuring of the largest portion of Puerto
Rico’s debt cleared an important legislative hurdle this month. As it
stands, the deal will bestow massive profits on vulture funds at the
direct expense of Puerto Ricans.
By our estimates, the small group of hedge funds driving the deal will
make over $1 billion in profits. Puerto Ricans, meanwhile, continue to
suffer deteriorating living conditions, with hundreds of public schools
having been closed and thousands of families in danger of seen their
mortgages foreclosed.
This series of two articles offers background on the debt restructuring
agreement, including how it will play out for speculators on the debt.
The agreement came through the Puerto Rico legislature’s recent approval
of House Bill 1837
<http://www.oslpr.org/2017-2020/%7B0E915DA9F84747568ED565D30082AE2C%7D.docx>,
which facilitates the restructuring of the debt of the Sales Tax
Financing Corporation (commonly known as COFINA, by its Spanish
acronym). The bill was passed without any public hearings or discussion;
it is another step in the process of certifying the COFINA Adjustment
Plan, the first debt restructuring achieved through Title III of PROMESA
(the Puerto Rico Oversight, Management, and Economic Stability Act, the
federal law that created Puerto Rico’s Fiscal Oversight Board), and the
second restructuring achieved after the Government Development Bank.
This agreement will restructure around $17.5 billion – or about 23.8% –
of the total debt. This is the largest slice of all the debts of the
government of Puerto Rico.
/*What is COFINA?*/
COFINA was created in 2006, during the administration of Governor Aníbal
Acevedo Vilá, and under a legislature dominated by the New Progressive
Party. It is a public corporation whose sole purpose was to issue bonds
to refinance the so-called extra-constitutional debt.
The source of repayment for the bonds that COFINA issued is the sales
and use tax (SUT), which started at 7% but gradually increased to 11.5%,
the highest sales tax in the entire United States. COFINA’s original
objective was also amended to include financing the operational expenses
of the various government agencies.
The arrangement generated needed revenue for Puerto Rico as it first
entered its ongoing economic crisis – but it did so by expanding
unsustainable lending arrangements that would ultimately prove
disastrous. Wall Street banks such as Santander – and revolving door
government officials tied to these banks – encouraged the creation and
expansion of this debt, enriching themselves through bond commissions
and sales.
/*What is the restructuring?*/
COFINA is one of the five entities that the Fiscal Board entered into
the bankruptcy process through Title III of PROMESA – the others were
PREPA (the public electric utility), the Retirement System, the Highway
Authority and the Central Government (the Commonwealth). A restructuring
consists of an agreement with creditors that establishes a new payment
structure for the debt. The last step to exit a bankruptcy process is
the approval of an adjustment plan, which finalizes the new agreement.
The basis of the COFINA adjustment plan is the division of the
collections generated by the SUT (again, the sales and use tax).
Of the 11.5% tax, 5.5% belonged to COFINA. From the start of the
bankruptcy process in federal court, different groups of creditors and
vulture funds have battled over who gets to extract this money.
The General Obligation (GO, or Commonwealth) bondholders and the
Unsecured Creditors Committee (the committee representing all unsecured
creditors of the government, like unions and businesses) have attacked
the constitutionality of COFINA, claiming that they are owed its share
of the SUT. Section 8 of Article VI of the Commonwealth Constitution
states:
“In case the *available revenues* including surplus for any fiscal
year are insufficient to meet the appropriations made for that year,
interest on the public debt and amortization thereof shall first be
paid, and other disbursements shall thereafter be made in accordance
with the order of priorities established by law.” /(emphasis added)/
Does “available revenues” include the proceeds from the SUT that are
passed on to COFINA? This question has never been answered by a court in
Puerto Rico. Cutting COFINA’s payments to its bondholders would mean
more money to both the Commonwealth (for example, to finance essential
services for the population) and its creditors.
The Fiscal Board and Judge Laura Taylor Swain, who is presiding over the
Title III process in federal court, avoided deciding on this matter,
preferring to open a mediation process that culminated in the following
agreement that forms the basis of the newly approved adjustment plan:
From the 5.5% portion of the SUT belonging to COFINA, 53.65% will be
preserved for the bondholders of COFINA and the rest will be for the
central government.
Through the recently approved restructuring law, the government of
Puerto Rico renounces its right to challenge the constitutionality of
COFINA in the future.
The adjustment plan of COFINA will be effective for the next 40 years.
Once approved, neither the legislature nor the governor can eliminate
the SUT during that period, unless they fulfill some very restrictive
conditions established in the agreement. /(See the “Substitution of
Collateral” conditions on //page 286/
<https://emma.msrb.org/ES1207302-ES942883-ES1343652.pdf>/of the
disclosure statement for the adjustment.)/
The Financial Control Board established by PROMESA and the
administration of Governor Ricardo Rosselló are selling the plan as a
victory and step toward restoring the country’s access to credit
markets. In particular, the cuts to the bonds’ face value (“haircuts”)
made through the agreement stand out, from approximately $17.6 billion
to $11.9 billion, or a reduction of 32%. The question is, are these cuts
enough?
To understand the cuts, it is necessary to understand the hierarchy of
COFINA bonds. On the one hand, there are senior bonds, those whose debt
is more secured, and which are the first in line to collect. Then there
are the subordinates or juniors, which are next in line. Senior bonds
total $7.7 billion (44% of the total debt), while juniors total $9.8
billion (56%). /(See //page 138/
<https://drive.google.com/file/d/1iotA4SxTa19aXk_3BwMyepe6n84v8SjZ/view>/of
the COFINA fiscal plan.)/
Senior bonds were only cut by 7%; that is, they will be able to recover
93% of the nominal value of the bonds, while the juniors were cut by
46.1%, enabling a recovery of only 53.9% of the bonds’ nominal value.
Obviously, the weight of the cuts fell on the owners of junior bonds. It
should be noted that Puerto Rican investors own a larger portion of
these subordinated bonds.
The sustainability of this adjustment plan is questionable. After all,
Puerto Rico has been in an economic depression since 2005. Not only does
the economy continue to contract, as recognized by the fiscal plans of
the Fiscal Board, but the emigration of Puerto Ricans to the United
States, mainly to Florida, will continue in the coming years, according
to the same projections. The only growth expected will come from the
impact of billions of dollars in federal money, primarily through
Federal Emergency Management Agency (FEMA) and Community Development
Block Grant (CDBG) funds. Once those funds end, the economy will likely
again falter.
In an economy that has been shrinking for the past 13 years, how can an
agreement that will increase debt payments annually and govern the
country for the next 40 years be approved?
Examining the first restructuring plan to emerge from PROMESA leaves no
doubt that the Fiscal Board is at the service of vulture funds and other
large investors whose profits are directly related to the hollowing out
of public services and the decline in the quality of life of the
majority of the people of Puerto Rico. As the government fails,
corporate interests step in to profit. What represents a disaster for
the island is a bonanza for Wall Street.
__________________________________
https://news.littlesis.org/2018/11/20/the-cofina-agreement-part-2-profits-for-the-few/
The COFINA Agreement, Part 2: Profits for the Few
/This is the second installment of a two-part series on the COFINA debt
restructuring agreement for Puerto Rico. We posted the first part
<https://news.littlesis.org/2018/11/19/the-cofina-agreement-part-1-the-first-40-years/>
on Monday, November 19th. You can read this article in Spanish here
<https://news.littlesis.org/2018/11/20/el-acuerdo-de-cofina-parte-2-las-ganancias-de-los-pocos/>./
If the COFINA agreement represents the continuous ruin of their country
for the large majority of Puerto Ricans who are working people, for the
bondholders, it constitutes a guarantee of immense profits on their
investments.
The biggest beneficiaries of this agreement are the vulture funds that
purchased the debt when bond prices fell significantly between 2014 and
2016. Among them are hedge funds Aristeia Capital, Baupost Group, Canyon
Capital, GoldenTree Asset Management, Old Bellows Partners, Scoggin
Capital Management, Taconic Capital Advisors, Tilden Park Capital and
Whitebox Advisors. Collectively, these hedge funds are organized as the
COFINA Senior Bondholders Coalition
<http://cases.primeclerk.com/puertorico/DownLoad-DownloadPDF?id1=ODkzMzIy&id2=0&id3=0>.
By August 2018 they held around $5.2 billion in bonds – almost 30% of
COFINA’s debt.
If we assume that these funds bought senior bonds at an average of 55
cents for every dollar (a roughly average price between 2014 and 2016),
then under this agreement they would secure over $1 billion in profits,
a massive payout on their initial investment. The below table shows
these figures:
*Table 1. Estimated profits for senior bondholders*
*Hedge funds* *Nominal value of senior COFINA debt* *Value of purchase
(if purchased at 55 cents on the dollar)* *Repayment (at 93 cents on
the dollar)* *Profits*
Aristeia Capital LLC $185,520,000 $102,036,000 $172,533,600 $70,497,000
Baupost Group $452,413,003 $248,827,151 $420,744,092 $171,916,941
Canyon Capital Advisors $246,075,000 $135,341,250 $228,849,750
$93,508,500
Fideicomiso Plaza $1,210,000 $665,500 $1,125,300 $459,800
GoldenTree Asset Management LP $732,239,032 $402,731,467 $680,982,299
$278,250,832
Old Bellows Partners LP $172,988,236 $95,143,529 $160,879,059
$67,735,530
Scoggin Management LP $54,425,100 $29,933,805 $50,615,343 $20,681,538
Taconic Capital Advisors LP $180,284,093 $99,156,251 $167,664,206
$68,507,955
Tilden Park Capital Management LP $544,743,752 $299,609,063
$506,611,689 $207,002,626
Whitebox Advisors LLC $125,643,939 $69,104,166 $116,848,863 $47,744,697
*Totals* *$2,695,542,155* *$1,482,548,182* *$2,506,854,201*
*$1,026,305,419*
Despite the cuts to subordinated bondholders, the vulture funds that
also invested in these bonds will also profit heavily.
Five of the funds in the COFINA Senior Bondholders Coalition – Aristeia
Capital, GoldenTree, Old Bellows, Tilden Park and Taconic Capital – made
huge purchases of subordinated bonds just after Hurricane Maria. Due to
the chaos caused by the hurricane, the bond prices fell significantly in
the following months. These funds quadrupled their junior bond holdings
from October 2017
<https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=NzExNDA2&id2=0>
to April 2018
<https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=NzMxNTUx&id2=0>,
from $254 million to $1.1 billion.
All this came while these firms signed a statement
<https://www.prnewswire.com/news-releases/cofina-seniors-coalition-issues-statement-of-support-for-puerto-rico-in-the-wake-of-hurricanes-irma-and-maria-300526993.html>
“in support of Puerto Rico” for the ravages caused by the natural disaster.
Let’s assume that these funds purchased subordinated COFINA bonds
between October 2017 and April 2018 at an average of 15 cents for every
dollar (several subordinated bonds exchanged between 5 and 28 cents in
that time period). Under the terms of the agreement they would see the
following gains on their post-hurricane purchases:
*Table 2. *Estimated profits from subordinated bonds acquired after the
hurricane**
*Hedge funds* *Nominal value of subordinated bonds purchased between
October 2017 and April 2018* *Value of purchase (if purchased at 15
cents on the dollar)* *Repayment (at 54 cents on the dollar)* *Profits*
GoldenTree Asset Management LP $408,675,047 $61,301,257 $220,684,525
$159,383,268
Tilden Park Capital Management LP $282,530,939 $42,379,641
$152,566,707 $110,187,066
Taconic Capital Advisors LP $107,530,194 $16,129,529 $58,066,305
$41,936,776
Old Bellows Partners LP $30,620,000 $4,593,000 $16,534,800 $11,941,800
Aristeia Capital LLC $22,585,000 $3,387,750 $12,195,900 $8,808,150
*Totals* *$851,941,180* *$127,791,177* *$460,048,237* *$332,257,060*
We would be talking about approximately $332 million in profits, or a
260% return on the total capital invested. Between April and August of
2018 these five funds continued to buy subordinated bonds, totaling
<http://cases.primeclerk.com/puertorico/DownLoad-DownloadPDF?id1=ODkzMzIy&id2=0&id3=0>$243,739,618.
It is important to note that while the executives at these hedge funds
will be raking in huge profits at the expense of Puerto Ricans, they are
also managing money on behalf of outside clients – meaning that outside
investors in the hedge funds, such as universities, public pension
funds, and foundations will also be profiting. Baupost’s investors, for
instance, include Ivy League universities Harvard, Yale, and Princeton,
some of the wealthiest universities in the world. In the case of
GoldenTree Asset Management, the vulture fund manages some of the
investments of the Teacher Retirement System of Texas, Miami University,
and the University of Maine System.
Vulture funds have used a variety of aggressive strategies to maximize
their profits in Puerto Rico, spending heavily on lawyers and lobbyists.
In July of 2018, we were able to get a brief window
<https://www.noticel.com/la-calle/tribunales/al-descubierto-los-arreglos-de-cabilderos-involucrados-en-la-deuda/766161257>onto
this lobbying offensive when one of their hired lobbying firms sued for
payment in federal court. The contract with Politank, a lobbying firm
hired by a law firm representing hedge funds who own COFINA bonds, shows
how high-powered law and lobbying firms also stand to profit from the
extraction of debt payments from Puerto Rico.
Politank was hired by Quinn Emanuel Urquart & Sullivan LLP, a law firm
representing the COFINA hedge funds. Their contract
<https://media.noticel.com/o2com-noti-media-us-east-1/document_dev/2018/07/10/dem%20politank%20cabilderos_1531258631998_12345125_ver1.0.pdf>was,
among other things, to lobby the government of Puerto Rico to reach a
consensual agreement for the restructuring of COFINA’s debt. Politank is
led by Francisco J. Domenech, the former campaign director for Jenniffer
Gonzalez, Puerto Rico’s nonvoting member of the House of Representatives
in Washington. Kenneth McClintock, past President of the Senate and
former Secretary of State, is also a principal at the lobbying firm.
Politank’s lawsuit on behalf of COFINA bondholders reveals just how
lucrative the contract was for the firm. In addition to monthly payments
of $55,000, the contract with Politank stipulated a “success fee,” a fee
that depended on the amount repaid by COFINA to the vulture funds. The
greater the profits, the greater the success rate – or, in other words,
the more the people of Puerto Rico had to pay the vulture funds, the
greater the bonus for lobbyists.
According to the lawsuit, if the bondholders’ recovery was 95% or more,
the fee would be $3 million. If it was 92.5%, it would be $2.5 million;
if it was 90%, it would be $1.275 million, and so on.
The contract was terminated by Quinn Emanuel Urquart & Sullivan LLP for
the alleged violation of one of the clauses that established that should
Politank commit any illegality, the contract would be automatically
canceled. Though the specific cause of cancellation remains unclear, it
could be due to the domestic violence charges that Domenech’s wife,
Veronica Ferraiuoli, brought against him, drawing attention from the
press. Charges were later dropped
<https://www.noticel.com/ahora/tribunales/desestiman-querella-contra-cabildero-francisco-domenech/748368750>and
Ferraiuoli now represents Politank in the case.
The next adjustment plan will be that of the Central Government. As is
the case with the COFINA agreement, this adjustment plan will also
govern the country for the next 40 years and will in all likelihood mean
millions in profits for the bondholders.
--
Freedom Archives 522 Valencia Street San Francisco, CA 94110 415
863.9977 https://freedomarchives.org/
-------------- next part --------------
An HTML attachment was scrubbed...
URL: <http://freedomarchives.org/pipermail/news_freedomarchives.org/attachments/20181120/74e66824/attachment.htm>
More information about the News
mailing list