Odds For Recoveries On Puerto Rico's General Obligation And COFINA Bonds?

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Includes: AFB, BAF, BBF, BBK, BFK, BKN, BLE, BSD, BYM, CXH, DMB, DMF, DSM, DTF, EIM, EIV, EOT, EVN, EXD, FMB, FMN, IIM, IQI, KSM, KTF, LEO, MEN, MFL, MFM, MFT, MHD, MMU, MNP, MQT, MQY, MUA, MUB, MUE, MUH, MUS, MVF, MVT, MYD, MYF, MYI, MZF, NAD, NEA, NEV, NIM, NMI, NUV, NUW, NVG, NXP, NXQ, NXR, NZF, OIA, PMF, PML, PMM, PMO, PMX, PRB, PVI, PZA, RVNU, TFI, VFL, VGM, VKI, VKQ, VMO, VTEB, XMPT
by: Carl Dincesen
Summary

Which class of creditor is entitled to sales tax revenue is a disagreement that should not be possible. The only explanation is laws were broken by the Commonwealth.

Making Commonwealth GOBs subject to the PROMESA Act, Congress assumed its plenary power over territories was absolute. The constitution granted by Congress to the Commonwealth in 1952 disagrees with PROMESA.

The fact that at this stage of the process neither of the above issues have been litigated or filed has allowed the winds to blow on political currents.

I think haircuts will be definite within one year. I would put that probability at 75-80%.

The PROMESA Act has an initial term of 5 years, and requires the Commonwealth to demonstrate it has access to the bond market on its own credit at affordable interest rates.

I believe the probability of the introduction of a new bond structure meeting the above requirements is about 60% and could include clear court decisions regarding payment priority as well as possible constitutional amendments.

History is on the side of short memories. Market access after bond debacles is usually rapid for governmental entities post-bankruptcy.

The financial reality on the ground is the Commonwealth can only afford to pay 50% of GOB debt service and 50% of COFINA debt. As a result, the central government could pay 100% on one bond and nothing on the other. I would put the odds of a 50/50 split at 60% from new bond structure proceeds, and odds of 30% and 10% for a 100% payout on GOB’s and COFINA’s, respectively.

However, one unexpected court decision could change all that.

As a holder of Commonwealth GOs, the above runs counter to what I believe outcomes should be. Rather, it is based on where the prevailing winds have been and are blowing. More information about the GO and COFINA conflict (click here).

Disclosure: I am/we are long PUERTO RICO GOB'S. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.