Objections filed in the Puerto Rico Sales Tax Financing Corp. (COFINA) Title III bankruptcy case may force changes to the restructuring plan for more than $17 billion of bonds, attorneys said.
Title III Judge Laura Taylor Swain is scheduled to hold a hearing in San Juan on the proposed COFINA plan of adjustment on Jan. 16.
In addition to the written objections filed up to the Jan. 2 deadline, Title III Judge Laura Taylor Swain said Monday that people could make oral presentations about the deal in the San Juan court or in her New York City court room, which will have an audio/video connection. If more than 25 people sign up, the slots will be randomly allocated.
Complicating matters further, the IRS through the U.S. Department of Justice filed a request on Dec. 27 for an extension of time to file an objection, citing the federal shutdown. Swain extended the deadline for the IRS to Jan. 4 but didn’t extend it further.
If the IRS were to try to make its views known before the hearing, it remains to be seen if Swain would take them into account.
At least seven parties filed written objections up to Jan. 2. The filers range from individual holders to trade unions to credit unions to institutional holders to a member of the Puerto Rico House of Representatives.
The plan of adjustment would give Puerto Rico a 32% reduction in COFINA debt and more than $17 billion in debt service savings. The Puerto Rico Oversight Board has said that the plan would lead to recoveries of 93% for COFINA senior bondholders and 56.4% for COFINA subordinate holders.
Bondholder Peter Hein and institutional holder GMS Group have strong arguments, said Puerto Rico attorney John Mudd. Mudd pointed to Hein’s objection based on the plan treating holders in Puerto Rico differently from those residing outside of it and Hein’s and GMS’s arguments based on the stripping of a lien without consent or compensation.
The seven COFINA plan objectors have covered every conceivable argument, said James Spiotto, managing director at Chapman Strategic Advisors.
The judge will consider the written objections in deciding on whether to approve the plan, Spiotto said. She will also look at how decisively bondholders vote for the deal.
If Swain has substantial concerns about the plan, she could voice them and request the plan’s proponents to create an amendment to address them, Spiotto said. If the changes are significant, COFINA holders might have to vote again on the plan.
Hein pointed out that the plan sets aside $1 billion for “on-island investors” to accept taxable bonds.
“Puerto Rico investors owning subordinate COFINA bonds can elect to receive a 2% cash fee and one tranche of current interest bonds with a 2040 maturity,” Hein wrote. “By contrast, non-residents of Puerto Rico get no cash fee and their distribution of securities is splintered up into four coupon maturities (going out to 2058) and seven capital appreciation bond maturities (going out to 2051). Almost all of the repayment of principal to investors in the 50 states is back-loaded to 2046, 2051, and 2058.”
Hein said this practice of treating some holders of a particular claim differently from other holders of the claim is prohibited by U.S. bankruptcy code.
Hein argued that the plan of adjustment’s breaking of the COFINA lien on sales tax revenue violates the Contract and Takings Clauses of the U.S. Constitution.
Hein also complained that he was given a thumb drive with the roughly 600 page disclosure document only seven business days before the deadline for filing an objection to the deal. He said this gave him and other individual COFINA holders inadequate time to create a written response and file it.
GMS, which holds more than $500 million in subordinate bonds either in retail client accounts or in proprietary accounts, said the plan would be contrary to the Takings Clause of the U.S. Constitution. The enactment of PROMESA doesn’t make a difference, it said. “Congress, too, is bound by the Fifth Amendment [which includes the Takings Clause]. Puerto Rico cannot enlist Congress in violating an amendment to which Congress is also bound.”
GMS chief executive officer Paul Konsig complained that institutional holders of COFINA senior and subordinate bonds increased their holdings of the COFINA subordinate bonds to August 2018 from August 2017 by $1 billion while participating in confidential mediation.
A person close to the institutional entities that participated in the mediation said, “Such a claim is baseless given purchases wouldn’t have occurred during the mediation when parties were restricted from trading. Any purchases occurred at the appropriate time, which was after public blow-out milestones.” In the “public blow-out” periods the terms of the negotiated proposals were released to the public.
Some parties, including the trade unions, argued in their objections that the proposed deal is too generous to bondholders.
Before the Jan. 16 hearing, proponents of the deal will file written responses to the objections, Spiotto said.
