COFINA Bondholders, Take Note: 

Bondholders of the highest-rated bonds issued by the Commonwealth would do well to watch for upcoming legislation that will overhaul the means by which the Commonwealth imposes sales taxes.  The Padilla Administration is looking to the same consultants who worked in 2000 with the then-Calderon administration to overhaul the tax structure in Puerto Rico.  Although the first order of business is corporate taxes, individual taxes would be next on the agenda. 

That group’s recommendation, back in 2000, was to impose a VAT, and it remains their recommendation now.  The Treasurer has spoken about a VAT and the benefits of imposing such and has noted that it would have to be constructed so that it does not impair the security enjoyed by COFINA Bonds. 

The VAT is also meant as a potential replacement for Act 154, a bane to those paying the tax because there is no clear ruling from the IRS as to their treatment under the federal tax credit rules. For the time being, however, the IRS is looking the other way, leading many market observers to label Act 154 as a “back door Federal bailout”.  

Even if a VAT does not pass the legislature in the current sessions, we need to consider that replacing Act 154 will take on even greater urgency with time, as the Act nears its sunset.  As things stand currently, Act 154 will be replaced in 2017 with a very burdensome source income tax that will challenge both the Commonwealth and the taxpayers.

Needless to say, replacing the current SUT with a VAT will raise myriad legal issues regarding the security for the COFINA bonds. Perhaps this is why, after months of talking up COFINA as its financing vehicle of choice, the Padilla Administration has suddenly veered toward issuing a new G.O. bond instead?

February 11, 2014

Axios Advisors LLC


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  1. […] Yield Municipals: – COFINA Bondholders, beware. – Bondholders of the highest-rated bonds issued by the Commonwealth would do well to watch for […]


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About Triet M. Nguyen

Triet Nguyen is a veteran of the fixed-income markets and a high yield/distressed municipal bond expert. Over his 32 year career, Triet has designed, marketed and managed every type of buy side investment products, from mutual funds (open and closed-end) to managed accounts and hedge funds. He is currently the managing partner of Axios Advisors LLC, an independent municipal research and investment advisory boutique specializing in high income strategies. Triet is the author of “Investing In The High Yield Municipal Market”, to be published in July 2012 by John Wiley/Bloomberg Press. He also moderates the Municipal Credit Research Forum on LinkedIn. His Twitter handle is @HighYieldPro. Before rejoining Axios (which he founded in 2002), Mr. Nguyen was a Senior Vice President at B.C. Ziegler, where he traded tax-exempt high yield and taxable municipal bonds (including Build America Bonds). From January 2004 to January 2008, he was a Managing Director of Saybrook Capital, LLC, managing one of the first ever municipal hedge funds dedicated to a credit strategy. As Director of Information Services at between 2000 and 2001, Triet contributed to the development of a pioneering online muni bond evaluation system. Prior to 2000, he was a Vice President/Portfolio Manager of the John Hancock Funds and a Senior Portfolio Manager of the Putnam Funds. Triet received a B.A. in Economics and an M.B.A. in Finance and Accounting from the University of Chicago.