[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*/


  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 

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 
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 

    “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 

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/ 
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.



  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 
on Monday, November 19th. You can read this article in Spanish here 

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 

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 
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 
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 
Old Bellows Partners LP 	$172,988,236 	$95,143,529 	$160,879,059 
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 
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* 

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 
to April 2018 
from $254 million to $1.1 billion.

All this came while these firms signed a statement 
“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 

*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 
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 
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 

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 
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 
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 
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/
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