<html>
<head>
<meta http-equiv="content-type" content="text/html; charset=UTF-8">
</head>
<body text="#000000" bgcolor="#FFFFFF">
<div class="container font-size5 content-width3">
<div class="header reader-header reader-show-element"> <font
size="-2"><a class="domain reader-domain"
href="https://news.littlesis.org/2019/01/10/debt-island-wall-street-closes-in-on-40-years-of-profit-at-puerto-ricos-expense/">https://news.littlesis.org/2019/01/10/debt-island-wall-street-closes-in-on-40-years-of-profit-at-puerto-ricos-expense/</a></font>
<h1 class="reader-title">Debt Island: Wall Street Closes in on
40 Years of Profit at Puerto Rico’s Expense</h1>
<div class="meta-data">
<div class="reader-estimated-time">
<div class="post-meta">
<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><time class="entry-date
published" datetime="2019-01-10T08:42:30+00:00"> -
January 10, 2019</time> </div>
</div>
</div>
</div>
</div>
<hr>
<div class="content">
<div class="moz-reader-content line-height4 reader-show-element">
<div id="readability-page-1" class="page">
<div>
<p><em><a
href="https://news.littlesis.org/wp-content/uploads/sites/2/2019/01/DebtIsland_COFINAreport_V2.pdf">View
a pdf of this report</a></em></p>
<p><em><a
href="https://news.littlesis.org/2019/01/10/isla-deuda-wall-street-tiene-en-la-mirilla-40-anos-de-ganancias-a-expensas-de-puerto-rico">View
Spanish language version</a></em></p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p><strong>The COFINA Plan and Approval Process</strong></p>
<p>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.</p>
<p>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.</p>
<p>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 <u><a
href="https://news.littlesis.org/2018/11/20/the-cofina-agreement-part-2-profits-for-the-few/">hundreds
of millions of dollars</a></u>. The deal has been
widely <u><a
href="http://cepr.net/blogs/the-americas-blog/puerto-rico-s-crisis-has-been-good-for-many-just-not-the-island-s-residents">criticized</a></u>
as being far too generous for bondholders, including
from some unlikely corners (such as former Obama
administration official, banker, and PROMESA architect <u><a
href="https://www.bloomberg.com/opinion/articles/2018-10-08/puerto-rico-needs-a-better-debt-deal">Antonio
Weiss</a></u>).</p>
<p>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.</p>
<p>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.”<strong> </strong></p>
<p><strong>The Next Major Plan</strong></p>
<p>The Oversight Board has <u><a
href="https://www.elnuevodia.com/noticias/locales/nota/lajuntadesupervisionfiscalponderaajustealosbonistas-2466563/">stated</a></u>
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.</p>
<p>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 essential services.</p>
<p>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.</p>
<p>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.</p>
<p><strong>Hurricane recovery money padding vulture fund
profits</strong></p>
<p>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.</p>
<p>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
pre-hurricane.</p>
<p>This is evident in the oversight board’s fiscal plans.
From its <u><a
href="https://drive.google.com/file/d/1H7ucE-d_dyV0TR0JIsJakOiBfbIAI4gv/view">March
2017 fiscal plan</a></u> (pre-Maria) to its <u><a
href="https://drive.google.com/file/d/17ca0ALe7vpYn0jEzTz3RfykpsFSM0ujK/view">October
2018 fiscal plan</a></u> (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 <u><a
href="https://twitter.com/biggsag/status/1055487342171979776">“economic
feedback”</a></u> in an October 2018 tweet).</p>
<p>Rather than leveraging these resources to strengthen
essential services and infrastructure, the oversight
board is promising it to Wall Street.</p>
<p><strong>The billionaires profiting</strong></p>
<p>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?</p>
<p><strong>Seth Klarman</strong> is the billionaire CEO of
the Baupost Group, a Boston based hedge fund founded in
1982 known for its investments in distressed assets. It
<u><a
href="https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=ODk5ODcw&id2=0">owns</a></u>
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.</p>
<p>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.</p>
<p>Another profiteer that recently has been very
aggressive in its investments is <strong>Steve
Tananbaum</strong> 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 <u><a
href="https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=NzExNDA2&id2=0">October
2017</a></u> and <u><a
href="https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=NzMxNTUx&id2=0">April
2018</a></u>. With the COFINA deal as it is,
GoldenTree can expect profits of around $160 million
from these investments alone.</p>
<p>GoldenTree has a wide array of investors, including
public and private universities from the US like <u><a
href="https://miamioh.edu/_files/documents/about-miami/president/bot/2017/FA_12-07-17.pdf">Miami
University</a></u> and the <u><a
href="https://staticweb.maine.edu/wp-content/uploads/2014/02/Meeting-Materials78.pdf?0d0f03">University
of Maine System</a></u>. It also manages money for
some public pension fund systems (including Los Angeles
County, Boston, New York State, and Texas).</p>
<p>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 <strong>Josh
Birnbaum</strong>, 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 <u><a
href="https://www.lacera.com/about_lacera/boi/meetings/2018-08-08-boi_agnd.pdf">$17
million</a></u> in compensation.</p>
<p>Tilden Park has more than <u><a
href="https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=ODk5ODcw&id2=0">$950
million</a></u> in COFINA bonds. It also took
advantage of the plummeting prices following Hurricane
Maria, scooping up around $282 million in COFINA
subordinated debt between <u><a
href="https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=NzExNDA2&id2=0">October
2017</a></u> and <u><a
href="https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=NzMxNTUx&id2=0">April
2018</a></u>. From these investments Tilden Park can
expect profits around $110 million.</p>
<p>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.</p>
<p><strong>What is to be done?</strong></p>
<p>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
adjustment.</p>
<p>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 life.</p>
<p>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.</p>
</div>
</div>
</div>
</div>
<div> </div>
</div>
<div class="moz-signature">-- <br>
Freedom Archives
522 Valencia Street
San Francisco, CA 94110
415 863.9977
<a class="moz-txt-link-freetext" href="https://freedomarchives.org/">https://freedomarchives.org/</a>
</div>
</body>
</html>