Puerto Rico Sales-Tax Bonds Rally After Negotiation Terms Released

(Bloomberg) -- Puerto Rico’s sales-tax bonds rallied after rival groups of bondholders disclosed details of negotiations over how to divide up the tax revenue, suggesting the sides are making strides toward resolving a major issue in the island’s bankruptcy.

The securities were among the most actively traded Friday. Subordinated sales-tax bonds due in 2042 -- which have a lower claim on the funds -- climbed to an average of 41 cents on the dollar from 38.5 cents Thursday and traded for as much as 44.8 cents, according to data compiled by Bloomberg. Senior securities due in 2040, among the most heavily traded, rose to an average of 84.8 cents from 81.6 cents.

Owners of the two classes of sales-tax bonds, know as Cofinas, have been haggling over how to split up $13 billion of anticipated revenue, a sum agreed upon in a deal between a court-appointed agent negotiating on behalf of Cofina bondholders and the agent representing the commonwealth.

A group of subordinate bondholders including OppenheimerFunds Inc., Goldman Sachs Asset Management and UBS AG proposed splitting new sales-tax collections so that 55 percent goes to senior bondholders and 45 percent to owners of subordinate debt. The subordinate bondholders would receive new securities equal to 62 percent of their $9.9 billion of pre-bankruptcy claims, while senior bondholders would get those equal to 90 percent of their $7.8 billion in pre-petition senior claims.

Senior bondholders countered with a proposal to receive 100 percent of what they’re owed, with subordinate debt owners getting 45.7 percent.

The terms of the negotiations needed to be disclosed publicly so bondholders who were restricted from trading during the talks could do so, a person familiar with the matter said.

If the Cofina holders can end their battle and present a united front in court, they will boost the chances that the sales-tax deal is approved by U.S. District Court Judge Laura Taylor Swain.

Any agreement among Cofina holders would be one among several interlocking deals that are needed to avoid a protracted, expensive court fight over how best to reduce Puerto Rico’s $74 billion public debt and end its bankruptcy. A federally appointed oversight board will write a debt-reduction plan based in part on the deal between the commonwealth agent and the Cofina agent.

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