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Judge considers COFINA restructuring deal and is asked to invalidate other bonds

The federal judge overseeing Puerto Rico's bankruptcy heard testimony Thursday on a restructuring agreement for bondholders of debt issued by Puerto Rico's Sales Tax Financing Corp., known as COFINA.

The proposed COFINA agreement, filed with the court Oct. 19, restructures all $17.6 billion of COFINA debt and represents 24% of Puerto Rico's total bonded debt. The agreement is supported by bondholders, bond insurance companies, and the Financial Oversight and Management Board for Puerto Rico. It is the first debt adjustment plan to advance in Puerto Rico's bankruptcy process, which is being overseen by U.S. District Court Judge Laura Taylor Swain, who has to approve the agreement before it goes into effect later this month.

The deal reduces COFINA debt overall by 32% and gives senior bondholders 93% of the value of the original bonds and junior bondholders 55%. It also saves Puerto Rico about $17.5 billion in debt service and enables local retail bondholders in Puerto Rico to receive a significant recovery, oversight board officials said.

Power 4 Puerto Rico, a coalition of civil rights, faith-based, labor and advocacy organizations, said in a statement that the deal "would saddle the island with 40 years of staggering payments" and set the stage for another debt default. "Many economists have projected that Puerto Rico will not generate enough revenue to comply with this agreement," the group said.

In a separate legal action Monday, the oversight board and a group of unsecured creditors asked Ms. Swain to declare another $6 billion of general obligation bonds issued in 2012 and 2014 as null and void, arguing they were issued in violation of the Puerto Rico Constitution's section on debt limit. The creditors' committee alleged separately the debt also violates a balanced budget requirement in the constitution, because debt proceeds were used to finance deficit spending.