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June 27, 2018

Puerto Rico COFINAs Out of the Woods? Maybe, Maybe Not…

by Thomson Reuters.

Puerto Rico Sales Tax Bonds, better known as COFINAs, have been some of the best performing muni bonds in 2018, having risen in value by nearly 110% between January 2, 2018 and June 20, 2018[1]. This is quite a move for any financial security in less than 6 months, nonetheless a defaulted municipal bond. Still, this isn’t particularly surprising given the rally in many Puerto Rico names over that same time frame. Just look at the price graphs of some of the largest Puerto Rico issuers since January 1st:

A rising tide lifts all boats as they say, and an improving fiscal outlook (as per Governor Rossello’s revised fiscal plans) has translated into an improved recovery outlook for almost all Puerto Rico bondholders. The gains look even more impressive when expressed in percentage terms.

More recently however, COFINAs have started to significantly outperform their GO and PREPA counterparts, and much of this outperformance can be traced back to a particular bit of news that broke on June 5th: Puerto Rico’s GO, COFINA bondholders reach settlement read one headline by Reuters News. To summarize, it was announced that GO and COFINA creditors had reached an agreement in-principle to end a long-running dispute as to whether or not GO bondholders would (and could) be entitled to sales tax revenues that were pledged to COFINA bonds. The news sent COFINA bonds soaring, with senior secured 5.25s due in 2057 jumping over $6 between June 5th and 6th, from $68.75 to $75.00. The rally continued for several days, topping out on June 11th at $84.00. [2] This relative outperformance versus GO bonds and PREPAs since June 5th is highlighted below:

As it turns out, the party may have been a bit premature. On June 12th, a group of GO bondholders said that it was not prepared to back the proposed settlement.[3] They are seeking a 60-day delay in the ruling of the litigation, but only if they can negotiate new terms. While this news is a credit negative for COFINA bondholders, and potentially throws a wrench into the settlement process, senior secured COFINAs have drifted lower by only about 2% since then. While this long-running dispute appears as close to a resolution as it has in many years, it seems that we will need to wait a little longer before a final outcome.

[1] Source: Thomson Reuters Pricing Service closing bid prices as of 1/1/2018 and 6/20/2018.

[2] Source: Thomson Reuters Pricing Service closing bid prices as of 6/5/2018, 6/6/2018, and 6/11/2018.

[3] Source: Reuters News, Puerto Rico GO bondholders will not support COFINA settlement, 6/12/2018

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