A battle of hedge funds, and their competing interests, has erupted in Puerto Rico over the last few weeks. This week, hedge funds Tilden Park Capital Management LP, Whitebox Advisors LLC, Merced Capital LP, and GoldenTree Asset Management LP filed a motion asking a court to impose a legal stay that would delay the lawsuit filed by general obligation bondholders that want Puerto Rico to stop directing sales-tax revenue away from the general fund. These hedge funds that submitted the motion collectively hold about $2 billion of tax revenue bonds, which are called COFINA bonds, locally.
Meantime, the general obligation bondholders that filed the lawsuit are also hedge funds. They include entities under the management of Aurelius Capital Management, FCO Advisors, Autonomy Capital, Covalent Partners, Monarch Alternative Capital, and Stone Lion Capital Partners. Earlier this month, they asked a court to stop the island from using sales-tax revenue to pay back COFINA debt. Those funds believe that the sales tax revenue should pay back the general obligation bonds first because Puerto Rico’s constitution states that general obligation should be repaid before other debt. However, the hedge funds holding the COFINAs that are requesting the legal stay are arguing that COFINA’s share of the sales-and-use-tax should not be “subject to clawback” in the event of a payment shortfall of the general obligation bonds.
This fight is playing out at the same time the U.S. Government is trying to help the U.S. Commonwealth with its financial crisis. PROMESA, which stands for the Puerto Rico Oversight Management and Economic Stability Act, is the new law that includes the legal stay that the CONFINA holders want imposed. The stay postpones creditor lawsuits against the island until February 15, 2017 in order to give Puerto Rico time to work out how to repay the $70 billion of debt it owes. Although Puerto Rico is way overdue on $1.8 billion of principal plus interest payments, this includes what the island owes on general obligation bonds, the Commonwealth paying back COFINAs.