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G25 CooperativismoAhorroyCrédito

Coming out of the Standstill: A Comprehensive Proposal to

Re-Balance Puerto Rico’s Public Debt

During the past 11 months we have represented and advised a group of major state chartered credit unions (“Cooperativas de Ahorro y Crédito”) 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 Rico’s 78 municipalities. Additional credit unions and Fondo de Inversión 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 Commonwealth’s call for comprehensive restructuring proposals, we hereby submit our overview and proposal. Current situation Puerto Rico’s 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 Rico’s Public Debt

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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 Rico’s market credibility. These damages are contrary to our economic recovery and delay Puerto Rico’s 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 Rico´s constitutional order. If our public debt is to be resolved by Puerto Rico’s 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.

1An alternate possibility is validation of Puerto Rico’s 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.2The Commonwealth’s advisors have publicly acknowledged that $15 billion is in the hands of Puerto Rico investors.3This does not release Congress from solving the inequities of the insufficient funding of federal health programs in Puerto Rico.


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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 Viñas, Managing Director of Ramírez & Co. (starting from data disclosed by the Commonwealth’s 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

Commonwealth’s 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.

4These are public issuers other than the Commonwealth (GOs) and COFINA and excluding PREPA and PRASA.


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§ 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 Commonwealth’s 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.


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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 Commonwealth’s 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.

ThiscomprehensiveproposalispresentedonbehalfoftheG25byJoséA.SosaLloréns,Esq.andFernandoViñasMiranda.

JoséA.Sosa-Llorenshasover25yearsofexperienceincorporateandfinanciallaw.HeservedasCommissionerofFinancial Institutionsof theCommonwealthofPuertoRicoandwasamemberof theConferenceof StateBankSupervisors,oftheLatinAmericanCenterforMonetaryStudiesandchairedtheBoardofDirectorsofPuertoRico'sCreditUnionSharesandDeposit InsuranceCorporation (1990-1992). HehascounseledandrepresentedPuertoRicoCreditUnions formore than twenty years. Hewas adjunctprofessorofBanking and Financial InstitutionsManagement (University of Puerto RicoMBA Program) and Visiting Professor of Corporate Law (InteramericanUniversityofPuertoRicoSchoolofLaw)andFinancialInstitutionsLaw(CatholicUniversityofPuertoRicoSchoolofLaw). He isagraduateofCatholicUniversityofPuertoRico(B.B.A.,1982; J.D.,summacumlaude,1986)andofHarvardLawSchool(LL.M.,1987).FernandoViñas-Miranda isaregisteredMunicipalandGeneralPrincipal. Hehasover25years incorporateandpublic finance, investment banking and assetmanagement. Has served as Resident Vice President for Citibank(1987–1989),VicePresidentoftheChaseManhattanBankNA(1990-1998),SeniorVicePresidentatBBVA-BBVASecurities (1998-2007)andSeniorVicePresident/ManagingDirectoratSamuelA.Ramirez&Co.,andRamirezAsset Management (2007 – Present). Has acted as Co-Senior manager, Co-Lead Bank, Lead Manager, SoleUnderwriterandLeadBankofmultiplemunicipalandcorporatefinancetransactions.HoldsaBA,EconomicsfromtheUniversityofPuertoRico(1975–1979)andaPostGraduateStudiesonEconomicsfromPennStateUniversity(1979–1981).

June 7, 2016

Rebalance Proposal

A Debt Restructure Proposal by Puerto Rico’s Credit Unions to the Government of Puerto Rico

G25CooperativismoAhorroyCrédito

PresentSituation– GO’s,RelatedIssuersandCOFINA

§ TheCommonwealth’sWorkingGrouphasproposedanannualallocationof$1,850MM*torepay$52,628MMofPRDebt.Underitsproposal,theCentralGovernmentwouldassume100%ofthepaymentofbondsissuedbytheRelatedIssuersandCOFINA.However,incalculatingtheproposeddebtservicecapacityof15%ofrevenues,theWorkingGroupleavesoutcertainrevenuesassignedtothoseRelatedIssuerswhichwerepledgedinfavorofbondholders,suchas:üUPR’s“PledgedRevenues”,DebtServiceRentComponentatPBA,PRIDCO’sRentRevenuesandRevenuesunderthe1968and1998Resolutions atPRHTA.**

ü TheSUTcomponentretainedbyCOFINAtoservice itsdebt.(TotalCOFINArevenuesareexcludedfromtheGeneralFund. Oncedebtserviceisappropriatedthebalanceistransferred.)

*TheWorkingGroup anditsadvisors(MillsteinandCleary-Gottlieb) havestatedthatPRassigns36%oftheGeneralFund’sInternalRevenuestodebtserviceofGOandRelatedEntities andproposes toreduceitto15%.Estimates.**UPRPledgedRevenues$75MM,PBADebtServiceRentals$250MM,HTA$300MM,PRIDCORentals$60MM.

OutstandingBalances- PRGOBonds– RelatedIssuersandCOFINA$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%

• BalancescalculatedusingfiguresdisclosedbytheCommonwealth’sWorkingGroupinitsFEGPwhichhavenotbeenindependentlycorroborated.IncludesaccretedvaluesofCABsasof6-30-2016

2ForDiscussion Purposes Only

PresentSituation– GO’s,RelatedIssuersandCOFINAThe current high level of debt service is due to a “front loaded” debtamortization structure, concentrated within 20 years, with annual payments inthe order of $3,500MM during the years 2016 to 2022. (Present debt servicerequires payments of $3,527MM, $3,360MM y 3,879MM from FY 2016 to FY AF2018.)

In the face of the downgrading of the Commonwealth's credit , its reducedrevenues and the mounting debt service obligations, the positions adopted bythe Commonwealth’s Working Group and its advisors (Millstein and Cleary-Gottlieb) have been counterproductive:

•The Government declared itself unable to pay.

•They propose, as their sole alternative, a “Super Bond” structure that entailssevere principal discounts. As it relates to GO’s, this option contravenes theconstitutional priority granted to their debt service; yet they offer that sameconstitutional 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 theGO 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 GDB’s liquidity and capital.


§ TheRe-BalanceOptionforG.O.sispremisedonupholdingtheConstitutionalGuaranteeandprioritywithrespect totheirpayment ofPrincipal,withinthecontextofaSettlementAgreement* thatextendsmaturitiesandreducesinterestpaymentsonatemporary basis.

ü Theamortizationschedule wouldextendthemaximummaturityto2051(35years)withatemporary*reductionoftheaveragecoupon to4.00%(comparedtoanactualaveragecouponof6.12%),andnoprincipalhaircut.

ü TheAgreementwouldprohibitallfutureissueofnewGOsuntiltheachievement ofcertainmilestonesandthenundercertainconditions(pg10).

§ Topartially reestablish liquidity totheState,providepermanentworkingcapitalandenableanorderlytransitiontotheupcomingAdministration,a“newmoney”seriesfor$1,000MMwouldbeincludedintherestructuringtransactiontorefinance the2016TRANs.

ü Aportionofthe“newmoney”wouldbeusedtorepaytheTRANsacquiredbydifferentinstrumentalities oftheGovernment.ü TheunusedbalancewouldberetainedbyaTrustee*anddisbursedtothePRTreasuryforspecificallyagreeduponpurposes.

§ DebtServicewouldbereducedto$729MMannually,reducingannualcashoutflowsonaverage$409MMduringtheyears2017to2022.

Re-BalanceProposaltoRestructureG.O.s


§ Total outstanding debt of Related Issuers amounts to approximately $21,478MM.ü The Re-Balancing Restructuring would allocate the balance of the $1,850MM* available after debt service of the GO’s to

repayment of the Related Issuers Debt. Said balance ($1,046MM) allocated to service debt restructured at a 4.5% wouldenable the refinancing of approximately $19,534MM or 91% of the total debt of the Related Issuers.

Re-BalanceProposaltoRestructureRelatedIssuers

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Issuer($000’s)

OutstandingBalance “Hair-Cut”

NetBalance

ERS $3,841,110 10% $3,456,999GDB $3,655,922 10% $3,290,330HTA $4,878,660 10% $4,390,794PBA $4,071,837 5% $3,868,245PFC $1,090,740 10% $981,666PRCCDA $397,740 10% $357,966PRIFA $2,847,605 10% $2,562,845PRIDCO $177,105 10% $159,395UPR $518,245 10% $466,421

Total $21,478,964 $19,534,659

*TheRe-balanceProposalassumesthatCOFINAgeneratesfundsthatarenot“AvailableRevenue”totheGeneralFundandthattheSUTcanamortizeCOFINA’sdebt andcontribute totheGeneralFundtheremainingfunds.

§ The Re-Balance Proposal follows the following principles:

ü All Bonds of a Related Issuer would be exchanged for a bondGuaranteed by the Commonwealth of PR and said guarantee wouldbe subordinated in payment to the GO Bonds.

ü Exchange Prices:• PBA – Considering their rent payment guarantee: 95% of Par.• All other issuers: 90% of Par.

ü The Restructuring Agreement and exchange documents wouldprohibit any and all bond issues of any kind by any of therestructured issuers until the rebalanced bonds have been fully paid.

ü Permanent coupon reduction to 4.5%.ü “Entry-Point” Clause: To prevent unjust or excessive enrichment in

light of the discount suffered by the traditional investors, theexchange price would be adjusted to limit capital gains to amaximum 20% of the amount originally invested.

ForDiscussion Purposes Only

§ Totalreductionofprincipalofapproximately$1,944MM.§ Maximumtenorofthebondswouldbereducedfromtheyear2058to2051.§ Averagereductioninannualdebtservicepaymentsof$657MMforeachofthenext5yearsand$354MMthereafterforthefollowing10years.

§ ThecreditqualityofthenewbondswouldbesuperiortothatofthebondsoftheRelatedIssuers.

Re-BalanceProposaltoRestructureRelatedIssuers


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

§ Each SUT percentage point represents approximately$224MM.

§ COFINA has been assigned 3.5% of the SUT for Debt Service,that is $784MM, which covers 1.18 times $667MM of the 2016debt service.

§ During the next 4 fiscal years debt service is well coveredassuming a conservative growth rate of 0.5% of SUT revenue.Thereafter, the annual increase in COFINA debt service wouldrequire significant growth in SUT revenues (2.5% annually after2021 and 4.0% growth from 2024 onwards).

§ In light of these conditions the Rebalance Proposal toRestructure COFINA requires a combined strategy of thefollowingmeasures:

§ 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 increasein the level of SUT pledged to COFINA, from 3.5% to 4.25%.

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Re-BalanceProposaltoRestructureCOFINA

• IncludesaccreetedvaluesofCABsasof6-30-2016

COFINAOutstandingBalance “Hair-Cut” NetBalance

SeniorLien 7,584,478,670 5% 7,205,254,737SubLien 10,962,261,044 10% 9,866,034,939Total 18,546,739,714 17,071,289,676


§ “Entry-Point” Clause: To prevent unjust or excessive enrichment in light of the discount suffered by thetraditional investors, the exchange price would be adjusted to limit capital gains to a maximum 20% of theamount originally invested.

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Re-BalanceProposaltoRestructureCOFINA

§ The Re-Balance Proposal to Restructure COFINA ispremised on upholding the SUT revenue pledge made toits bondholders as well as the Senior and Subordinateprincipal repayment priorities in the context of anAgreement that restructures maturities and reducesinterest payments:

ü To 4.00% on an interim basis for COFINA Seniorbonds (compared to an average coupon of 5.6%).

ü Permanently for the Subordinate Bonds to 4.5%(compared to an average coupon of 5.9%).


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§ TofinanceinfrastructureprojectsandcapitalimprovementsinPuertoRicothatareconsideredfundamentalforeconomicdevelopment,anewpublictrustwouldbeestablishedinaccordancewithAct219of2012(PublicTrusts).(FinancingofUPRcapitalimprovementswillbefundedthroughthePRIEDFT.)

§ TheCommonwealthwillendowPRIEDFTupto2%oftheSUTandwillcontractuallycommittonotrestrictnorinterferewiththeflowoffundstothetrustuntilanyfinancingstructuredbythePRIEDFTisfullyrepaid.

§ COFINA’sTrusteeshalltransfertothetrusteeforthePRIEDFTtheamountofSUTowedwithoutinterventionofGovernmentofPuertoRico.TherightsofCOFINA’sbondholderswillnotbealtered.

§ Forillustrationpurposesonly:Abondissueat7%“TrueInterestCost”for30yearsandtowhich2%ofSUT($448MM)isassignedfordebtservicecouldraiseupto$5,556MM.

§ Thiswouldeffectivelyinstituteacapitalinvestmentprogramofapproximately$550millionannuallyforthenext10years.

Re-BalanceProposalPRInfrastructureandEconomicDevelopmentFinanceTrust(PRIEDFT)


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Theproposed Re-BalancingRestructuringTransactionwillachievethefollowingbenefits:

§ Liquidity relieftotheCommonwealth:§ TotaldebtserviceforGOsandRelatedIssuerswouldbelimitedtothegoalsetbytheCommonwealth’s WorkingGroupanditsadvisors

($1,.850MM)§ AnnualdebtserviceforGOswillbereducedonaverage$409MMduringtheyears2017to2022.§ AnnualdebtserviceforRelatedIssuerswillbereduced$657MMforeachofthenext5yearsand$354MMthereafterforthefollowing 10

years.§ Liberationof$1,453MMofSUTtotheGeneralFund.

§ ReductionofPrincipalamountowedbytheCommonwealth:§ DebtowedbyRelatedIssuerswouldbereducedinapproximately$1,944MM.§ DebtowedbyCOFINAwould bereducedinapproximately$1,475MM.§ Total“DebtRelief”totheCommonwealth:$3.419MM

§ RestorationoftheCommonwealth’s repaymentcapacity,whichwillenhancemarketvaluationoftheRe-BalancedBonds.

§ Avoidanceofdefaults,moratoriumsanduncertainlitigation.

§ Reaffirmationoftheconstitutional guaranteeofGOsandoftheSUTpledgeinfavorofCOFINA.

§ Establishment offurthercontractualmechanisms toprovideadditional safeguardstorepaymentofRe-Balancedbonds.

§ Establishment ofInfrastructureandEconomicDevelopment Financingmechanismtospurproductiveinvestment.

Re-BalanceRestructureProposal:SummaryofBenefitstobeAchieved


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