What COFINA Investors Need to Know About the Puerto Rico Bond Default
Puerto Rico’s bond default crisis has resulted in considerable losses for many different investors. COFINA bondholders, who were often promised by their brokers, broker-dealers, and the Puerto Rican government that they were making a safe investment, are no exception.
Here, our Puerto Rico bond default attorneys explain what a COFINA bond actually is, and we detail the challenges COFINA investors face, as well as what investors can do to protect their legal rights and financial interests.
What are Puerto Rico COFINA Bonds?
COFINA, known in Spanish as the Corporación del Fondo de Interés Apremiante, and in English as Puerto Rico Urgent Interest Fund Corporation, is probably best understood by thinking about it using its alternative name: The Puerto Rico Sales Tax Financing Corporation.
This is the most important attribute of COFINA bonds; they are attached to the island’s sales tax. Essentially, COFINA is a corporation that is owned and controlled by the Puerto Rican government. When it issues debt, the funds that will be used for repayment comes directly from sales tax revenue.
This is the key feature that distinguishes COFINA bonds from general obligations bonds. General obligation bonds or GO bonds are not tied to any specific funding mechanisms. Instead, those bonds are backed by the full faith and credit of the Puerto Rican government as well as the island’s constitution.
Puerto Rico’s ‘Sales and Use Tax’, which is the specific tax that supplies revenue for COFINA bondholders, charges a 7 percent fee on many different sales and transactions that are conducted on the island. The revenue raised by this 7 percent tax goes in several different directions. More specifically, the breakdown works as follows:
- 21.4 percent of the tax revenue (1.5 percent overall) goes to the local municipal government;
- 39.2 percent of the tax revenue (2.75 percent overall) goes to the state government; and
- 39.2 percent of the tax revenue (2.75 percent overall) goes to COFINA bondholders.
COFINA Bonds: Not So Safe
As Puerto Rico is in the midst of a serious multi-year financial crisis, with no clear end in sight, many COFINA bondholders have discovered that their brokers dramatically understated the risks associated with these products. Now, major legal battles are ongoing regarding Puerto Rican bonds. In some cases, different types of bondholders are stuck with diametrically opposing interests.
As was reported by Bloomberg Markets in October 2016, some general obligation bondholders have brought lawsuits against Puerto Rico to try to get the island’s government to stop paying COFINA bondholders. According to their legal argument, COFINA bond payments were unconstitutionally diverted tax revenue, thereby damaging the interests of GO bondholders.
COFINA bondholders are also bringing legal action. On April 12th, 2017, Reuters reported a holder of COFINA debt brought a lawsuit against the Bank of New York Mellon Corp. According to the complaint, senior COFINA bondholders are being damaged by Puerto Rico’s debt restructuring plans. This argument has a strong basis on the grounds that Puerto Rico’s restructuring plans have been projected to cut payments to all classes of bondholders, including COFINA bondholders.
This overall situation in Puerto Rico is still developing. The new government that took office in January has been working on a debt restructuring plan. Now, some observers believe that the island may be sliding towards bankruptcy. COFINA bondholders should keep a close watch on all of the latest political, legal and financial developments in Puerto Rico.
Did You Lose Money Investing in COFINA Bonds?
If you sustained substantial losses investing in COFINA bonds, you need to seek legal assistance. A qualified attorney should review your claim immediately, in order to determine if your rights have been violated.
Indeed, if you suffered major losses, you may have a viable claim against the broker or brokerage firm that sold you COFINA bonds. Brokers and broker-dealers have a legal obligation to look out for the best interests of their clients. Sadly, when it comes to COFINA bonds, similar to many other types of Puerto Rican bonds, many major brokers and investment firms were pushing customers into unsuitable investments.
Not only were brokers wrongfully downplaying the risks, but they were often encouraging their clients to buy these risky bond with leverage, and failing to ensure proper diversification.
Request Your Free Legal Consultation Today
At the Sonn Law Group, our securities fraud lawyers have extensive experience handling Puerto Rico bond claims.
If you lost money investing in COFINA bonds, our team may be able to help. Please do not hesitate to call our firm today at 844-689-5754 to set up a free review of your case. We represent investors in Miami, Puerto Rico and throughout the United States.