[News] Debt Island: Wall Street Closes in on 40 Years of Profit at Puerto Rico’s Expense
news at freedomarchives.org
Thu Jan 10 14:37:33 EST 2019
Debt Island: Wall Street Closes in on 40 Years of Profit at Puerto
By Abner Dennis <https://news.littlesis.org/author/abner-dennis/> and
Kevin Connor <https://news.littlesis.org/author/kevin/>- January 10, 2019
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An important chapter in the story of the Puerto Rican debt crisis is
coming to an end this month, as an adjustment plan around sales
tax-backed, or COFINA, debt is being voted on by creditors and will
likely be approved by the federal court overseeing the restructuring
process in mid-January. The agreement will lock in 40 years of payments
to Wall Street bondholders, with deep consequences for Puerto Rico.
Hedge fund billionaires are on the verge of pulling off what seemed
unthinkable in the wake of Hurricane Maria: a massive payday, at the
direct expense of the Puerto Rican people, on debt that was trading for
pennies on the dollar in the months following the hurricane. As a result
of debt restructuring agreements like the COFINA plan, an island reeling
from economic and climate-induced crisis will be paying for billionaire
yachts and vacation homes instead of basic necessities and a just recovery.
But more is coming: in 2019, another major adjustment plan concerning
the commonwealth’s debt will need to be developed by the oversight board
and approved by creditors.
This report outlines basic information about the COFINA adjustment plan
and where it stands, the next plan to come, the shocking extent to which
promised debt service rose as a result of the hurricanes, two of the
billionaires profiting – and what is to be done.
*The COFINA Plan and Approval Process*
The COFINA adjustment plan is a sign of what is to come in the next
adjustment plan: indefensibly and unsustainably high debt service
payments, over the course of the next 40 years, that will necessarily
lead to extreme austerity measures. Mass layoffs, pension cuts, and deep
cuts to Medicaid and other essential services are the clear consequences
of these plans and their financial terms (not to mention a sales tax
rate that will remain sky-high); Puerto Ricans will be forced to pay for
Wall Street’s profits.
As a result of the plan, COFINA debt principal will be reduced from
$17.6 to $11.9 billion, or a 32% reduction – though overall, when
interest payments are included, the total debt service will be $32.3
billion over 40 years. This includes a 7% haircut for senior COFINA
bonds, and a 46% haircut for subordinated COFINA bonds.
Governor Rossello and the oversight board have hailed this as a victory
and as significant debt relief, but vulture funds that bought Puerto
Rico’s bonds at low prices will be securing massive profits – by our
estimates, some hedge funds will be profiting to the tune of _hundreds
of millions of dollars
The deal has been widely _criticized
as being far too generous for bondholders, including from some unlikely
corners (such as former Obama administration official, banker, and
PROMESA architect _Antonio Weiss
The COFINA plan is subject to approval by creditors, who must vote on
the plan by January 11, 2019. On January 16, it will go before Judge
Laura Swain for final approval. The voting process surrounding these
agreements is yet another illustration of just how anti-democratic the
restructuring is: only creditors are allowed to vote.
Some Puerto Ricans will be able to register their dissent in the voting
process, since anyone with government claims, such as retired public
employees, is able to vote. However, while there will be many, possibly
hundreds of thousands, of non-Wall Street voters, hedge funds have the
upper hand: the agreements can technically move forward with approval of
just one class of voters (such as a class of bondholders) through a
process called “cramdown.”**
*The Next Major Plan*
The Oversight Board has _stated
that an adjustment plan for central government debt will be negotiated
in the coming months. Commonwealth debt is the second largest slice of
the total debt, $13.2 billion, mostly held by general obligations
bondholders (GO’s). Since the COFINA plan of adjustment established a
precedent, the Commonwealth plan will also likely be for 40 years. This
plan will be developed by the oversight board and negotiated in a
process overseen by federally-appointed mediators.
This agreement will be extremely important because it will determine how
much of the General Fund will go to the bondholders. That means future
funding for education, health, and housing will be on the negotiating
table. The more they take to pay the debt, the less there will be for
The approval of the Commonwealth’s adjustment plan will hinge on another
voting process – all creditors, including any person with some kind of
claim against the central government, will have a vote. Voters will be
divided in groups according to their class of claims. As noted above,
the agreement can be forced through via a process called “cramdown” as
long as one class of creditors votes to accept the plan.
Hedge funds, who have the biggest portion of the debt, will likely vote
yes to the plan, since it will likely promise high bond payments. But
active public employees, retirees, government vendors and all persons
with claims against the Commonwealth will also get to vote.
*Hurricane recovery money padding vulture fund profits*
Why is the Oversight Board promising so much money to bondholders? It
turns out that hurricane recovery funds are playing a significantly role
– not in paying bondholders directly, but in indirectly padding and
subsidizing bond payments.
The restructuring should have taken a much different path following the
hurricane: debt held by Wall Street vultures should have been canceled
in order to free up resources for a just recovery. Instead, the federal
recovery money is padding short-term economic and fiscal projections. As
a result, the Wall Street-captured Oversight Board has promised much
higher payments to bondholders, post-hurricane, than they were offering
This is evident in the oversight board’s fiscal plans. From its _March
2017 fiscal plan
(pre-Maria) to its _October 2018 fiscal plan
(post-Maria), the fiscal board doubled debt service payments, apparently
based on projections bolstered by hurricane recovery money (Oversight
Board member Andrew Biggs described this as _“economic feedback”
<https://twitter.com/biggsag/status/1055487342171979776>_ in an October
Rather than leveraging these resources to strengthen essential services
and infrastructure, the oversight board is promising it to Wall Street.
*The billionaires profiting*
What is devastating for the vast majority of Puerto Ricans means huge
profits for vulture funds. They are managed by billionaires who are the
principal winners in these restructuring agreements. Who are they?
*Seth Klarman* is the billionaire CEO of the Baupost Group, a Boston
based hedge fund founded in 1982 known for its investments in distressed
assets. It _owns
more than $900 million in COFINA bonds. It invested big in Puerto Rico’s
debt in the second half of 2015, when it incorporated ten companies in
Delaware called Decagon Holdings with the purpose of hiding its identity.
Baupost investors include some of the wealthiest universities in the
world, including Ivy League universities like Harvard, Yale, and
Princeton, some of the wealthiest universities in the world which will
be making significant profits at the expense of Puerto Rico.
Another profiteer that recently has been very aggressive in its
investments is *Steve Tananbaum* from GoldenTree Asset Management.
GoldenTree now ranks in the top three Puerto Rico bondholders with more
than $2 billion in COFINA and general obligation bonds. Taking advantage
of the chaos caused by hurricane Maria, GoldenTree invested more than
$400 million in COFINA subordinated debt between _October 2017
and _April 2018
With the COFINA deal as it is, GoldenTree can expect profits of around
$160 million from these investments alone.
GoldenTree has a wide array of investors, including public and private
universities from the US like _Miami University
and the _University of Maine System
It also manages money for some public pension fund systems (including
Los Angeles County, Boston, New York State, and Texas).
Tilden Park Capital Management is another hedge fund that has been
investing big lately in Puerto Rico’s debt. It was founded and is
directed by *Josh Birnbaum*, former managing director at Goldman Sachs
who left the bank to found Tilden in 2009. Birnbaum is known for being
one of the traders that devised Goldman Sachs investment strategy that
took advantage of the 2007-2008 financial crisis. Betting against the
mortgage market, he made _$17 million
Tilden Park has more than _$950 million
in COFINA bonds. It also took advantage of the plummeting prices
following Hurricane Maria, scooping up around $282 million in COFINA
subordinated debt between _October 2017
and _April 2018
From these investments Tilden Park can expect profits around $110 million.
Tilden Park Capital Management manages the investments for some
retirement systems also, such as the Teachers Retirement System of the
State of Illinois and the New York State and Local Retirement System.
*What is to be done?*
As the approval process for the next adjustment plan unfolds, some
Puerto Ricans with claims against the government, such as retirees, will
have the opportunity to vote no. While rejection by these voters will
not override a bondholder yes vote, it will put pressure on the process.
Also, as shown in the debt restructuring process of the Government
Development Bank and COFINA, the Puerto Rican legislature can play a
role and vote against the enabling legislation for yet another
disastrous adjustment plan. Even though the Fiscal Board’s authority has
significantly undermined the legislature’s power, it will need its
consent to pursue a major restructuring in the Commonwealth’s plan of
Beyond that, those who cannot vote can say no in the informal corridors
of power, on the streets and in the airwaves – no to money for Wall
Street at the expense of basic services and necessary infrastructure, no
to 40 years of creditor control, no to a corrupt process that
prioritizes the value of payments to bondholders over the value of human
This, ultimately, is the only thing standing in the way of Wall Street’s
takeover of the next 40 years of Puerto Rico’s future: a rejection by
the Puerto Rican people of these adjustment plans. Significant public
pressure could force the oversight board, the federal judge, and her
appointed mediators to stop working for Wall Street; it could keep the
Puerto Rican legislature from passing any legislation necessary to put
the plans into effect; and it could ultimately force Wall Street
creditors to accept less profitable terms that do not clear the way for
deep austerity and corporate control.
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