Puerto Rico

The COFINA Agreement, Part 2: Profits for the Few

3 December by Abner Dennis , Kevin Connor

This is the second installment of a two-part series on the COFINA debt restructuring agreement for Puerto Rico.

If the COFINA agreement represents the continuous ruin of their country for the large majority of Puerto Ricans who are working people, for the bondholders, it constitutes a guarantee of immense profits on their investments.

The biggest beneficiaries of this agreement are the vulture funds Vulture funds
Vulture fund
Investment funds who buy, on the secondary markets and at a significant discount, bonds once emitted by countries that are having repayment difficulties, from investors who prefer to cut their losses and take what price they can get in order to unload the risk from their books. The Vulture Funds then pursue the issuing country for the full amount of the debt they have purchased, not hesitating to seek decisions before, usually, British or US courts where the law is favourable to creditors.
that purchased the debt when bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. prices fell significantly between 2014 and 2016. Among them are hedge funds Hedge funds Unlisted investment funds that exist for purposes of speculation and that seek high returns, make liberal use of derivatives, especially options, and frequently make use of leverage. The main hedge funds are independent of banks, although banks frequently have their own hedge funds. Hedge funds come under the category of shadow banking. Aristeia Capital, Baupost Group, Canyon Capital, GoldenTree Asset Asset Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). Management, Old Bellows Partners, Scoggin Capital Management, Taconic Capital Advisors, Tilden Park Capital and Whitebox Advisors. Collectively, these hedge funds are organized as the COFINA Senior Bondholders Coalition. By August 2018 they held around $5.2 billion in bonds – almost 30% of COFINA’s debt.

If we assume that these funds bought senior bonds at an average of 55 cents for every dollar (a roughly average price between 2014 and 2016), then under this agreement they would secure over $1 billion in profits, a massive payout on their initial investment. The below table shows these figures:

Table 1. Estimated profits for senior bondholders

Hedge funds Nominal value of senior COFINA debt Value of purchase (if purchased at 55 cents on the dollar) Repayment (at 93 cents on the dollar) Profits
Aristeia Capital LLC $185,520,000 $102,036,000 $172,533,600 $70,497,000
Baupost Group $452,413,003 $248,827,151 $420,744,092 $171,916,941
Canyon Capital Advisors $246,075,000 $135,341,250 $228,849,750 93,508,500
Fideicomiso Plaza $1,210,000 $665,500 $1,125,300 $459,800
GoldenTree Asset Management LP $732,239,032 $402,731,467 $680,982,299 $278,250,832
Old Bellows Partners LP $172,988,236 $95,143,529 $160,879,059 $67,735,530
Scoggin Management LP $54,425,100 $29,933,805 $50,615,343 $20,681,538
Taconic Capital Advisors LP $180,284,093 $99,156,251 $167,664,206 $68,507,955
Tilden Park Capital Management LP $544,743,752 $299,609,063 $506,611,689 $207,002,626
Whitebox Advisors LLC $125,643,939 $69,104,166 $116,848,863 $47,744,697
Totals $2,695,542,155 $1,482,548,182 $2,506,854,201 $1,026,305,419

Despite the cuts to subordinated bondholders, the vulture funds that also invested in these bonds will also profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. heavily.

Five of the funds in the COFINA Senior Bondholders Coalition – Aristeia Capital, GoldenTree, Old Bellows, Tilden Park and Taconic Capital – made huge purchases of subordinated bonds just after Hurricane Maria. Due to the chaos caused by the hurricane, the bond prices fell significantly in the following months. These funds quadrupled their junior bond holdings from October 2017 to April 2018, from $254 million to $1.1 billion.

All this came while these firms signed a statement “in support of Puerto Rico” for the ravages caused by the natural disaster.

Let’s assume that these funds purchased subordinated COFINA bonds between October 2017 and April 2018 at an average of 15 cents for every dollar (several subordinated bonds exchanged between 5 and 28 cents in that time period). Under the terms of the agreement they would see the following gains on their post-hurricane purchases:

Table 2. Estimated profits from subordinated bonds acquired after the hurricane

Hedge funds Nominal value of subordinated bonds purchased between October 2017 and April 2018 Value of purchase (if purchased at 15 cents on the dollar) Repayment (at 54 cents on the dollar) Profits
GoldenTree Asset Management LP $408,675,047 $61,301,257 $220,684,525 $159,383,268
Tilden Park Capital Management LP $282,530,939 $42,379,641 $152,566,707 $110,187,066
Taconic Capital Advisors LP $107,530,194 $16,129,529 $58,066,305 $41,936,776
Old Bellows Partners LP $30,620,000 $4,593,000 $16,534,800 $11,941,800
Aristeia Capital LLC $22,585,000 $3,387,750 $12,195,900 $8,808,150
Totals $851,941,180 $127,791,177 $460,048,237 $332,257,060

We would be talking about approximately $332 million in profits, or a 260% return on the total capital invested. Between April and August of 2018 these five funds continued to buy subordinated bonds, totaling $243,739,618.

It is important to note that while the executives at these hedge funds will be raking in huge profits at the expense of Puerto Ricans, they are also managing money on behalf of outside clients – meaning that outside investors in the hedge funds, such as universities, public pension funds Pension Fund
Pension Funds
Pension funds: investment funds that manage capitalized retirement schemes, they are funded by the employees of one or several companies paying-into the scheme which, often, is also partially funded by the employers. The objective is to pay the pensions of the employees that take part in the scheme. They manage very big amounts of money that are usually invested on the stock markets or financial markets.
, and foundations will also be profiting. Baupost’s investors, for instance, include Ivy League universities Harvard, Yale, and Princeton, some of the wealthiest universities in the world. In the case of GoldenTree Asset Management, the vulture fund manages some of the investments of the Teacher Retirement System of Texas, Miami University, and the University of Maine System.

Vulture funds have used a variety of aggressive strategies to maximize their profits in Puerto Rico, spending heavily on lawyers and lobbyists. In July of 2018, we were able to get a brief window onto this lobbying offensive when one of their hired lobbying firms sued for payment in federal court. The contract with Politank, a lobbying firm hired by a law firm representing hedge funds who own COFINA bonds, shows how high-powered law and lobbying firms also stand to profit from the extraction of debt payments from Puerto Rico.

Politank was hired by Quinn Emanuel Urquart & Sullivan LLP, a law firm representing the COFINA hedge funds. Their contract was, among other things, to lobby Lobby
A lobby is an entity organized to represent and defend the interests of a specific group by exerting pressure or influence on persons or institutions that hold power. Lobbying consists in conducting actions aimed at influencing, directly or indirectly, the drafting, application or interpretation of legislative measures, standards, regulations and more generally any intervention or decision by the Public Authorities.
the government of Puerto Rico to reach a consensual agreement for the restructuring of COFINA’s debt. Politank is led by Francisco J. Domenech, the former campaign director for Jenniffer Gonzalez, Puerto Rico’s nonvoting member of the House of Representatives in Washington. Kenneth McClintock, past President of the Senate and former Secretary of State, is also a principal at the lobbying firm.

Politank’s lawsuit on behalf of COFINA bondholders reveals just how lucrative the contract was for the firm. In addition to monthly payments of $55,000, the contract with Politank stipulated a “success fee,” a fee that depended on the amount repaid by COFINA to the vulture funds. The greater the profits, the greater the success rate – or, in other words, the more the people of Puerto Rico had to pay the vulture funds, the greater the bonus for lobbyists.

According to the lawsuit, if the bondholders’ recovery was 95% or more, the fee would be $3 million. If it was 92.5%, it would be $2.5 million; if it was 90%, it would be $1.275 million, and so on.

The contract was terminated by Quinn Emanuel Urquart & Sullivan LLP for the alleged violation of one of the clauses that established that should Politank commit any illegality, the contract would be automatically canceled. Though the specific cause of cancellation remains unclear, it could be due to the domestic violence charges that Domenech’s wife, Veronica Ferraiuoli, brought against him, drawing attention from the press. Charges were later dropped and Ferraiuoli now represents Politank in the case.

The next adjustment plan will be that of the Central Government. As is the case with the COFINA agreement, this adjustment plan will also govern the country for the next 40 years and will in all likelihood mean millions in profits for the bondholders.

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