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<div class="header reader-header reader-show-element"> <font
color="#ff0000"><i><b><font size="+2">Part 2 follows</font></b></i></font><font
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<a class="domain reader-domain"
href="https://news.littlesis.org/2018/11/19/the-cofina-agreement-part-1-the-first-40-years/">https://news.littlesis.org/2018/11/19/the-cofina-agreement-part-1-the-first-40-years/</a></font>
<h1 class="reader-title">The COFINA Agreement, Part 1: The First
40 Year Plan</h1>
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<div class="byline"> By <a
href="https://news.littlesis.org/author/abner-dennis/"
title="Posts by Abner Dennis" class="author url fn"
rel="author">Abner Dennis</a> and <a
href="https://news.littlesis.org/author/kevin/"
title="Posts by Kevin Connor" class="author url fn"
rel="author">Kevin Connor</a></div>
<div class="posted-on"><time class="entry-date published"
datetime="2018-11-19T14:27:37+00:00">November 19, 2018</time></div>
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<p><em>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 <a
href="https://news.littlesis.org/2018/11/19/el-acuerdo-de-cofina-parte-1-el-primer-plan-de-40-anos/">here</a>.</em></p>
<p><span>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. </span></p>
<p><span>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.
</span></p>
<p><span>This series of two articles offers background on
the debt restructuring agreement, including how it
will play out for speculators on the debt.</span><span><br>
</span></p>
<p><span>The agreement came through the Puerto Rico
legislature’s recent approval of </span><a
href="http://www.oslpr.org/2017-2020/%7B0E915DA9F84747568ED565D30082AE2C%7D.docx"><span>House
Bill 1837</span></a><span>, 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. </span></p>
<p><span>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.</span></p>
<p><em><strong>What is COFINA?</strong></em></p>
<p><span>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. </span></p>
<p><span>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. </span></p>
<p><span>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.</span></p>
<p><em><strong>What is the restructuring?</strong></em></p>
<p><span>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.</span></p>
<p><span>The basis of the COFINA adjustment plan is the
division of the collections generated by the SUT
(again, the sales and use tax). </span></p>
<p><span>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. </span></p>
<p><span>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: </span></p>
<blockquote>
<p><span>“</span><span>In case the <strong>available
revenues</strong> 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.</span><span>”
</span><i><span>(emphasis added)</span></i></p>
</blockquote>
<p><span>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.</span></p>
<p><span>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.</span></p>
<p><span>Through the recently approved restructuring law,
the government of Puerto Rico renounces its right to
challenge the constitutionality of COFINA in the
future.</span></p>
<p><span>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. </span><i><span>(See
the “Substitution of Collateral” conditions on </span></i><a
href="https://emma.msrb.org/ES1207302-ES942883-ES1343652.pdf"><i><span>page
286</span></i></a><i><span> of the disclosure
statement for the adjustment.)</span></i></p>
<p><span>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? </span></p>
<p><span>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%). </span><i><span>(See </span></i><a
href="https://drive.google.com/file/d/1iotA4SxTa19aXk_3BwMyepe6n84v8SjZ/view"><i><span>page
138</span></i></a><i><span> of the COFINA fiscal
plan.)</span></i></p>
<p><span>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.</span></p>
<p><span>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. </span></p>
<p><span>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?</span></p>
<p><span>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.</span></p>
<p><span>__________________________________</span></p>
<div class="container font-size5 content-width3">
<div> <font size="-2"><a class="domain reader-domain"
href="https://news.littlesis.org/2018/11/20/the-cofina-agreement-part-2-profits-for-the-few/">https://news.littlesis.org/2018/11/20/the-cofina-agreement-part-2-profits-for-the-few/</a></font>
<h1 class="reader-title">The COFINA Agreement, Part 2:
Profits for the Few</h1>
<p><em>This is the second installment of a two-part
series on the COFINA debt restructuring agreement
for Puerto Rico. We posted the <a
href="https://news.littlesis.org/2018/11/19/the-cofina-agreement-part-1-the-first-40-years/">first
part</a> on Monday, November 19th. You can read
this article in Spanish <a
href="https://news.littlesis.org/2018/11/20/el-acuerdo-de-cofina-parte-2-las-ganancias-de-los-pocos/">here</a>.</em></p>
<p>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.</p>
<p>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 <a
href="http://cases.primeclerk.com/puertorico/DownLoad-DownloadPDF?id1=ODkzMzIy&id2=0&id3=0">COFINA
Senior Bondholders Coalition</a>. By August 2018
they held around $5.2 billion in bonds – almost 30%
of COFINA’s debt.</p>
<p><span>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:</span></p>
<p><strong>Table 1. Estimated profits for senior
bondholders</strong></p>
<table>
<tbody>
<tr>
<td><strong>Hedge funds</strong></td>
<td><strong>Nominal value of senior COFINA debt</strong></td>
<td><strong>Value of purchase (if purchased at
55 cents on the dollar)</strong></td>
<td><strong>Repayment (at 93 cents on the
dollar)</strong></td>
<td><strong>Profits</strong></td>
</tr>
<tr>
<td>Aristeia Capital LLC</td>
<td>$185,520,000</td>
<td>$102,036,000</td>
<td>$172,533,600</td>
<td>$70,497,000</td>
</tr>
<tr>
<td>Baupost Group</td>
<td>$452,413,003</td>
<td>$248,827,151</td>
<td>$420,744,092</td>
<td>$171,916,941</td>
</tr>
<tr>
<td>Canyon Capital Advisors</td>
<td>$246,075,000</td>
<td>$135,341,250</td>
<td>$228,849,750</td>
<td>$93,508,500</td>
</tr>
<tr>
<td>Fideicomiso Plaza</td>
<td>$1,210,000</td>
<td>$665,500</td>
<td>$1,125,300</td>
<td>$459,800</td>
</tr>
<tr>
<td>GoldenTree Asset Management LP</td>
<td>$732,239,032</td>
<td>$402,731,467</td>
<td>$680,982,299</td>
<td>$278,250,832</td>
</tr>
<tr>
<td>Old Bellows Partners LP</td>
<td>$172,988,236</td>
<td>$95,143,529</td>
<td>$160,879,059</td>
<td>$67,735,530</td>
</tr>
<tr>
<td>Scoggin Management LP</td>
<td>$54,425,100</td>
<td>$29,933,805</td>
<td>$50,615,343</td>
<td>$20,681,538</td>
</tr>
<tr>
<td>Taconic Capital Advisors LP</td>
<td>$180,284,093</td>
<td>$99,156,251</td>
<td>$167,664,206</td>
<td>$68,507,955</td>
</tr>
<tr>
<td>Tilden Park Capital Management LP</td>
<td>$544,743,752</td>
<td>$299,609,063</td>
<td>$506,611,689</td>
<td>$207,002,626</td>
</tr>
<tr>
<td>Whitebox Advisors LLC</td>
<td>$125,643,939</td>
<td>$69,104,166</td>
<td>$116,848,863</td>
<td>$47,744,697</td>
</tr>
<tr>
<td><strong>Totals</strong></td>
<td><strong>$2,695,542,155</strong></td>
<td><strong>$1,482,548,182</strong></td>
<td><strong>$2,506,854,201</strong></td>
<td><strong>$1,026,305,419</strong></td>
</tr>
</tbody>
</table>
<p>Despite the cuts to subordinated bondholders, the
vulture funds that also invested in these bonds will
also profit heavily.</p>
<p>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 <a
href="https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=NzExNDA2&id2=0">October
2017</a> to <a
href="https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=NzMxNTUx&id2=0">April
2018</a>, from $254 million to $1.1 billion.</p>
<p>All this came while these firms signed a <a
href="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">statement</a>
“in support of Puerto Rico” for the ravages caused
by the natural disaster.</p>
<p>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:</p>
<p><strong>Table 2. <b>Estimated profits from
subordinated bonds acquired after the hurricane</b></strong></p>
<table>
<tbody>
<tr>
<td><strong>Hedge funds</strong></td>
<td><strong>Nominal value of subordinated bonds
purchased between October 2017 and April
2018</strong></td>
<td><strong>Value of purchase (if purchased at
15 cents on the dollar)</strong></td>
<td><strong>Repayment (at 54 cents on the
dollar)</strong></td>
<td><strong>Profits</strong></td>
</tr>
<tr>
<td>GoldenTree Asset Management LP</td>
<td>$408,675,047</td>
<td>$61,301,257</td>
<td>$220,684,525</td>
<td>$159,383,268</td>
</tr>
<tr>
<td>Tilden Park Capital Management LP</td>
<td>$282,530,939</td>
<td>$42,379,641</td>
<td>$152,566,707</td>
<td>$110,187,066</td>
</tr>
<tr>
<td>Taconic Capital Advisors LP</td>
<td>$107,530,194</td>
<td>$16,129,529</td>
<td>$58,066,305</td>
<td>$41,936,776</td>
</tr>
<tr>
<td>Old Bellows Partners LP</td>
<td>$30,620,000</td>
<td>$4,593,000</td>
<td>$16,534,800</td>
<td>$11,941,800</td>
</tr>
<tr>
<td>Aristeia Capital LLC</td>
<td>$22,585,000</td>
<td>$3,387,750</td>
<td>$12,195,900</td>
<td>$8,808,150</td>
</tr>
<tr>
<td><strong>Totals</strong></td>
<td><strong>$851,941,180</strong></td>
<td><strong>$127,791,177</strong></td>
<td><strong>$460,048,237</strong></td>
<td><strong>$332,257,060</strong></td>
</tr>
</tbody>
</table>
<p><span>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, </span><a
href="http://cases.primeclerk.com/puertorico/DownLoad-DownloadPDF?id1=ODkzMzIy&id2=0&id3=0"><span>totaling</span></a><span>
$243,739,618.</span></p>
<p><span>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.</span></p>
<p><span>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
</span><a
href="https://www.noticel.com/la-calle/tribunales/al-descubierto-los-arreglos-de-cabilderos-involucrados-en-la-deuda/766161257"><span>brief
window</span></a><span> 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.</span></p>
<p><span>Politank was hired by Quinn Emanuel Urquart
& Sullivan LLP, a law firm representing the
COFINA hedge funds. Their </span><a
href="https://media.noticel.com/o2com-noti-media-us-east-1/document_dev/2018/07/10/dem%20politank%20cabilderos_1531258631998_12345125_ver1.0.pdf"><span>contract</span></a><span>
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.</span></p>
<p><span>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. </span></p>
<p><span>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. </span></p>
<p><span>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. </span><a
href="https://www.noticel.com/ahora/tribunales/desestiman-querella-contra-cabildero-francisco-domenech/748368750"><span>Charges
were later dropped</span></a><span> and
Ferraiuoli now represents Politank in the case.</span></p>
<p><span>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.</span></p>
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