Puerto Rico sales tax creditors circle wagons in fight with GO bondholders

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By Nick Brown

<span class="articleLocation”>Creditors of Puerto Rico’s sales tax authority
have asked a federal court to prevent the U.S. territory from
diverting the revenue that guarantees its debt to repay other
investors, the latest volley in an escalating battle.

Crippled by high poverty and nearly insolvent public health
and pension systems, Puerto Rico is trying to restructure $70
billion in debt to fend off economic catastrophe.

Its two largest debt classes are $18 billion in general
obligation, or GO, bonds guaranteed by the island’s
constitution, and some $17 billion in so-called COFINA debt
backed by sales tax revenue.

Funds holding more than $2 billion in senior COFINA debt on
Wednesday sought to intervene in a lawsuit filed by GO
bondholders against Puerto Rico’s government. That lawsuit, led
by Lex Claims LLC, says COFINA funds should be redirected to GO
holders under payment priority rules.

In its statement, the COFINA group, which includes funds
like Goldentree and Canyon Capital, called the GO bondholders’
claims “meritless” and “self-serving.”

The “baseless action threatens the island’s ability to
re-access the capital markets,” the group said.

The brewing battle between the GO and COFINA groups will be
central to any debt restructuring. GO lenders, which include
hedge funds like Aurelius and Monarch, say their
constitutionally protected debt should be repaid ahead of all
other obligations, while COFINA holders say sales taxes are
exempt from that priority scheme.

GO creditors have run scathing ads on local radio blasting
the “COFINA scam” and accusing that group of standing in the way
of Puerto Rico’s revitalization.

In Wednesday’s statement, COFINA creditors said they have
more than seven times as many local, individual investors than
GO debt classes do. “Retail investors and retirees are in the
crosshairs,” the group said.

The COFINA filing follows a federal judge’s ruling on Friday
allowing the Lex Claims lawsuit to proceed.

Most debt-related lawsuits against the island’s government
are under a temporary freeze pursuant to a federal Puerto Rico
rescue law passed last year. But Judge Francisco Besosa deemed
this one an exception because it merely seeks to enforce legal
protections rather than demand immediate payment of debt.

Puerto Rico’s finances are under the supervision of a
federally appointed board that must approve budgeting and other
financial decisions. Governor Ricardo Rossello has until Tuesday
to present the board with a fiscal turnaround plan outlining
spending cuts and revenue initiatives.

The board has called for austerity, seeking $4.5 billion in
annual savings.

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