Paul Sanchez
The Puerto Rico Sales Tax Financing Corporation, also known as COFINA, issues bonds that are repaid through revenues from Puerto Rico's sales and use tax. In February 2019, as part of the Puerto Rico bankruptcy process, $17.6 billion of old COFINA bonds were restructured into about $12 billion of new COFINA bonds. The new bonds consisted of $9.12 billion of current interest bonds and $2.9 billion of initial-value capital appreciation bonds. Assured Guaranty, an insurance company, has insured Puerto Rico-related bonds, including COFINA bonds. In 2019, the company paid off in full the COFINA bonds it insured as part of a court-approved plan, receiving a total recovery of 60% of its pre-petition claim.
| Characteristics | Values |
|---|---|
| Issuer | Puerto Rico Sales Tax Financing Corporation (COFINA) |
| Insurer | Assured Guaranty |
| Bond Type | Municipal bonds |
| Bond Status | Restructured in February 2019 |
| Refunding Status | Uncertain |
| Original Bond Value | $17.6 billion |
| New Bond Value | $12 billion |
| Interest Rates | 4.5% to 5.625% |
| Maturity Dates | 2024-2058 |
| Call Dates | 2025 |
| Recovery Rate | 60% |
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What You'll Learn
Cofina bond insurers
Cofina, or the Puerto Rico Urgent Interest Fund Corporation, is a government-owned corporation that issues bonds and uses financing mechanisms to pay and refinance Puerto Rico's public debt. Cofina bonds are repaid through revenues from Puerto Rico's sales and use tax.
In 2018, Puerto Rico reached a settlement agreement with investors who held bonds issued by Cofina. The deal reduced the territory's debt by about one-third and cut future debt payments by $17.5 billion. As part of the agreement, investors swapped their old bonds for new ones, with senior Cofina bondholders recovering 93% of their investment and junior creditors receiving 56.4%.
In February 2019, as part of Puerto Rico's bankruptcy process, $17.6 billion of old Cofina bonds were restructured into approximately $12 billion of new Cofina bonds. The new bonds consisted of $9.12 billion of current interest bonds with maturities ranging from 2034 to 2058 and $2.9 billion of initial value capital appreciation bonds with maturities from 2024 to 2051. The restructured Cofina bonds offered interest rates between 4.5% and 5.625%.
While the sources do not explicitly state whether Cofina bonds are insured, they do mention insurance companies with exposure to Puerto Rico's debt, such as MBIA, Ambac, and Assured Guaranty. These insurers saw their shares surge following the 2018 bond settlement, suggesting they may have had some involvement in insuring Cofina bonds. However, without specific information, it cannot be confirmed if Cofina bonds are insured or not.
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Cofina bond refinancing
Cofina, or the Puerto Rico Urgent Interest Fund Corporation, is a government-owned corporation that issues bonds to pay and refinance the public debt of Puerto Rico. In February 2019, as part of the Puerto Rico bankruptcy process, $17.6 billion of old Cofina bonds were restructured into about $12 billion of new Cofina bonds. The new bonds consisted of $9.12 billion of current interest bonds with maturities from 2034 to 2058 and $2.9 billion of initial value capital appreciation bonds with maturities from 2024 to 2051. The restructured Cofina bonds were issued with interest rates ranging from 4.5% to 5.625%. The earliest call date for the current interest bonds is 2025, which is for the bonds maturing in 2034. These bonds make up 3.1% of the total Cofina par.
The refinancing of Cofina bonds has been a topic of discussion among analysts, who have questioned the timing and cost savings of such a move. While some have argued that the current rate environment may pose a challenge to Cofina refunding, others have supported the effort, noting that if it saves Puerto Rico any money, it is worthwhile. The Puerto Rico Fiscal Agency and Financial Advisory Authority (FAFAA) has considered refunding the Cofina bonds, with J.P. Morgan Securities as the lead underwriter on a sale. However, the posting to the EMMA website warns that the refunding is not certain and no sales date has been provided.
The Cofina bonds are repaid through revenues from Puerto Rico's sales and use tax. As of May 2011, Cofina had issued over $14.4 billion in bonds, with $13.4 billion outstanding. The restructuring deal in 2018 allowed senior Cofina bondholders to recover 93% of their investment, while junior creditors received 56.4%. This deal reduced Puerto Rico's debt by about one-third and cut future debt payments by $17.5 billion, resulting in annual savings of about $425 million for the government over the next 40 years.
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Cofina bond repayment
Cofina, or the Puerto Rico Sales Tax Financing Corporation, is a public corporation that was established in 2006 to issue bonds to refinance the extra-constitutional debt of Puerto Rico. The source of repayment for Cofina bonds is the sales and use tax (SUT), which started at 7% but gradually increased to 11.5%, the highest sales tax in the United States. Of the 11.5% tax, 5.5% belonged to Cofina.
In February 2019, as part of the Puerto Rico bankruptcy process, $17.6 billion of old Cofina bonds were restructured into about $12 billion of new Cofina bonds. The new bonds consisted of $9.12 billion of current interest bonds with maturities from 2034 to 2058 and $2.9 billion of initial value capital appreciation bonds with maturities from 2024 to 2051. The restructured Cofina bonds were issued with interest rates ranging from 4.5% to 5.625%.
The earliest call date for the new Cofina bonds is 2025, which is for the current interest bonds maturing in 2034. These bonds represent 3.1% of the total Cofina par.
The restructuring of Cofina bonds resulted in cuts to the bonds' face value, with senior bondholders recovering 93% of their investment and junior creditors receiving 56.4% of their investment. The agreement also reduced Puerto Rico's debt payments by $17.5 billion over the next 40 years, saving the government an average of $425 million annually.
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Cofina bond investors
Cofina, or the Puerto Rico Sales Tax Financing Corporation, is a municipal bond issuer. In 2019, as part of the Puerto Rico bankruptcy process, $17.6 billion of old Cofina bonds were restructured into about $12 billion of new Cofina bonds. The new bonds consist of $9.12 billion of current interest bonds with maturities from 2034 to 2058 and $2.9 billion of initial-value capital appreciation bonds with maturities from 2024 to 2051. The restructured Cofina bonds were issued with interest rates from 4.5% to 5.625%.
Cofina bonds are repaid through revenues from Puerto Rico’s sales and use tax. The bonds are insured by companies such as Assured Guaranty, which has insured Puerto Rico-related bonds since at least 2016. In 2019, Assured Guaranty paid off in full the Cofina bonds it insured, receiving $152 million in initial par value of new court-validated Cofina bonds and cash, representing a total recovery of 60% of its pre-petition claim. As of 2022, investors owning Puerto Rico-related bonds insured by Assured Guaranty continue to receive uninterrupted full and timely payment of scheduled principal and interest in accordance with the terms of the company's insurance policies.
In addition to Assured Guaranty, other insurers with exposure to Cofina bonds include MBIA and Ambac. In 2018, shares of these insurers surged on the news of a plan to restructure Cofina bonds, which would slash Puerto Rico's debt by about one-third and cut future debt payments by $17.5 billion. Under the plan, senior Cofina bondholders would recover 93% of their investment, while junior creditors would receive 56.4%.
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Cofina bond risk
Cofina, or the Puerto Rico Sales Tax Financing Corporation, is a municipal bond issuer. Cofina bonds are repaid through revenues from Puerto Rico's sales and use tax.
In 2019, $17.6 billion of old Cofina bonds were restructured into about $12 billion of new Cofina bonds as part of the Puerto Rico bankruptcy process. The new bonds consist of $9.12 billion of current interest bonds with four maturities from 2034 to 2058 and $2.9 billion of initial value capital appreciation bonds with seven maturities from 2024 to 2051. The restructured Cofina bonds were issued with interest rates from 4.5% to 5.625%.
The restructuring of Cofina bonds has been a subject of debate, with some analysts questioning the timing and cost savings of the refunding. The high interest rates on the new bonds and the long maturity periods may pose risks to Puerto Rico's debt sustainability in the long term. Additionally, there is a concern about the pressure on Puerto Rico's treasury due to the rise in Cofina debt service from $0.7 billion a year in 2015 to an estimated $1.8 billion a year by 2040.
Furthermore, there have been legal challenges regarding Cofina bondholder losses, with ongoing court cases to determine whether the US government should be held responsible. The outcome of these cases could have a significant impact on Puerto Rico's financial situation and the value of Cofina bonds.
While the restructuring of Cofina bonds aimed to reduce Puerto Rico's debt burden, it is important for investors to carefully consider the risks associated with these bonds, including the potential for high interest rates and the long maturity periods. The financial stability of Puerto Rico and its ability to meet its debt obligations are crucial factors in assessing the risk of investing in Cofina bonds.
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Frequently asked questions
Yes, two bond insurance subsidiaries of Assured Guaranty Ltd. made claim payments to holders of insured general obligation and other bonds on which Puerto Rico defaulted on January 1, 2022.
Cofina, or the Puerto Rico Sales Tax Financing Corporation, is a municipal bond offering from Puerto Rico.
Investors benefit from uninterrupted full and timely payment of scheduled principal and interest in accordance with the terms of Assured Guaranty’s insurance policies.
Cofina bonds are repaid through revenues from Puerto Rico’s sales and use tax.
Analysts are uncertain about the timing and cost savings of refunding Cofina bonds. However, some believe that if refinancing saves Puerto Rico any money, it is worthwhile.
