The Puerto Rico Fiscal Agency and Financial Advisory Authority, or AAFAF, is exploring refinancing a portion of the $12 billion in outstanding restructured COFINA bonds and has circulated a request for proposals related to a potential transaction among a group of investment banks that AAFAF has qualified through its most recent RFQ process in March 2021. AAFAF is also looking to hire an investment banker to analyze alternatives to execute the proposed debt restructuring at the Puerto Rico Highways and Transportation Authority, or HTA, with an issuance of new bonds, a cash payment and a P3 transaction that could defease a portion of the debt all under consideration.

In a telephone interview with Reorg on Monday evening, Feb. 14, AAFAF Executive Director Omar Marrero confirmed both initiatives are underway but emphasized that no decisions related to either a potential COFINA refinancing or the mechanism to execute the HTA restructuring have been made. He called the issuance of the RFPs “standard operating procedure” and an integral part of his fiduciary responsibility as AAFAF chief to continually explore potential savings through market transactions. He noted the work performed by the professionals on the alternatives is of vital importance to AAFAF but will not be remunerated unless a transaction is undertaken.

Marrero said that a COFINA refinancing will only move forward if debt service savings can be achieved. He added that beyond the debt savings, a potential COFINA refinancing could help bolster the commonwealth’s case that it regards access to the municipal bond market at reasonable rates a key requirement for the PROMESA oversight board to conclude its work and disband. Gov. Pedro Pierluisi has said that the oversight board should end its mandate following the completion of the three major pending debt restructurings involving the commonwealth, the HTA and the Puerto Rico Electric Power Authority, or PREPA. Both the commonwealth and the oversight board are aiming to complete all three this year.

The AAFAF chief indicated that a potential COFINA refinancing and the HTA debt restructuring would not happen until the commonwealth plan of adjustment takes effect, which should happen by a March 15 deadline.

COFINA

Regarding COFINA, Marrero acknowledged the rising interest rate environment and the fact that the outstanding bonds have not reached call dates present challenges.

A tender offer and voluntary bond exchange would be employed because the COFINA bonds are currently not callable. Marrero said that a tender offer strategy had been employed during the “phenomenal” transaction to refinance outstanding Puerto Rico Aqueduct and Sewer Authority, or PRASA, debt, and indicated that a potential COFINA transaction would follow the same model.

A tender offer strategy could still be viable with COFINA as a high-yield municipal transaction, Marrero indicated, but added that “in no event” would “the structure of COFINA” or the “rights of individual bondholders” be affected under a potential COFINA refinancing. Despite the rising interest rate environment, refinancing might make sense for some tranches of the COFINA debt, including the longer-term bonds, while it clearly would not for other tranches, according to Marrero.

Current COFINA creditors might be incentivized to exchange their bonds for lower coupons if they get longer call dates than on their current bonds or a premium for exchanging their bonds, according to two sources familiar with the matter.

The $12 billion COFINA debt stack has $9.1 billion of current interest bonds and $2.9 billion of outstanding capital appreciation bonds, according to an AAFAF EMMA disclosure regarding the restructured bonds that was issued in February 2019 as the COFINA plan of adjustment took effect.

Interest rates on the debt range from 4.25% to 5.625%, according to the disclosure.

Series 2019A current interest COFINA bonds maturing on July 1, 2034, have a July 1, 2025, call date, while series 2019A current interest bonds maturing from July 1, 2040, through July 1, 2058, have a July 1, 2028, call date, according to the restructured COFINA bond disclosure. Capital appreciation bonds maturing from 2029 through 2051 also face a July 1, 2028, call date.

HTA

Marrero said AAFAF’s RFP for investment banking services related to the HTA restructuring is centered on ensuring the commonwealth receives the best treatment possible in executing the plan of adjustment, which has yet to be filed. Under the HTA plan support agreement, the commonwealth and HTA can substitute cash in lieu of new HTA bonds at the HTA effective date. The agreement also includes a P3 alternative that can be used to redeem all or a portion of the HTA revenue bonds at par. Marrero indicated a P3 transaction could be a way for the commonwealth to avoid implementing a new toll and traffic fee rate schedule being pushed by the oversight board.

Marrero said that all three options would be explored before an HTA alternative is selected. He indicated that the administration wants to pursue more P3 opportunities and build on the transactions begun under the administration of former Gov. Luis Fortuňo, involving the long-term concessions of the Luis Munoz Marin Airport and Highway 22 that runs from San Juan to Arecibo. The transactions defeased $500 million of Ports Authority debt and $1 billion of highway debt, respectively, and have demonstrated resilience in their operations through the Covid-19 pandemic. During a December 2021 oversight board meeting, Public-Private Partnerships Authority Executive Director Fermín Fontanés said he hoped to issue a draft study on potential highway concessions “very soon.”

The HTA RSA outlines a transaction framework consisting of $1.245 billion in new bonds and a total cash consideration of $264 million. The new bonds would mature after 40 years and have an average interest rate of 5% annually. HTA current interest bonds, or CIBs, and capital appreciation bonds, or CABs, would be callable in 10 years at par. The issuance also includes HTA convertible CABS are callable at par on the earlier of either seven years after the conversion date of 10.5 years after issuance.

The oversight board expects to certify a revised fiscal plan for the HTA by Feb. 18 and to file an HTA plan of adjustment before the end of February.

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