(Bloomberg) -- Puerto Rico says it owns $400 million in cash being held by a bondholder trustee, raising an issue at the heart of the territory’s $74 billion bankruptcy.
By making the claim in court papers Tuesday, lawyers for the commonwealth’s sales-tax agency, known as Cofina, boosted the stakes for bondholders who have been fighting among themselves over how to divide $16 million in interest due on June 1. Any interest payments would come from the $400 million to which Puerto Rico is now laying claim.
“This is unusual,” said Daniel Solender, head of municipals at Lord Abbett & Co., which manages $19 billion of state and local debt, including senor and junior Cofinas. “There is a pool of money there, so everyone’s going to try to claim it.”
Next week, U.S. District Judge Laura Taylor Swain is scheduled to decide whether the interest should be paid or held in trust with the rest of the cash while Puerto Rico’s bankruptcy case moves forward.
Bank of New York Mellon Corp., the Cofina bond trustee, had no comment on Puerto Rico’s claim to the $400 million, said Ligia Braun, a spokeswoman for the bank.
Puerto Rico’s bankruptcy is a complex tangle of competing claims with different groups of creditors fighting each other and the island’s government. To resolve the unprecedented legal disputes, Swain must reconcile the commonwealth’s laws, the U.S. Bankruptcy Code and 2016 legislation designed by Congress to restructure the island’s debt.
The ownership issue is so important to bondholders that bond insurer National Public Finance Guarantee Corp. attacked the claim even before the Cofina had filed its paperwork.
“National disagrees with the Puerto Rico Fiscal Agency and Financial Advisory Authority’s representation to BNYM that the funds held by BNYM are not, in fact, bondholder property,” the insurer said, referring to one of the government bodies trying to restructure the island’s debt.
The fight is linked to the broader question of whether Cofina bondholders or general obligation bondholders should receive better recovery rates. Since Puerto Rico has said it can’t afford to pay all its debts, creditors have been jockeying for a place at or near the head of the line.
The GO bondholders argue that Puerto Rico’s constitution says all available resources must go first to pay them. That position would be strengthened if Swain agrees that the $400 million belongs to Puerto Rico, not the Cofina bondholders.
Senior and junior Cofina holders, who are owed about $17 billion, have been fighting among themselves over how the interest should be divided. A senior group argued that it should be paid off in full before the juniors get anything, which could mean holding back the juniors’ $5 million share of the $16 million in interest. But both are united in their belief that the sales-tax money is collected on their behalf and, until they are paid, none of it can be touched by the commonwealth.
A portion of Puerto Rico’s sales-tax revenue is dedicated to repaying those securities. Historically, sales-tax receipts flow to the bond trustee from July, the start of the fiscal year, until January, when the general fund starts receiving that money. That may change in July if Puerto Rico opts to direct sales-tax revenue to its general fund at the start of the fiscal year.
Some Puerto Rico sales-tax bonds climbed Wednesday. Junior Cofinas maturing in 2040 changed hands at an average 25.7 cents on the dollar, up from an average 23.7 cents Monday, according to data compiled by Bloomberg.
This year, Puerto Rico’s legislature gave the government more authority over the sales-tax proceeds, a move that National and other creditors say violates the Cofina bond contract and puts the debt into potential default. If the government doesn’t retract the law, default will be unavoidable, National said in court papers Tuesday.
At a May 17 hearing in San Juan, Swain said her “first choice” would be to delay payment and allow BNY Mellon to hold the money so she could have more time to rule. She scheduled a May 30 hearing to give all sides a chance to talk her out of ordering a halt to the payment and any related lawsuits.
“It’s unfortunate,” Solender said. “There’s so many different parties arguing now it really seems like everybody’s going to wait for the judge to give an opinion for how to proceed.”
The case is In re Commonwealth of Puerto Rico, 17-03283, U.S. District Court, District of Puerto Rico (San Juan).