PR GO, COFINA bondholders spar over pending litigation
The COFINA Seniors Coalition on Wednesday filed a motion to join litigation already pending in the U.S. District Court in Puerto Rico — Lex Claims, LLC et al. v. Garcia-Padilla et al. — to expose what they called “meritless, self-serving claims brought by a litigious faction” of General Obligation (“GO”) bondholders.
“Although our group preferred to respect PROMESA’s litigation stay and use this valuable time window to pursue a voluntary restructuring agreement, we now welcome the opportunity to successfully defend our constitutionally-protected property rights and ultimately assert our strong legal standing over these unsecured creditors,” the holders of debt issued by the Sales Tax Financing Corp., known as COFINA, said in a statement.
“While the Plaintiffs clearly view their litigation campaign as a means of holding Puerto Rico’s economy hostage, our group understands this baseless action threatens the island’s ability to re-access the capital markets through securitized finance mechanisms and also puts countless local bondholders at risk,” the bondholders said.
“The fact that COFINA bonds are the most widely held on-island issuance by a seven-to-one margin compared to GO bonds means retail investors and retirees are in the crosshairs,” the group said.
“Preventing these individuals from receiving their coupon payments and depressing COFINA bond values will translate to a further reduction in commerce and another uptick in outmigration,” they added.
The COFINA Seniors Coalition of creditors is made up of retirees and individual investors in Puerto Rico and throughout the United States, as well as asset managers GoldenTree Asset Management LP, Merced Capital LP, Tilden Park Capital Management LP, Whitebox Advisors LLC, and others.
COFINA and GO bondholders have been clashing over how each will get paid as the Puerto Rico government restructures close to $70 billion in debt. While GO debt is constitutionally protected and should be paid before other public expenses, the government has missed interest payments over the past year.
COFINA bondholders have received their pay, given that revenue used to cover that debt comes from sales tax collections that are channeled directly to a trustee who handles disbursements.
The litigation pending in court poses the question of whether it was illegal for the Commonwealth to assign billions of its tax revenues to COFINA.
“We believe that assignment was illegal. The COFINA group disagrees. If the court agrees with us, the Commonwealth will be more than $50 billion better off,” said Ad Hoc Group of General Obligation Bondholders, responding to the first group’s claims.
“Since we are confident in our position, we are content to allow the court to decide this important issue unless it can be satisfactorily settled,” the GO bondholders said in their statement. “In contrast, the COFINA bondholder group first tried to stay the litigation, which the court recently refused to do.”
The GO bonholders called COFINA’s statement as “filled with fear-mongering and mischaracterization,” by suggesting “that the political leaders of the Commonwealth should impose a $50 billion burden on all citizens of Puerto Rico for the exclusive benefit of investors of COFINA bonds — including the off-island hedge funds that have nearly all the COFINA bondholder group’s holdings.”
“These tactics speak volumes. The COFINA bondholder group has bet on a scam, and they are mighty uncomfortable having to defend it,” the GO bondholders stated.
Meanwhile, the COFINA bondholders expressed hope that “Puerto Rico’s leaders and citizens do not overlook this GO bondholder group’s startling level of comfort with inflicting economic collateral damage on the island.”
“If the plaintiffs achieve their desired outcome, the government’s historic financing challenges will be compounded by a loss of access to the securitization channel and very limited capacity to issue new GO debt without violating Puerto Rico’s constitutional debt limits,” the group said.
“This strategy of obstruction first came to light during the Plaintiffs’ failed attempt to lobby against PROMESA and has reappeared in the form of hostile litigation and deceptive on-island ads that attack COFINA. In contrast, we look forward to being heard in court and prevailing on the legal merits of our case,” the GO group said.