On May 14, a large coalition of stakeholders in the COFINA-Commonwealth litigation, which we previously reported on here, announced a proposed settlement outline to resolve the long-running dispute over who owns the sales and use taxes pledged by COFINA to secure COFINA bonds. The proposed settlement is supported by the Ad Hoc Group of Puerto Rico General Obligation Bondholders, the COFINA Senior Bondholders Coalition, and certain monoline insurers. But while this is an important step forwards, the settlement does not yet have the support of the two agents appointed by the Oversight Board, the only parties with authority to settle the dispute.

The settlement framework contemplates retention of 5.5% Sales and Use Tax (“SUT”) by a newly-formed securitization trust, which would take ownership of the SUT through the effective date of the COFINA plan of adjustment plus 40 years (or until the new trust certificates are paid in full, whichever is longer). Under the proposal:

  • COFINA bondholders would receive Trust certificates entitling them to 52.5% of SUT cash flows plus 52.5% of the cash held by Bank of New York Mellon (representing previously collected and now disputed SUT)
  • Participating GO bondholders would receive 46.2% of SUT cash flows plus 46.2% of Bank of New York Mellon cash
  • Holders of other Commonwealth General Unsecured Claims up to an allowed claim amount of $500 MM would have the right to tender their claims to the Trust and receive up to 1.3% of future 5.5% SUT cash flows and 1.3% of the Bank of New York Mellon cash.[1]

The settlement framework is the most detailed proposal for resolution of the COFINA dispute to emerge from the mediation that has remained largely out of public view since last summer. It also marks the first instance of public agreement between large groups of holders of both COFINA bonds and GO bonds with respect to a resolution of the COFINA-Commonwealth dispute.

Notwithstanding these tailwinds, this proposal is perhaps more noteworthy for the number of parties that do not support it. Most importantly, the supporting parties acknowledge that “the two agents appointed by the Oversight Board would need to support the Joint Settlement Outline.” But, “the Commonwealth Agent did not support any portion of the Joint Settlement Outline.” And, while the supporting parties announced that the “the COFINA Agent supported the allocation of the Pledged Sales Tax between the Commonwealth and COFINA,” she quickly released her own statement to the contrary:

The press release made by the Ad Hoc Group of GO Bondholders earlier today erroneously states that the COFINA Agent ‘supported the allocation of the Pledged Sales Tax between the Commonwealth and COFINA’ in a proposed settlement of the Commonwealth-COFINA Dispute. This is inaccurate. The COFINA Agent neither endorsed nor rejected the proposed settlement. Additionally, the COFINA Agent specifically advised counsel to the Ad Hoc Group of GO Bondholders that any characterization of the COFINA Agent’s position in favor of the proposed settlement was neither authorized nor accurate.

Two other key stakeholders have rejected the proposal. The Financial Oversight and Management Board has stated that “the economic terms of this creditor proposal were not crafted with any prior input from either the Oversight Board or the Government and are completely unaffordable.” Puerto Rico’s government has also announced its opposition to the proposal. Describing the proposal as simply “not acceptable,” the Puerto Rico Fiscal Agency and Financial Advisory Authority insisted that the settlement’s “debt service requirements are not sustainable in light of Puerto Rico’s projected fiscal and economic situation.”

Given the lack of support for the proposed settlement framework – particularly from the two agents, the only parties that are authorized to settle the dispute – it is reasonable to assume that any eventual resolution of the Commonwealth-COFINA dispute will differ meaningfully from the May 14 proposal. But the significance of this development should not be understated: the emergence of a detailed framework with public support from key economic stakeholders on both sides of the dispute suggests that parties holding a significant portion of the island’s debt can achieve consensus on economic terms. It is a first step towards resolution of the Commonwealth-COFINA dispute.