On August 8, 2018, the Commonwealth and COFINA Agents announced a new, more lucrative deal on COFINA.

In fact, this is a coup for the COFINA bondholders: the aggregate recovery is almost 75%, and a 93% for COFINA Seniors.

This is a stunning turn of events. COFINA faced months of heavy attacks both from the GOs questioning their constitutionality, and from the Governor, who wanted access to the lockbox monies.  Moreover, in April 2017, COFINA holders were offered a 39.2% recovery.

Deal Details

Essentially, 53.65% of the “Pledged Sales Tax Base Amount (“PSTBA”) cash flow through and including 2058 (40 years) is fully allocated to the New COFINA Bonds.” The Commonwealth will keep the remaining 46.35% of this PSTBA, plus any excess of up to 5.50% of the SUT, which the Board calculates will increase in value. Hence, the new bonds will be secured (senior pledge) but by a decreased part of the SUT. The Board still believes it is a large amount of money. Also, from the terms of the agreement, it seems the monolines are on board with the deal.

Interest rate as to CIB’s is Total/Avg $9,249,560,000.00 @ 4.543%, but which works out as follows (page 5):

2028 995,875,000.00    4.350%

2032 1,206,510,000.00 4.500%

2038 3,212,925,000.00 4.550%

2043 3,834,250,000.00 4.600%

Interest rate as to CAB’s is Total/Avg $2,697,682,642.20 $15,401,229,579.75 5.500%

2058 2,697,682,642.20 15,401,229,579.75 5.500%

The breakdown of the recovery is as follows (page 8):

Aggregate Par + BNYM Recovery (in %)

COFINA Sr. Recovery 93.000% COFINA

Sub. Recovery 56.399% RSA Acceptance Charge 2.000% Aggregate Recovery 74.505%

Looming Questions

This tentative agreement, however, leaves a lot of questions unanswered.

Is the deal a result of pressure from Congress?

Is the deal a realization that the Board and Governor lack credibility in Washington?

A big question will be what the GOs do, if anything? Can the Commonwealth afford such a sweetheart deal after 2 years of non-stop claims by the Board and Governor that Puerto Rico is broke, and unable to pay her debts?  We should assume the confirmation of the COFINA Plan of Adjustment will be challenged in the Commonwealth Title III confirmation hearing. Although I am sure Judge Swain will sweep aside any objections, the First Circuit may not.

The Commonwealth may believe it is entitled to a bigger part of the 5.5% of the pledged SUT. Will it insist on more? What will Judge Swain do?

Moreover, the GO’s were allowed to intervene in the Commonwealth v. COFINA litigation and to file a motion for summary judgment. What if they insist on having a determination on their claims? Seems easier to come up with a deal for them than to continue litigating.

Does the deal have the requisite 2/3 amount majority and 50 +1 number of creditors required by the Plan of Adjustment or are the parties still working on it?

Now that we have almost 75% recovery for COFINA and 77.5% recovery for PREPA, is this the new bench mark? It is true that the GDB agreement has only 55% recovery, but its law states that the Commonwealth is not liable for its debts and has no assets except loans. It is only reasonable to wonder if other bondholders will receive the same deal. If so, the Title III may be resolved quickly and cheaply, and we may have wasted hundreds of millions of dollars and precious time that the Board and Governor cannot bring back. Let’s see what happens.