Senior holders of Puerto Rico Sales Tax Financing Corp. (COFINA) bonds filed a motion Wednesday to become involved in a court case that pits their interests against those of the commonwealth's general obligation bond holders.
If the judge in the case, Francisco Besosa, rules for the general obligation holders the court could reduce COFINA's "indebtedness to close to zero," said attorney John Mudd in a blog post on Friday.
The COFINA Senior Coalition filed a motion to intervene in the case Lex Claims, LLC et al. v. Garcia Padilla et al. in U.S. District Court for Puerto Rico.
At issue is whether the sales and use tax revenues that in the early part of fiscal years flow into an escrow account at Banco Popular to pay off COFINA Puerto Rico Sales Tax Financing Corp. bonds are sacrosanct. Though the commonwealth government has been defaulting on its general obligation debt since July 1, it has been paying both its subordinate and senior lien COFINA bonds.
According to the Puerto Rico Treasury, enough money is in the escrow account to make COFINA debt service for the rest of the fiscal year. According to Puerto Rico as of July 2, 2016, $17.3 billion in COFINA bonds par and $12.5 billion in GO bonds were outstanding. An additional $193 million in GO notes and GO General Services Administration Loan were outstanding.
In a complicated and
Besosa is the judge in charge of nearly all the debt-related cases in the federal court system. By denying the stay, Besosa opens the door for his ruling in the case.
Puerto Rico attorney John Mudd, in a blog post about Besosa's ruling on the stay, said the case is a "paper litigation," meaning that Besosa can rule without an oral hearing. "I am sure plaintiffs are at this time preparing their motion for summary judgement to have the court decide the issue quickly and I have no doubt he will do so," Mudd continued.
In a phone conversation Mudd noted that the Puerto Rico Oversight, Management and Economic Stability Act give GO bonds certain protections not found in Chapter 9 bankruptcy.
In a written statement the COFINA Senior Coalition said that island residents hold seven times more COFINA bonds than they hold GO bonds. Partly because of this, a haircut to these bonds would have a substantial impact on Puerto Rico's economy. Impairing the COFINA bonds would also threaten the island's ability to re-access the capital markets, they said.
The GO holders argue that the Puerto Rico constitution gives priority to their bonds, meaning the money for the COFINA holders should be diverted to make GO payments.
