Debt backed by a portion of Puerto Rico’s sales tax rallied in active trading on Friday following the disclosure of the terms of an agreement between two major bondholder groups.
Under the agreement, laid out in a court filing on Thursday, sales-tax bonds will receive 54 per cent of future sales tax revenues set aside for bond payments, along with all of the cash that has accrued so far in a trust account meant for debt service.
The remaining 46 per cent of future sales tax revenue will go to the general obligation (GO) bonds, which are backed by Puerto Rico’s “good faith, credit and taxing power”, and a constitutional provision that gives those bonds a first claim on its resources.
The agreement was reached in connection with Puerto Rico’s bankruptcy case, and involved Cofina, an entity set up to issue debt secured by a portion of the revenues from Puerto Rico’s sales and use tax.
Owners of Puerto Rico’s GO bonds argued that their constitutional first claim gave them a claim on Puerto Rico’s sales tax revenue before the Cofina bondholders.
The agreement was seen as a positive for the sales-tax bonds, which were among the most actively traded securities in the municipal bond market on Friday. The senior sales-tax bonds were among the biggest beneficiaries of the deal.
A bond maturing in 2040 traded as high as 84 cents on the dollar, its highest price since 2014, according to EMMA. Subordinate sales-tax bonds prices rose to 42.5 cents, the highest since early 2017.
Patrick Fleming, a distressed debt manager with Newfleet, said he expected that Cofina will exit bankruptcy in a matter of months once the agreement is approved — much more quickly than the commonwealth itself. GO bonds fell slightly, also in heavy trading.
“Cofina only has two groups of creditors, so it’ll be relatively easy for them to come up with a plan,” he said. “The sales and use tax was a big chunk of revenue for the government — they almost couldn’t negotiate a restructuring until they knew what they’d get from the sales and use tax.”
The terms of the deal can still be challenged by dissatisfied bondholders or Puerto Rico’s government. US district court judge Laura Taylor Swain will rule on the agreement on August 4, after a 60-day delay requested by the bondholders’ representatives.
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