After suffering through years of financial hardship and then experiencing one of the most brutal hurricanes in recent history, it is a relief to finally see some progress on Puerto Rico’s road to economic recovery.
Representatives for the commonwealth, and Puerto Rico’s largest debt issuance known by the Spanish acronym COFINA, gave us some much-needed good news last month by agreeing to settle their litigation over who owns the island’s sales tax.
Their compromise would allow the government to restructure COFINA and access billions of dollars in new revenue over the coming decades while at the same time ensuring that local and off-island bondholders recoup meaningful value in line with their rights.
There has naturally been heated debate over the settlement and potential financial recoveries for COFINA’s senior and junior bondholders, but we should not lose sight of the bigger picture. This settlement means we will avoid years of courtroom battles that would only prolong our financial uncertainty and economic pain. Anyone taking stock of Puerto Rico’s disastrous electric grid and battered infrastructure knows we need to use this deal as a springboard for solving bigger challenges impacting our day-to-day lives.
In terms of the deal’s economic implications, COFINA debt will be cut to between $11 billion and $12 billion depending on final negotiations with the Financial Oversight and Management Board. COFINA’s ownership of sales taxes will be reduced by almost half and the commonwealth’s general fund should begin receiving hundreds of millions per year in additional cash. That money can be applied to investments in growth-oriented projects, funding social services, and compensating other unsecured creditors and commonwealth stakeholders.
Another key point is that the $7 billion to $8 billion in debt reduction will yield a recovery of approximately $0.65 for COFINA — a reasonable amount that is nowhere near the figures suggested by rival stakeholders.
While COFINA’s senior bondholders will receive close to a full recovery, public disclosures indicate that subordinate bondholders are poised to receive strong value too. Recent proposals exchanged between COFINA creditors include subordinate bondholder recovery rates that are at least 20 percent higher than the average rate of $0.37 for junior secured creditors, a figure published in a 2012 study from the Federal Reserve.
Because of the prospective deal, COFINA bondholders will also be able to once again plan on receiving coupon payments that represent valuable income for individuals. This will be a particularly positive development here in Puerto Rico, where local investors hold COFINA bonds at a 7-to-1 ratio compared to general obligation debt. The sooner a deal can be finalized, the sooner many Puerto Ricans will have a little more cash to pay bills or put in the bank. Our economy will benefit accordingly.
Finally, it is important to separate fact from fiction when assessing whether the commonwealth’s representative secured favorable enough terms in the COFINA settlement.
I think we can all agree it was better to have a court-appointed representative cut a deal than rely on Wall Street firms holding general obligation bonds. The negotiation between COFINA and general obligation creditors in the spring produced a settlement that would have given the government’s share of the sales tax right to general obligation bondholders.
Hopefully, the COFINA compromise is on a fast track to being formalized now that settlement terms have been reached and bondholder recoveries are being drawn up. In addition to helping reduce our debt burden and bringing more cash into the government’s coffers, the deal represents a model for helping the Financial Oversight and Management Board resolve other cases through negotiation. This is exactly the type of progress we need to be making after more than 14 months in bankruptcy.
José (Pepín) Rodriguez is an investor and former pro-bono public executive of the Government of Puerto Rico.