SAN JUAN, Feb 25 (Reuters) - Puerto Rico’s largest mutual fund creditors are urging the cash-strapped island to honor debt owed to creditors of its sales taxing authority, to avoid a ripple effect they say could threaten other restructuring deals on the island.
Puerto Rico, facing $70 billion in debt, is trying to climb out of economic crisis by reaching consensual restructuring deals with various creditor groups. Among its obligations is about $17 billion in debt owed to creditors of its sales taxing authority, known as COFINA.
In a letter on Wednesday night to Puerto Rico’s legislators, Franklin Advisers, OppenheimerFunds and the First Puerto Rico Family of Funds said the U.S. territory should protect COFINA debt. The funds have more than $10 billion combined invested in Puerto Rico, including a big stake in COFINA.
In a debt restructuring proposal earlier this month, Puerto Rico’s advisers proposed cutting various debt, including reducing COFINA debt by about 51 percent.
They funds say impairing COFINA debt could threaten other deals that were financed under structures similar to COFINA‘s.
COFINA debt is backed by a dedicated revenue stream from the island’s sales tax collections, a securitization passed by lawmakers when COFINA was created in 2006.
Earlier this month, Puerto Rico’s congress passed a similar securitization creating a new revenue stream to facilitate an $8.3 billion restructuring at the territory’s power utility PREPA, where Franklin and Oppenheimer are also key creditors. Congress is considering a similar revenue stream at water authority PRASA.
Raiding COFINA would signal to markets that Puerto Rico’s securitizations are vulnerable, the mutual funds said in the letter. That would hurt Puerto Rico’s “ability to obtain investment grade ratings for the securitization transactions contemplated for PREPA and PRASA,” threatening those deals, the funds said.
The funds are also big holders in the island’s constitutionally-protected general obligation (GO) debt, underscoring the complexity of Puerto Rico’s widely-held bonds. GO and COFINA holders are typically seen as having opposing interests, the former believing they have a constitutional first priority on all repayments, the latter contending their dedicated revenue stream exempts them from impairment.
“GO and COFINA bondholders’ interests are in direct opposition,” Nuveen Asset Management, which holds around $300 million in par value of insured Puerto Rican paper, said in a note this month. (Reporting by Nick Brown; Editing by Richard Pullin)