June 1, 2017 / 11:50 PM / 2 years ago

Puerto Rico sales tax creditors want to depose officials over 'conflicts'

NEW YORK, June 1 (Reuters) - Senior creditors of Puerto Rican debt backed by the island’s sales tax revenues are seeking to depose government officials over what they see as conflicts of interest in how the U.S. territory manages its bond payments.

As Puerto Rico sorts its way through the biggest bankruptcy in U.S. municipal history with $70 billion in bond debt and another $49 billion in pension liabilities, several creditor groups are litigating feverishly over who gets paid first.

This group, holding some $2.5 billion in senior debt issued by Puerto Rico’s sales tax authority, COFINA, asked a judge on Thursday to let them depose officials in charge of Puerto Rico’s fiscal agency, known by its acronym AAFAF.

A source familiar with the COFINA creditors’ thinking said the group wants to depose Puerto Rico Governor Ricardo Rossello, one of his key advisers Elias Sanchez, and AAFAF’s director, Gerardo Portela.

A spokesman for the COFINA bondholder group declined to comment. Sanchez, Portela and a spokeswoman for Rossello could not be reached for comment.

The decision on the scope of depositions will ultimately fall to Judge Laura Taylor Swain, who oversees Puerto Rico’s massive bankruptcy.

Thursday’s filing was part of a legal dispute between senior and junior COFINA creditors over a $16 million interest payment due on June 1.

Court papers filed by the senior creditor group, which includes Cyrus Capital Partners and Tilden Park Capital Management, said AAFAF “suffers from irreconcilable conflicts of interest” because it acts on behalf of both COFINA and Puerto Rico’s central government - separate debt issuers whose creditors are fighting over the same money.

COFINA’S $17 billion in bonds are backed by sales tax revenue. But holders of the central government’s $18 billion in general obligation (GO) bonds, including Aurelius Capital Management and Monarch Alternative Capital, argue their constitutionally guaranteed debt puts them first in line for that revenue.

The senior COFINA holders claim AAFAF has made overtures suggesting it supports raiding COFINA coffers to benefit GO holders. Creditors should be allowed to depose officials to determine “what ownership interest” AAFAF has in the disputed funds, they argued.

Recoveries for COFINA creditors will hinge on their ability to establish COFINA as separate from the government and thus inaccessible to government creditors. Showing AAFAF is acting in the government’s best interest, but not COFINA’s, could support that strategy.

Reporting by Nick Brown; Editing by Daniel Bases and Diane Craft

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