Puerto Rico's Top Creditors Flex Muscles in Bond Fight
November 23 2016 - 3:20PM
Dow Jones News
Puerto Rico's largest mutual-fund bondholders have broken their
silence in an ongoing $30 billion creditor standoff, underscoring
tensions between the commonwealth's traditional municipal investor
base and the hedge funds now involved in its financial
restructuring.
Funds controlled by fixed-income giants Franklin Investments and
OppenheimerFunds asked a federal judge last week to enter them as
defendants in a lawsuit brought by hedge funds holding general
obligation, or GO, bonds that have been in default since July.
The lawsuit pits those creditors against investors holding $17
billion in competing bonds known as Cofinas for their Spanish
acronym and backed by sales tax revenues. If successful, the
lawsuit could compromise the Cofina bondholders' liens and free up
a fresh source of repayment for the GO bondholders, which are
guaranteed under the Puerto Rican constitution.
The courts, on the other hand, could affirm the commonwealth's
longstanding position that the sales-tax revenues are off-limits to
the GO bondholders. U.S. District Court Judge Francisco Besosa
could also freeze the dispute in the hopes that the warring
investor groups will negotiate a settlement, as the Cofina
investors have urged.
Congress installed a federal oversight board over the summer to
take over Puerto Rico's financial decision-making, but it has yet
to announce the hiring of legal and financial advisors with whom
creditors will negotiate. The legal status of the Cofina revenues
has never been tested in the courts, and resolving it now would
take a major question on creditors' rights out of the board's
hands. For now, it wants the dispute paused under the automatic
stay provisions of the Puerto Rico Oversight, Management and
Economic Stability Act, or PROMESA.
Franklin and Oppenheimer, along with Santander Asset Management,
are cross-holders with a combined $3.6 billion in Cofina claims and
$1.1 billion in GO claims, according to a filing in Puerto Rico
federal court.
With $2.8 billion of their exposure in subordinated Cofina debt,
the mutual funds said they have the "greatest possible interest" in
protecting the sales taxes from being diverted. Junior Cofina bonds
would suffer the most if the revenue stream were interrupted,
although they have continued to be paid even with the territorial
government in default on its constitutional debt.
Hedge funds exclusively holding senior Cofina bonds have already
asked to be heard in the lawsuit. Those bondholders, including
GoldenTree Asset Management, Merced Capital and Taconic Capital
Advisors, hold zero-coupon bonds that don't come due for decades,
according to people familiar with the matter. Their group has taken
the position that diverting the sales taxes would cause their
claims to come due immediately, leapfrogging over those of junior
creditors.
As holders of both types of bonds, the mutual funds said they
aren't conflicted and have reason to guard the interests of all
creditors within the $17 billion Cofina debt stack. Puerto Rican
lawmakers first segregated sales-tax revenues from its general fund
a decade ago to create an alternate borrowing mechanism.
"The interests of Cofina, its bondholders generally and its
current-pay subordinate bonds in particular are served by
maintaining the statutory transfer," lawyers for Franklin,
Oppenheimer and Santander wrote in court papers. "It is likely that
the senior Cofina bondholders want Cofina to default."
A spokesman for the mutual funds declined to comment beyond the
filing. Representatives for the GO bondholder group and for Cofina
bond trustee Bank of New York Mellon didn't immediately respond to
requests for comment.
James Doak of Miller Buckfire & Co., an adviser to the
senior Cofina bondholder group, called the mutual funds' appearance
"a positive for Puerto Rico, the oversight board and the incoming
administration."
"Major, long-standing investors holding both GO and Cofina bonds
are stepping forward to defend PROMESA's stay provision and reject
more litigious GO bondholders' attempts to seize [sales tax]
revenue," he said.
The benchmark 8%-coupon GO bonds due in 2035 traded Friday at
69.5 cents on the dollar, according to FactSet, having cooled off
from a post-election rally that pushed prices to 73 cents. Puerto
Rico recently elected Dr. Ricardo Rossello, a statehood supporter
perceived by investors as friendlier to creditor interests, to
replace Gov. Alejandro Garcí a Padilla. The new governor takes
office in January.
(END) Dow Jones Newswires
November 23, 2016 16:05 ET (21:05 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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