Swain concludes that the Fiscal Oversight Board (JSF) and the administration of Ricardo Rosselló complied with all the requirements of the PROMESA Law and the applicable provisions of the Bankruptcy Code. But, judging by the approaches of several creditors and a recent analysis of the Nobel Prize in Economics, Joseph Stiglitz, the proposed renegotiation for COFINA will not be as beneficial for Puerto Rico as alleged.
In addition, according to the objections filed in court, the adjustment plan will grant and benefit almost all of the payment to the main COFINA bondholders (a.k.a. Wall Street), causing losses to the subordinated creditors, who in majority are residents of Puerto Rico. Essentially, having a double standard which again hurts the local economy.
In that sense, the COFINA bondholders will have days, or at most a few weeks, in the middle of the festive season to determine if the adjustment plan suits them, an extensive and very complex document, full of warnings and risks that few or none presumably they will read.
In that sense, the COFINA bondholders will have days, or at most a few weeks, in the middle of the festive season to determine if the adjustment plan suits them, an extensive and very complex document, full of warnings and risks that few or none presumably they will read.
WHAT WILL HAPPEN TOMORROW TUESDAY?
Next Tuesday, Swain will have the opportunity to hear the arguments for and against the COFINA adjustment plan and will examine the informative statement presented by the JSF. Broadly speaking, it is a 621-page document, divided into several sections or chapters. The document includes the tax plan of COFINA, as well as details of the agreement signed by the Committee of Unsecured Creditors (UCC) and agent Bettina M.
Whyte on behalf of COFINA, which put an end to the controversy surrounding the ownership of the Sales and Use Tax (SUT). In addition, the document includes the preliminary agreement or PSA (in English) to modify the debt of COFINA and the amortization of the renegotiated debt to 40 years.
RUSHING THE PROCESS
The agreement is the result of the mediation process encouraged by Swain and which ended the dispute over the membership of the SUT. In the light of the judicial file, there is a rush to renegotiate the principal debt of the government of Puerto Rico.
The main legal adviser of the JSF, Martin Bienenstock, told Swain, earlier this month, that the entity expects to achieve approval of the adjustment plan for next January, that is, just as the US Congress passes into the hands of Democrats after the elections. of medium term.
Furthermore, unless the objectors prevail or Swain determines that the plan is not reasonable in the light of PROMESA , the voting process of the adjustment plan will be, in essence, academic because in the informative statement before the judge it is established that” the parties, as described in the PSA, will have to vote to accept the COFINA plan”.
On the other hand, Judge Swain denied a motion from the Official Committee of Retired Persons (COR), a group that requested that the deadlines be extended to present objections to the proposal at the table.
THE CONSTITUTIONAL MARGIN
Last Friday, the COR warned Swain that the pact presented now puts into play the future of Puerto Rico. Specifically, the COR reported that, in the first agreement between the parties, it was agreed that in the future, when COFINA issues debt again, it will have to be calculated within the margin of 15% established in the Constitution.
“Neither the agreement nor the Title III adjustment plan includes this safeguard,” the COR warned, through his attorney, Robert D. Gordon, adding that allowing the agreement without such a restriction is a “dangerously short-term” position. The indication is not light, because one of the findings of the special investigator Kobre & Kim on the reasons for the fiscal collapse of the island was not to count multiple debt transactions in the analysis of the constitutional margin.
THE GOOD, ACCORDING TO THE JSF
Sources assure that the JSF is not very in agreement with the terms reached with the COFINA bondholders. But faced with the possibility that the battle for membership of the IVU took years and the government had to spend hundreds of millions of dollars on lawyers, the JSF agreed to the agreement between the UCC and Whyte, on behalf of COFINA.
In short, the UCC and Whyte agreed to split almost equally between COFINA and the General Fund, the pledged portion of the IVU – that is, 5.5% of the total 11.5% that is the current rate. The agreement would allow the government to save about $ 17 billion in annual payments over the life of COFINA’s renegotiated debt.
According to the fiscal plan of COFINA, on page 10, and the PSA, Puerto Rico will only cut some $ 4.7 billion of the current principal of COFINA and that has been calculated at about $ 16.7 billion. Another argument in favor of the agreement, according to the JSF, is that it is an agreement signed by certain main COFINA creditors, municipal insurers and investment funds that hold General Obligation bonds (GOs) and that could have objected to the plan.
Apart from the debt exchanged, and as reported, those who sat at the negotiating table with the JSF and the government will receive $332 million, money that was accumulated in the accounts of the custodian bank of COFINA, Bank of New York Mellon, and that should have been used to pay the bondholders.
A “FARSA” OF 621 PAGES
Among the bondholders who will not receive a penny of that compensation figure Stephen T. Mangiaracina, a subordinate or “junior” bondholder of COFINA and who has cataloged the process that has been followed in COFINA as “a farce.” For the lawyer, the entire document presented by the JSF before the court “reeks of a rejection of due process of law” that shelters the bondholders.
“This objector will not be at the hearing on November 20, 2018. I live in South Carolina. That’s two days before Thanksgiving. It would cost an exorbitant amount of money for air ticket, lodging, meals and local transportation. My family and I can not spend what it would take to have a New York firm to represent us in court that day”, said the lawyer.
Apart from the COR, Mangiaracina, four savings and credit cooperatives have called on Swain not to give way to the COFINA agreement. “It is unreasonable for creditors to vote if they accept or reject a plan that is based on the numbers assigned to the claims of the creditors that have been presented”, argued the credit unions of Rincón and Juana Díaz, Manuel Zeno Gandía, Valenciano. This, referring to the 45,000 claims filed in COFINA and that until last May were estimated at $ 17.637 billion. Among other things, COFINA’s adjustment plan divides COFINA’s creditors into 10 groups or classes. But nowhere in the document is it explained how much COFINA should be for each class and what would be an approximate estimate of the level of recovery that each creditor would have, the cooperatives claimed.
On the other hand, the document also makes multiple technical warnings such as the fact that the renegotiation of COFINA contemplates exchanging exempt debt for taxable purposes and that the adjustment plan could be changed at any time. If this were the case, the JSF would notify it -at least- 15 days before the voting deadline.
He also warns that if a bondholder receives payment of his claim by check and does not change that check within six months, he will lose forever any possibility of claiming what belongs to him.
THE HISTORY OF THE IVU
In dollars and cents, as of fiscal year 2020, Puerto Rico would dedicate approximately $ 814.5 million for the payment of COFINA and other credits in the General Fund. The figure would increase to $ 1.85 billion towards fiscal year 2041. In total, after 40 years, and considering the cut of the principal provided by the PSA, Puerto Rico will pay the COFINA bondholders approximately $ 32.3 billion.
Beyond the complexities of the informative declaration, the debt that is exchanged and issued by the successor entity of COFINA, seems to rest on the premises that were questioned before the Title III of PROMESA was invoked. When under the administration of Luis G. Fortuño the subordinated series of COFINA were conceived, the bondholders presented that the collections for IVU would increase every year at a rate of 4%. Despite the fiscal plan which states that the population of Puerto Rico and therefore, the number of consumers will go down, making an obvious contradiction. the amortization table of the new bonds of COFINA establishes, precisely, that from the fiscal year 2020 until the fiscal year 2041, the collections for IVU will grow 4%.
However, since the IVU was adopted in 2006, the story is different.
The information statement states that the IVU has raised about $ 17.457 billion from 2006 to the fiscal year 2018. This would mean an average annual growth of 14%. When analyzing the performance of the SUT year by year, volatility reigns in this source of revenues.
For the year 2009, for example, instead of increasing, the collections of the IVU fell 13% year-on-year. To counterbalance, the Treasury promoted the IVU-Loto and forced the inspection in the points of sale. After that move, between the fiscal years 2011 to 2013, the collections of the IVU only increased between 1% and 3%. At that time, the government returned to the charge and legislated to collect the IVU in Internet sales.
Two years later, a 4% IVU was applied to professional services, which contributed to raising these collections by 14%. A year later, the IVU exceeded the $2 billion mark in collections because the applicable rate was increased to 11.5%.
THE ANALYSIS OF STIGLITZ
“Sadly, he did not take the opportunity to straighten out the fiscal boat of Puerto Rico”, Economy Nobel laureate Joseph Stiglitz wrote in the magazine Project Syndicate last week. According to Stiglitz, instead of the JSF modifying the plan taking advantage of the situation represented by Hurricane Maria, the COFINA pact places Puerto Rico “in a straitjacket for indefinitely indebtedness”.
“The terms of the restructuring do not provide enough relief for Puerto Rico to achieve future growth,” Stiglitz explained, noting that when the agreement is analyzed, in the aggregate, the principal and subordinated bondholders will receive almost 76 cents. When it is segmented, the recovery of the main bondholders would be almost 93 cents and subordinates would be 54 cents. “If this agreement were implemented, there would be virtually nothing left for the other bond categories,” the noted economist warned.
“Thanks to (the JSF), the COFINA bondholders will now receive much more than they could have expected last December when the bonds of Puerto Rico hit bottom” said Nobel Prize Economist JOSEPH STIGLITZ .
COMMENTS