Commonwealth of Puerto Rico – Seeks Court Authority to Settle COFINA Dispute

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October 19, 2018 – The Commonwealth of Puerto Rico requested Court authority to settle a dispute with the Puerto Rico Sales Tax Financing Corporation [Docket No.4067]. The motion explains, “The Settlement is a watershed moment in the Title III Cases of the Commonwealth and COFINA. Since before the commencement of the Title III Cases, the dispute regarding whether the Commonwealth or COFINA own the pledged sales tax revenue, which, at present, represents approximately $783 million in annual revenues (and grows annually by 4% until it reaches $1.85 billion in 2041), has been an overarching and gating issue that is one of the keys to Puerto Rico’s overall restructuring. Resolution of such dispute would determine what tax revenues might be available to the Commonwealth to address “essential services” and for debt service to satisfy COFINA debt or to pay Commonwealth expenses. Without a consensual resolution of the dispute, a litigated outcome will present each side with an all-or-nothing result. In each instance, regardless of the winner or loser in such litigation, the byproduct would be significant delay, cost, and uncertainty to all of Puerto Rico’s stakeholders…. On June 7, 2018, the Agents announced an Agreement in Principle to resolve the Commonwealth-COFINA Dispute. Building upon the progress and momentum of the Agreement in Principle, the Oversight Board, after weeks of participation in court-sanctioned mediation, announced on August 8, 2018 that it had reached an agreement with certain holders of Existing Securities and insurers on the economic treatment of the Existing Securities, terms of the compromise and settlement of the Commonwealth-COFINA Dispute, and terms of new COFINA securities to be incorporated into a COFINA plan of adjustment….This Motion is the culmination of over a year of negotiations and litigation regarding the Commonwealth-COFINA Dispute under the auspices of this Court’s appointed mediation team, and establishes an important cornerstone for the Commonwealth’s Title III Case to move towards its conclusion, and towards the Commonwealth’s overall economic recovery and access to the capital markets. The terms of the Settlement are fair and reasonable in light of the complex issues and risks attendant to costly and time-consuming litigation of the Commonwealth COFINA Dispute, and satisfy the requirements for approval under Bankruptcy Rule 9019. At bottom, the Settlement eliminates the inherent risks, delays, expense, and uncertainty of further protracted litigation of the Commonwealth-COFINA Dispute and the inevitable appeals that could take years to resolve. The Settlement ultimately will allow the Commonwealth’s Title III Case to proceed, with the assurance that certain sales and use tax revenues will be available to partially address the needs of the Commonwealth, its citizens and its creditors.”

The motion, which refers to the complexity of the settlement more than a dozen times (eg “At bottom the Settlement provides a more than reasonable solution to an extraordinarily complex dispute”) provides the following “summary” of the settlement.

Settlement Terms

(a) The Commonwealth-COFINA Dispute shall be compromised and settled pursuant to the Settlement Motion and the COFINA Plan, with (i) COFINA being granted ownership of the COFINA Portion, and (ii) the Commonwealth being granted ownership of the Commonwealth Portion; provided, however, that, except as expressly set forth in the Term Sheet (a) one hundred percent (100%) of the Pre-FY2019 BNYM Deposits are held by BNYM, as the COFINA bond trustee, for the benefit of the bondholders in accordance with the Adversary Proceeding and such other orders entered in connection therewith; provided, however, that, (i) of Seventy-Eight Million Three Hundred Fifty-Five Thousand Eight Hundred and Thirty-Seven Dollars and Sixty-Three Cents ($78,355,837.63) of the Pre-FY2019 BNYM Deposits, (x) ThirtyThree Million Three Hundred Fifty-Five Thousand Eight Hundred Thirty-Seven Dollars and Sixty-Three Cents ($33,355,837.63) shall be distributed to the Commonwealth, (y) Five Million Dollars ($5,000,000.00) shall be allocated to fund an operating expense fund for COFINA, and (z) Forty Million Dollars ($40,000,000.00) shall be allocated to the Taxable Election Cash distributable under the COFINA Plan and if the Taxable Election Cash distributable under the COFINA Plan is less than Sixty Million Dollars ($60,000,000.00), the Tax Election Remainder Amount shall be distributed (I) first, to further fund the operating expense fund for COFINA up to an additional Ten Million Dollars ($10,000,000.00), and (II) second, to the extent of any further remainder, to be distributed evenly to COFINA, on the one hand, to increase the COFINA Cash Available for Distribution and increase recoveries to all COFINA bondholders, and the Commonwealth, on the other hand, (b) one hundred percent (100%) of the FY2019 BNYM Deposits, on a first dollars basis up to the amount of fifty-three and sixty-five one hundredths percent (53.65%) of the PSTBA, plus any earnings thereon (the “COFINA FY2019 BNYM Deposits”) held by BNYM in accordance with the Adversary Proceeding and such other orders entered in connection therewith, will, on the Effective Date, be the exclusive property of COFINA and will be distributed to COFINA for purposes of distribution in accordance with the COFINA Plan of Adjustment and (c) any FY2019 BNYM Deposits net of the COFINA FY2019 BNYM Deposits, shall be distributed in its entirety to the Commonwealth. 

(b) Unless (i) approval of the Settlement Motion is denied by the Title III Court or (ii) the Effective Date does not occur, the effective date of the compromise and settlement (the “Compromise Date”) shall be retroactive to July 1, 2018 and, in addition to receipt of the PreFY2019 BNYM Deposits, net of amounts allocated pursuant to the provisions of the Term Sheet, and the COFINA FY2019 BNYM Deposits on the Effective Date, COFINA will own, and will be entitled to receive, the COFINA Portion commencing as of FY2019. Until the Effective Date, all revenues attributable to the PSTBA, including, without limitation, the COFINA Portion and the Commonwealth Portion, shall be maintained in accordance with orders of the Title III Court entered in the COFINA Title III Case, the Commonwealth Title III Case, the Adversary Proceeding and the Interpleader Action.

(c) On the Effective Date, pursuant to the Settlement Order and the Confirmation Order, which orders shall amend and supersede such orders of the Title III Court entered in the COFINA Title III Case, the Commonwealth Title III Case, the Adversary Proceeding and the Interpleader Action to the extent that such orders are inconsistent therewith, (1) BNYM shall make distributions as set forth in the Term Sheet, (2) the Adversary Proceeding shall be dismissed, with prejudice, and all other claims and causes of action asserted therein by the Commonwealth Agent, the COFINA Agent and the Permitted Intervenors, as defined in the Adversary Proceeding, shall be deemed dismissed, with prejudice, and the Commonwealth Agent and the COFINA Agent and their respective professionals shall be deemed to have satisfied any and all of their respective obligations in connection with the Adversary Proceeding and the COFINA Agent shall be deemed to have been released from any and all liabilities associated therewith, (3) the Interpleader Action will be dismissed, with prejudice, and all other claims and causes of action asserted therein shall be dismissed, with prejudice, and the funds deposited in connection therewith shall be distributed in accordance with the terms and provisions of this Term Sheet.”

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