Puerto Rico Bondholders Make Final Court Pitches in Key Dispute

(Bloomberg) -- Competing groups of Puerto Rico bondholders made their final pitches in court Tuesday to settle one of the most significant questions in the island’s record-setting bankruptcy: Who has the right to its sale-tax revenue, a major source of cash.

The island’s government and general-obligation bondholders are allied against investors who bought securities that are backed by a share of sales-tax collections. Payments on the bonds have been on hold since the bankruptcy case began last year.

The commonwealth and general-obligation bondholders want U.S. District Court Judge Laura Taylor Swain to throw out a law that transfers the sales taxes to a governmental agency, known as Cofina, whose only responsibility is to use the cash to pay its bondholders. Should Swain agree, the funds could then be used to pay for government services or cover general-obligation payments instead.

The dispute is a key legal question hanging over the bankruptcy case, which is being used by Puerto Rico to restructure about $74 billion in debt that it can’t afford to repay.

Puerto Rico’s ability to borrow money would be threatened if Cofina bondholders lose their right to be paid from the sales taxes, lawyer Thomas Moers Mayer argued in federal court in Manhattan.

The lead lawyer on the commonwealth side disputed that prediction.

“Argentina tortured bondholders for 10 years in this court,” Luc Despins, the agent for the commonwealth said in court. After the fight ended, the country issued 100-year bonds that were so popular the sale was over subscribed, he said.

The law that set up Cofina more than a decade ago was designed to guarantee that investors who purchased about $16 billion in bonds would get first claim on all sales taxes. The commonwealth and general-obligation bondholders argue that it violates Puerto Rico’s constitution and has other flaws as well. The Cofina holders argue that similar bond structures have been used for decades by state and local governments in the U.S.

Because the fight pits two different parts of Puerto Rico’s government against each other -- the commonwealth itself and Cofina, which issued the bonds -- Swain appointed two officials to represent the competing agencies.

The Cofina agent, Bettina Whyte, is being backed by Cofina bondholders, while Despins is allied with general-obligation bondholders.

At the start of the bankruptcy case last year, lawyers told Swain that the island cannot reorganize its debt without first resolving the question of who controls the sales tax.

Swain concluded the hearing by saying she would issue a written ruling, but didn’t say when. She ordered the two groups to stop preparing for a trial over the matter until she rules.

The case is The Official Committee of Unsecured Creditors v. Bettina Whyte, as agent of, the Puerto Rico Sales Tax Corp., 17-257, U.S. District Court, District of Puerto Rico (San Juan).

To contact the reporter on this story: Steven Church in Wilmington, Delaware at schurch3@bloomberg.net.

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, William Selway, Faris Khan

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