June 7, 2016

Debt Rebalancing Restructuring Transaction

Proposal by Puerto Ricos Credit Unions to the Government of Puerto Rico

G25

Cooperativismo
Ahorro y Crdito

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 Cleary-Gottlieb) 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
their debt service;
yet they offer that
same constitutional
to Contradicting
the Commonwealth's
representations
to the Bond Market (including those made by the present
provision
as
a
foundation
for
the
new
Super
Bond.
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-Balancing Restructuring Transaction: G.O.s

The Re-Balancing of 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-Balancing Restructuring Transaction: 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-Balancing Restructuring 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 ERS
guarantee would be subordinated in payment to the
GO Bonds.
GDB
Exchange Prices:
PBA Considering their rent payment guarantee: 95% of HTA
Par.
All other issuers: 90% of Par.

Outstandi
ng
Balance

HairCut

Net
Balance

$3,841,110

10% $3,456,999

$3,655,922

10% $3,290,330

$4,878,660

10% $4,390,794

PBA
$4,071,837
5% $3,868,245
The
Restructuring
Agreement
and
exchange PFC
$1,090,740
10% $981,666
documents would prohibit any and all bond issues of PRCCD
any kind by any of the restructured issuers until the A
$ 397,740
10% $357,966
rebalanced bonds have been fully paid.
PRIFA
$2,847,605
10% $2,562,845
Permanent coupon reduction to 4.5%.
Entry-Point Clause: To prevent unjust or excessive PRIDCO $ 177,105
10% $159,395
* The Re-balancing
Restructuring assumes
that COFINA
generates
funds thatsuffered
are not Available
to the General Fund
and that the SUT can
amortize
$ 518,245
10%
$466,421
enrichment
in light
of the
discount
byRevenue
the UPR
COFINAs debt and contribute to the General Fund the remaining funds.
$19,534,65
5
For Discussion
Purposes
traditional investors, the exchange
price would
be
Total
$21,478,964
9
Only

Re-Balancing Restructuring Transaction: 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-Balancing Restructuring Transaction: 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 Rebalancing Restructuring of
COFINA requires a combined strategy of the following
measures:

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

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

Outstandin
g Balance
Hair-Cut
7,584,478,6
70
5%
10,962,261,
044
10%
18,546,739,
714

Net
Balance
7,205,254,7
37
9,866,034,9
39
17,071,289,
676
7

Re-Balancing Restructuring Transaction: COFINA

The Re-Balancing Restructuring of 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
Entry-Point
Clause: toToanprevent
unjust
or excessive
enrichment in light of the discount
4.5% (compared
average
coupon
of
suffered
by the traditional investors, the exchange price would be adjusted to limit capital
5.9%).
gains to a maximum 20% of the amount originally invested.

For Discussion Purposes

Only

Re-Balancing Restructuring Transaction:

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 176 of the 1995 (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-Balancing Restructuring Transaction:

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