Puerto Rico Sales Tax Bonds: COFINA Lien, Coverage, and Risks

Puerto Rico sales tax bonds, known in the market as COFINA bonds, are municipal securities backed by a dedicated share of the island’s sales and use tax collections. About $12 billion in restructured bonds are outstanding, maturing on a schedule that runs through 2058, and the interest they pay is exempt from federal, state, and local income tax for investors anywhere in the United States.¹

COFINA stands for Corporación del Fondo de Interés Apremiante, officially the Puerto Rico Sales Tax Financing Corporation. It is an independent public corporation created under Act No. 91 of 2006 and is legally separate from the Commonwealth government. Its debts are not obligations of the central government, and the central government’s debts are not obligations of COFINA.² That separation is the whole point of the structure, and it is why these bonds trade on their own revenue stream rather than on the Commonwealth’s credit.

What Actually Backs the Bonds

COFINA is paid from a portion of Puerto Rico’s Sales and Use Tax, locally called the IVU. The IVU runs at a combined 11.5%, split between a 10.5% Commonwealth component and a 1% municipal component.³ Only the Commonwealth’s piece feeds COFINA.

The mechanics run through something called the Fixed Income Amount, a statutorily defined dollar figure that started at roughly $783 million in fiscal year 2019 and grows 4% per year until it caps at $1.85 billion. COFINA receives the first 53.65% of that figure each year, with the Commonwealth keeping the remaining 46.35% and anything collected above the Fixed Income Amount.⁴⁵

In dollar terms, COFINA started at about $420 million in fiscal 2019 and grows annually until its revenue tops out at roughly $992.5 million. That cap first hits in fiscal 2041 and holds flat through 2058, when the last bonds mature.⁵

Why the Statutory Lien Matters

What distinguishes COFINA from general obligation debt is a statutory first lien on the pledged revenue. Under Act 91, the lien attaches automatically when bonds are issued, without filings or court orders, and is enforceable against anyone with a claim on COFINA’s assets.⁶

In practice this means first-dollar funding. The very first SUT dollars the Treasury Department collects each fiscal year flow to COFINA’s trustee before the Commonwealth can spend any of those funds on schools, police, or anything else. Act 241-2018 added an explicit covenant that the government will not act to impair COFINA’s right to receive its revenue or materially harm the collection of pledged taxes.⁴ This ring-fencing is why senior COFINA holders ended up recovering far more than other Puerto Rico creditors in the restructuring.

The Tax Exemption That Reaches All Fifty States

COFINA interest is triple tax-exempt: free from federal income tax, state income tax, and local income tax, regardless of where the holder lives. A California municipal bond is normally only state-tax-exempt for California residents; a Puerto Rico bond is exempt everywhere in the country.

Two federal statutes create this benefit. 26 U.S.C. §103 excludes interest on state and local bonds from gross income, and its definition of “State” includes U.S. possessions, which covers Puerto Rico.⁷ More directly, 48 U.S.C. §745, which traces back to the Jones-Shafroth Act of 1917, says that bonds issued by the Government of Puerto Rico or by its authority “shall be exempt from taxation” by the United States and by any state, territory, possession, municipality, or the District of Columbia.⁸

For a resident of a high-tax state, that combination can produce a meaningfully higher after-tax yield than a mainland muni of similar credit quality. One caveat: investors subject to the federal Alternative Minimum Tax should check the specific COFINA series, because certain private activity bonds from U.S. territories can trigger AMT depending on how the bond is structured.

What Happened in 2019

Today’s COFINA bonds exist because the earlier ones defaulted. The current structure came out of a court-supervised restructuring under PROMESA, the Puerto Rico Oversight, Management, and Economic Stability Act of 2016, whose Title III process functions roughly like municipal bankruptcy and is overseen by the Financial Oversight and Management Board.⁹ A federal district court confirmed COFINA’s Plan of Adjustment on February 4, 2019, and on February 12 roughly $17.6 billion in par value was exchanged for about $12 billion in new securities.¹

Recovery rates varied sharply by seniority. Senior holders received about 93 cents on the dollar; junior holders recovered roughly 56 cents.¹ If you are evaluating COFINA today, that history is already reflected in current yields, but it is worth remembering before treating the statutory lien as a guarantee.

What Is Outstanding Today

The restructured debt totals roughly $12.3 billion and is divided into current interest bonds, which pay regular semiannual coupons, and capital appreciation bonds, which accrue interest and pay in large balloon payments at maturity. The biggest single capital appreciation payments are scheduled for 2046 at $1.1 billion and 2051 at $640 million.¹

The approximate breakdown:⁵

Series 2019A-1 (Senior): about $5.4 billion in current interest bonds with 4.50%–5.00% coupons and $3.1 billion in capital appreciation bonds at 4.25%–5.625% effective rates, maturing between 2019 and 2058.
Series 2019A-2 (Senior): about $3.6 billion in current interest bonds with 4.329%–5.00% coupons, maturing between 2035 and 2058.
Series 2019B-1 (Junior): about $69 million in current interest bonds and $40 million in capital appreciation bonds, mirroring the A-1 rate and maturity structure.
Series 2019B-2 (Junior): about $46 million in current interest bonds with 4.329%–4.784% coupons, maturing between 2035 and 2058.

The “A” series is senior and the “B” series is junior. If pledged revenue ever falls short of total debt service, seniors are paid first. Because junior bonds make up a very small fraction of the total, the practical gap between the two tiers has narrowed since the restructuring.

Current Coverage and the Stress Points Ahead

The key ongoing metric is the debt service coverage ratio, which measures how many times over the available revenue covers required payments. For fiscal year 2026, the Treasury Department projects a 3.45x ratio, based on estimated 5.5% SUT collections of $1.91 billion against $546 million in contractual debt service.¹⁰ That is a wide margin today.

The coverage will tighten over time. COFINA’s share grows until the Fixed Income Amount hits its $1.85 billion ceiling in fiscal 2041, while debt service on the capital appreciation bonds continues to build toward the balloon payments in the 2040s and early 2050s. Those years are the real stress test. If you hold bonds with later maturities, the number to watch is whether actual SUT collections keep tracking above the scheduled COFINA revenue amounts.

Risks to Weigh Before You Buy

The statutory lien and first-dollar funding give these bonds stronger legal protection than most municipal debt, but they are not risk-free. Pledged revenue depends entirely on consumer spending in Puerto Rico. A sustained economic contraction, a major hurricane, or continued population decline would cut SUT collections. Puerto Rico lost roughly 12% of its population between 2010 and 2020, and every departure is one fewer consumer generating sales tax.

The 2019 restructuring is itself proof these bonds can default. Original junior holders recovered only about 56 cents on the dollar. The restructured bonds now carry that history in their yields, but a statutory lien does not guarantee full repayment if the underlying revenue collapses.

Capital appreciation bonds carry their own concentration and interest rate risk. Because they accrue silently and pay in large lump sums decades out, their market value can swing significantly before maturity even when the underlying credit is healthy. That matters if you might need to sell before the payment date.

Where to Track Prices and Disclosures

Real-time trade data and ongoing financial disclosures are available through EMMA, the Electronic Municipal Market Access system operated by the Municipal Securities Rulemaking Board. The SEC has designated EMMA as the official public source for municipal securities data and disclosure documents.¹¹ On EMMA you can look up recent trade prices, pull continuing disclosure filings, set alerts on specific CUSIPs, and compare yields across series. EMMA is a data repository, not a trading platform, so purchases and sales still go through a broker-dealer.

COFINA also posts monthly SUT collection reports and its fiscal plans on its own website. The fiscal plans certified by the Financial Oversight Board include multi-decade revenue forecasts and sensitivity analyses for downturns, which is the most direct way to see whether the long-dated bonds you might be considering have real coverage behind them.

1
Congressional Research Service. Puerto Rico’s Public Debts – Accumulation and Restructuring
2
Puerto Rico Sales Tax Financing Corporation (COFINA). About Puerto Rico Sales Tax Financing Corporation (COFINA)
3
Worldwide Tax Summaries. Puerto Rico – Corporate – Other taxes
4
LexJuris de Puerto Rico. Ley Num 241 del ano 2018
5
Financial Oversight and Management Board for Puerto Rico. Fiscal Plan for COFINA
6
Puerto Rico Sales Tax Financing Corporation (COFINA). FAQ – Puerto Rico Sales Tax Financing Corporation (COFINA)
7
Office of the Law Revision Counsel. 26 USC 103 – Interest on State and Local Bonds
8
Office of the Law Revision Counsel. 48 USC 745 – Tax Exempt Bonds
9
Financial Oversight and Management Board for Puerto Rico. Debt
10
Government of Puerto Rico. COFINA SUT Collections
11
Municipal Securities Rulemaking Board. Electronic Municipal Market Access (EMMA)