G25

Cooperativismo
Ahorro y Crdito

Coming out of the Standstill:

A Comprehensive Proposal to
Re-Balance Puerto Ricos Public Debt
During the past 11 months we have represented and advised a group of major state
chartered credit unions (Cooperativas de Ahorro y Crdito) publicly known as the G25. These
credit unions represent 56% of the 1.2 million members and depositors and have a presence in 55 of
Puerto Ricos 78 municipalities. Additional credit unions and Fondo de Inversin y Desarrollo
Cooperativo (Fidecoop) have joined the Group, which now surpasses the original 25 institutions.
The G25 has made concrete proposals regarding the restructuring of public debt and has expressed
its opposition to HR 5278. In view of the lack of progress in the restructuring negotiations and the
Commonwealths call for comprehensive restructuring proposals, we hereby submit our overview
and proposal.
Current situation
Puerto Ricos fiscal crisis presents two dimensions: one is immediate while the other requires
a long term perspective. The immediate dimension is the current liquidity shortfall resulting from
front-loaded maturities concentrated in the coming years. The long term dimension confronts us
with substantive problems, such as the causes and effects of a decade long recession, the erosion of
our tax base and the sustainability of governmental spending. These challenges also require an
examination of the economic and political relations between Puerto Rico and the United States,
including:

the applicability of merchant maritime laws,

the inequitable funding of federal health programs,
the impact of the US Corporate Tax Policy and International Trade Agreements (such as
NAFTA and CAFTA) resulting in massive loss of manufacturing jobs,
and the scope of congressional power under the current territorial relation.

Certainly, a definitive and long term solution to our current fiscal crisis will require dealing with
these major issues.
In the face of this situation, the public policy options under discussion during the past year
have proven to be insufficient and unworkable. These specific policy options are:

A Comprehensive Proposal to
Re-Balance Puerto Ricos Public Debt

1.

A voluntary restructuring of public debt for which the Commonwealth and its
advisors seek significant principal haircuts (ranging from approximately 30% and
60%);

2.

Access to Chapter 9 bankruptcy, presumably to impose principal haircuts;1 and

3.

Adoption of a federally legislated Fiscal Control Board with debt restructuring

powers and broad authority over all public functions.

The last months have shown that each of these options carries inherent difficulties that
impede their implementation, which are as follows:
a.

With regards to the restructuring proposals, the principal haircuts proposed by the
Commonwealth are unreasonable and have not been adequately supported by
financial information. Haircuts of this magnitude have made a voluntary agreement
impossible. Furthermore, they entail a $7.5 billion loss of capital to our economy2
and an additional hit to Puerto Ricos market credibility. These damages are contrary
to our economic recovery and delay Puerto Ricos efforts to regain access to the
markets.

b.

Regarding access to Chapter, it is clear that Congress will not approve it, especially in
light of the economic problems of states such as Illinois and the active lobbying
efforts of certain creditors.

c.

With respect to the Fiscal Control Board, HR 5278 clashes with basic tenets of
democratic self-rule and essentially neuters Puerto Ricos constitutional order. If our
public debt is to be resolved by Puerto Ricos taxpayers as it should be3 the
entities or persons empowered to make the policy decisions must be accountable to
and ultimately subject to said taxpayers. We need and should have an independent
and capable control body to implement the necessary policy solutions; but that body
must also respect our constitutional order and preserve democratic rights.

The inability to implement any of these alternatives brought Puerto Rico to its first material
default in May 1st and has put us on the path to the even more significant default of June 30th. This
impending default involves a higher amount of principal, owed by a larger number of issuers. The
lack of progress in adopting a feasible solution is pushing both the Commonwealth and its creditors
into the uncertain realm of default or debt moratorium, complex litigation and the disruption of
public services. This is a recipe for continued economic downturn and the resulting vicious cycle of
reduced revenues. A new path must be tread.

1

An alternate possibility is validation of Puerto Ricos local bankruptcy regime for public corporations (Act 71 of June
28, 2014, also known as the Puerto Rico Public Corporation Debt Enforcement and Recovery Act) by the US Supreme
Court.
2
The Commonwealths advisors have publicly acknowledged that $15 billion is in the hands of Puerto Rico investors.
3
This does not release Congress from solving the inequities of the insufficient funding of federal health programs in
Puerto Rico.

A Comprehensive Proposal to
Re-Balance Puerto Ricos Public Debt

Our Comprehensive Proposal

In contrast to this adverse picture, we propose a new approach that acknowledges the two
distinct dimensions of the crisis: the immediate liquidity crunch and the substantive long term
challenges. We propose that the immediate dimension be addressed through a restructuring of
outstanding debt based upon the following principles:

Substantial preservation of principal;

Respect for the diverse priorities and credit ranks of the different issuers;

Evening out maturity dates;

Sustained payment of interests;

Adoption of credible and enforceable control measures that spur market confidence; and

Integration of reasonable mechanism for:

the financing of intra-year liquidity needs, and

the financing of capital improvements and infrastructure investments.

An in-depth financial analysis headed by Fernando Vias, Managing Director of Ramrez &
Co. (starting from data disclosed by the Commonwealths Working Group and its advisors) shows
the feasibility of a Re-Balancing Restructuring that complies with said principles. The terms and
assumptions for this Re-Balancing proposal are included in the attached Exhibit. A review of these
terms shows that the proposed Re-Balancing Restructuring will achieve the following major benefits:

The proposal will provide liquidity relief to the Commonwealth:

Total debt service for GOs and Related Issuers will be within the goal set by the
Commonwealths Working Group and its advisors ($1,850MM)

Annual debt service for GOs will be reduced on average $409MM during the years
2017 to 2022.

Annual debt service for Related Issuers4 will be reduced $657MM for each of the
next 5 years and $354MM thereafter for the following 10 years.

$1,453MM of SUT will also be liberated to the General Fund.

The proposal will provide a reasonable reduction of principal amount owed by the
Commonwealth:

Debt owed by Related Issuers would be reduced in approximately $1,944MM.

These are public issuers other than the Commonwealth (GOs) and COFINA and excluding PREPA and PRASA.

A Comprehensive Proposal to
Re-Balance Puerto Ricos Public Debt

Debt owed by COFINA would be reduced in approximately $1,475MM.

Total Debt Relief to the Commonwealth: $3.419MM

This Debt Relief is done in a balanced manner protecting traditional investors by

avoiding excessive cuts in favor of the government and avoiding excessive returns by
secondary market investors.

The proposal will restore the Commonwealths ability to pay its debts, which will enhance
market valuation of the Re-Balanced Bonds.

The proposal will address the working capital financing needs of the government and will
allow for the financing of infrastructure and capital investments needed to spur growth.

Furthermore, the proposal seeks to restore Puerto Rico's credibility by:

respecting the constitutional guarantee of GOs,

upholding the representations made by the Commonwealth regarding the pledging of

Sales and Use Tax to repay COFINA bonds,

providing holders of other government paper with a central government guarantee

subordinate to G.O.s but which is lacking in current bonds, and

recouping the capital of traditional investors through improved market valuation of

the re-balanced bonds in light of the Commonwealth's restored ability to meet its
obligations.

We believe these terms provide the Commonwealth with necessary liquidity respite and
reasonable debt relief while offering reasonable terms that will truly allow the participation of a
majority of bondholders in a voluntary restructuring, all of this without requiring extraordinary
legislative measures from Puerto Rico or Congress. The feasibility of this proposal is based upon
the reasonableness and good faith of its terms and the benefits both to the Commonwealth and to
its creditors. For potential "holdouts", the alternative would be lengthy, costly and uncertain
litigation. Certainly, preservation of the rights and prerogatives of the different creditor groups and
the expected improvement in market valuation of their holdings, are a better option to costly and
uncertain litigation. Achieving a rebalanced debt service will allow the proper functioning of
government and help restore confidence in Puerto Rico and its debt instruments and will remove
the very damaging uncertainty that has kept our economy at bay.
Proper design of the proposed Re-Balancing transaction may require setting up revenue
securitization and/or lock box mechanisms to overcome the loss of confidence generated during the
past year. These features may be adopted as contractual terms of the new bonds to be exchanged.
Even if new legislation is needed, the positive prospects of fiscal stability backed by a broad
consensus of a majority of bondholders should provide sufficient political and economic incentives
to attain these goals.

A Comprehensive Proposal to
Re-Balance Puerto Ricos Public Debt

As stated before, solving the immediate dimension does not liberate us from tackling the
underlying substantive challenges we still confront. Nevertheless, a stable fiscal outlook will provide
an improved context to address these economic and political challenges. For sure, we should strive
to do so promptly. The sooner we come out of the current standstill, the better positioned we will
be to tackle the long term challenges we have before us.
We openly put forth the terms of this proposed global restructuring with a view to have all
stakeholders weigh in and participate in a broad discussion geared towards reaching consensus
solutions. This proposal also fulfills the Commonwealths request for global proposals, as opposed
to segmented or individual solutions. We certainly hope that, working jointly and in good faith, we
may all carry forward this conceptual framework and convert it into a workable solution that takes
us out of the current standstill.

This comprehensive proposal is presented on behalf of the G25 by Jos A. Sosa Llorns, Esq. and Fernando
Vias Miranda.

Jos A. Sosa-Llorens has over 25 years of experience in corporate and financial law. He served as Commissioner of
Financial Institutions of the Commonwealth of Puerto Rico and was a member of the Conference of State Bank
Supervisors, of the Latin American Center for Monetary Studies and chaired the Board of Directors of Puerto Rico's
Credit Union Shares and Deposit Insurance Corporation (1990-1992). He has counseled and represented Puerto
Rico Credit Unions for more than twenty years. He was adjunct professor of Banking and Financial Institutions
Management (University of Puerto Rico MBA Program) and Visiting Professor of Corporate Law (Interamerican
University of Puerto Rico School of Law) and Financial Institutions Law (Catholic University of Puerto Rico School of
Law). He is a graduate of Catholic University of Puerto Rico (B.B.A., 1982; J.D., summa cum laude, 1986) and of
Harvard Law School (LL.M., 1987).


Fernando Vias-Miranda is a registered Municipal and General Principal. He has over 25 years in corporate and
public finance, investment banking and asset management. Has served as Resident Vice President for Citibank
(1987 1989), Vice President of the Chase Manhattan Bank NA (1990-1998), Senior Vice President at BBVA - BBVA
Securities (1998- 2007) and Senior Vice President / Managing Director at Samuel A. Ramirez & Co., and Ramirez
Asset Management (2007 Present). Has acted as Co-Senior manager, Co-Lead Bank, Lead Manager, Sole
Underwriter and Lead Bank of multiple municipal and corporate finance transactions. Holds a BA, Economics from
the University of Puerto Rico (1975 1979) and a Post Graduate Studies on Economics from Penn State University
(1979 1981).

June 7, 2016

G25
Cooperativismo
Ahorro y Crdito

Rebalance Proposal
A Debt Restructure Proposal by Puerto Ricos Credit Unions to the Government of Puerto Rico

Present Situation GOs, Related Issuers and COFINA

Outstanding Balances - PR GO Bonds Related Issuers and COFINA
$000s

G.O.s

$12,602,715

23.95%

ERS, GDB, HTA,PBA,PFC, PRCCDA, PRIDCO, PRIFA, UPR

$21,478,964

40.81%

COFINA

$18,546,739

35.24%

Total*

$52,628,418

100.00%

Balances calculated using figures disclosed by the Commonwealths Working Group in its FEGP which have not been independently
corroborated. Includes accreted values of CABs as of 6-30-2016

The Commonwealths Working Group has proposed an annual allocation of $1,850MM* to repay
$52,628MM of PR Debt. Under its proposal, the Central Government would assume 100% of the
payment of bonds issued by the Related Issuers and COFINA. However, in calculating the proposed
debt service capacity of 15% of revenues, the Working Group leaves out certain revenues assigned to
those Related Issuers which were pledged in favor of bondholders, such as:
UPRs Pledged Revenues, Debt Service Rent Component at PBA, PRIDCOs Rent Revenues and
Revenues under the 1968 and 1998 Resolutions at PRHTA.**
The SUT component retained by COFINA to service its debt. (Total COFINA revenues are excluded from the
General Fund. Once debt service is appropriated the balance is transferred.)

* The Working Group and its advisors (Millstein and Cleary-Gottlieb) have stated that PR assigns 36% of the General Funds Internal Revenues to debt service of GO and Related Entities and proposes to reduce it
to 15%. Estimates.
** UPR Pledged Revenues $75MM, PBA Debt Service Rentals $250MM, HTA $300MM, PRIDCO Rentals $60MM.

For Discussion Purposes Only

Present Situation GOs, Related Issuers and COFINA

The current high level of debt service is due to a front loaded debt
amortization structure, concentrated within 20 years, with annual payments in
the order of $3,500MM during the years 2016 to 2022. (Present debt service
requires payments of $3,527MM, $3,360MM y 3,879MM from FY 2016 to FY AF
2018.)
In the face of the downgrading of the Commonwealth's credit, its reduced
revenues and the mounting debt service obligations, the positions adopted by
the Commonwealths Working Group and its advisors (Millstein and ClearyGottlieb) have been counterproductive:
The Government declared itself unable to pay.
They propose, as their sole alternative, a Super Bond structure that entails
severe principal discounts. As it relates to GOs, this option contravenes the
constitutional priority granted to their debt service; yet they offer that same
constitutional provision as a foundation for the new Super Bond.

Contradicting the Commonwealth's representations to the Bond Market (including those made by the present Administration on 10-31-2013),
they have raised doubts as to the legality of the SUT pledge in favor of the COFINA bonds, opening the door to a confrontation between the
GO and COFINA bondholders.

Their actions propitiated materialization of the Legislative Appropriation risk with regards to certain Related Issuers (for example GDB, PFC),
thus producing defaults and bleeding the GDBs liquidity and capital.

For Discussion Purposes Only

Re-Balance Proposal to Restructure G.O.s

The Re-Balance Option for G.O.s is premised on upholding the Constitutional Guarantee and priority with respect to their payment of
Principal, within the context of a Settlement Agreement* that extends maturities and reduces interest payments on a temporary basis.
The amortization schedule would extend the maximum maturity to 2051 (35 years) with a temporary* reduction of the average coupon to 4.00%
(compared to an actual average coupon of 6.12%), and no principal haircut.
The Agreement would prohibit all future issue of new GOs until the achievement of certain milestones and then under certain conditions (pg 10).

To partially reestablish liquidity to the State, provide permanent working capital and enable an orderly transition to the upcoming
Administration, a new money series for $1,000 MM would be included in the restructuring transaction to refinance the 2016 TRANs.
A portion of the new money would be used to repay the TRANs acquired by different instrumentalities of the Government .
The unused balance would be retained by a Trustee * and disbursed to the PR Treasury for specifically agreed upon purposes.

Debt Service would be reduced to $729MM annually, reducing annual cash outflows on average $409MM during the years 2017 to 2022.

For Discussion Purposes Only

Re-Balance Proposal to Restructure Related Issuers

Total outstanding debt of Related Issuers amounts to approximately $21,478MM.
The Re-Balancing Restructuring would allocate the balance of the $1,850MM* available after debt service of the GOs to
repayment of the Related Issuers Debt. Said balance ($1,046MM) allocated to service debt restructured at a 4.5% would
enable the refinancing of approximately $19,534MM or 91% of the total debt of the Related Issuers.

The Re-Balance Proposal follows the following principles:

Issuer

($000s)

All Bonds of a Related Issuer would be exchanged for a bond

Guaranteed by the Commonwealth of PR and said guarantee would ERS
be subordinated in payment to the GO Bonds.
GDB
Exchange Prices:
HTA
PBA Considering their rent payment guarantee: 95% of Par.
PBA
All other issuers: 90% of Par.
The Restructuring Agreement and exchange documents would PFC
prohibit any and all bond issues of any kind by any of the PRCCDA
restructured issuers until the rebalanced bonds have been fully paid. PRIFA
Permanent coupon reduction to 4.5%.
PRIDCO
Entry-Point Clause: To prevent unjust or excessive enrichment in UPR
light of the discount suffered by the traditional investors, the
exchange price would be adjusted to limit capital gains to a Total
maximum 20% of the amount originally invested.

Outstanding
Balance

Hair-Cut

Net
Balance

$3,841,110

10%

$3,456,999

$3,655,922

10%

$3,290,330

$4,878,660

10%

$4,390,794

$4,071,837

5%

$3,868,245

$1,090,740

10%

$981,666

$ 397,740

10%

$357,966

$2,847,605

10%

$2,562,845

$ 177,105

10%

$159,395

$ 518,245

10%

$466,421

$21,478,964

$19,534,659

* The Re-balance Proposal assumes that COFINA generates funds that are not Available Revenue to the General Fund and that the SUT can amortize COFINAs debt and contribute to the General
Fund the remaining funds.

For Discussion Purposes Only

Re-Balance Proposal to Restructure Related Issuers

Total reduction of principal of approximately $1,944MM.
Maximum tenor of the bonds would be reduced from the year 2058 to 2051.
Average reduction in annual debt service payments of $657MM for each of the next 5 years and
$354MM thereafter for the following 10 years.
The credit quality of the new bonds would be superior to that of the bonds of the Related Issuers.

For Discussion Purposes Only

Re-Balance Proposal to Restructure COFINA

During FY 2016 the SUT generated approximately $2,353MM.
Each SUT
$224MM.

percentage

point

represents

approximately

COFINA has been assigned 3.5% of the SUT for Debt Service,
that is $784MM, which covers 1.18 times $667MM of the 2016
debt service.
During the next 4 fiscal years debt service is well covered
assuming a conservative growth rate of 0.5% of SUT revenue.
Thereafter, the annual increase in COFINA debt service would
require significant growth in SUT revenues (2.5% annually after
2021 and 4.0% growth from 2024 onwards).
In light of these conditions the Rebalance Proposal to
Restructure COFINA requires a combined strategy of the
following measures:
An evening out of the annual debt service; and
A moderate adjustment to the principal outstanding balance
(as shown on the adjoining table) in exchange for an increase
in the level of SUT pledged to COFINA, from 3.5% to 4.25%.

COFINA

Senior Lien
Sub Lien
Total

For Discussion Purposes Only

Includes accreeted values of CABs as of 6-30-2016

Outstanding
Balance
7,584,478,670
10,962,261,044
18,546,739,714

Hair-Cut
5%
10%

Net Balance
7,205,254,737
9,866,034,939
17,071,289,676

Re-Balance Proposal to Restructure COFINA

The Re-Balance Proposal to Restructure COFINA is
premised on upholding the SUT revenue pledge made to
its bondholders as well as the Senior and Subordinate
principal repayment priorities in the context of an
Agreement that restructures maturities and reduces
interest payments:
To 4.00% on an interim basis for COFINA Senior
bonds (compared to an average coupon of 5.6%).
Permanently for the Subordinate Bonds to 4.5%
(compared to an average coupon of 5.9%).
Entry-Point Clause: To prevent unjust or excessive enrichment in light of the discount suffered by the
traditional investors, the exchange price would be adjusted to limit capital gains to a maximum 20% of the
amount originally invested.

For Discussion Purposes Only

Re-Balance Proposal

PR Infrastructure and Economic Development Finance Trust (PRIEDFT)

To finance infrastructure projects and capital improvements in Puerto Rico that are considered
fundamental for economic development, a new public trust would be established in accordance with
Act 219 of 2012 (Public Trusts). (Financing of UPR capital improvements will be funded through the PRIEDFT.)
The Commonwealth will endow PRIEDFT up to 2% of the SUT and will contractually commit to not
restrict nor interfere with the flow of funds to the trust until any financing structured by the PRIEDFT
is fully repaid.
COFINAs Trustee shall transfer to the trustee for the PRIEDFT the amount of SUT owed without
intervention of Government of Puerto Rico. The rights of COFINAs bond holders will not be altered.
For illustration purposes only: A bond issue at 7% True Interest Cost for 30 years and to which 2% of
SUT ($448MM) is assigned for debt service could raise up to $5,556MM.
This would effectively institute a capital investment program of approximately $550 million annually
for the next 10 years.

For Discussion Purposes Only

Re-Balance Restructure Proposal:

Summary of Benefits to be Achieved

The proposed Re-Balancing Restructuring Transaction will achieve the following benefits:
Liquidity relief to the Commonwealth:
Total debt service for GOs and Related Issuers would be limited to the goal set by the Commonwealths Working Group and its advisors
($1,.850MM)
Annual debt service for GOs will be reduced on average $409MM during the years 2017 to 2022.
Annual debt service for Related Issuers will be reduced $657MM for each of the next 5 years and $354MM thereafter for the following 10
years.
Liberation of $1,453MM of SUT to the General Fund.
Reduction of Principal amount owed by the Commonwealth :
Debt owed by Related Issuers would be reduced in approximately $1,944MM.
Debt owed by COFINA would be reduced in approximately $1,475MM.
Total Debt Relief to the Commonwealth: $3.419MM
Restoration of the Commonwealths repayment capacity, which will enhance market valuation of the Re-Balanced Bonds.
Avoidance of defaults, moratoriums and uncertain litigation.
Reaffirmation of the constitutional guarantee of GOs and of the SUT pledge in favor of COFINA.
Establishment of further contractual mechanisms to provide additional safeguards to repayment of Re-Balanced bonds.
Establishment of Infrastructure and Economic Development Financing mechanism to spur productive investment.

For Discussion Purposes Only

10