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Tuesday, February 2, 2016

Working Group Releases Restructuring Proposal

Press Release

Government Development Bank


Comprehensive Voluntary Exchange Proposal Would Reduce the Common-
wealth’s Mandatorily Payable, Tax-Supported Debt from $49.2 Billion to
$26.5 Billion, Cap Annual Debt Payments at 15% of Government Revenues
and Provide Creditors the Opportunity to Recover the Principal Amount of
Their Investments by Making Them Partners in the Island’s Future Growth
San Juan, P.R. – Today, the Working Group for the Fiscal and Economic Re-
covery of Puerto Rico released details of the comprehensive voluntary exchan-
ge proposal presented to advisors to the Commonwealth’s creditors last week.
The proposal seeks to reduce the Commonwealth’s mandatorily payable tax-
supported debt and nearterm debt payments, providing the Island time to im-
plement the Fiscal and Economic Growth Plan (FEGP) and to stimulate real
economic growth. Together with the FEGP, the proposed debt restructuring, if
accepted by the Commonwealth’s creditors, will ensure the Commonwealth has
sufficient resources to provide essential services to all Puerto Rican residents,
pay back its suppliers and taxpayers, rebuild depleted cash resources and fund
its retirement systems.

With the Commonwealth facing financing gaps in both the  near and long term,
the Working Group developedthe FEGP, which includes a comprehensive set
of measures designed to put the Island back on a path to economic growth and
long-term sustainability. The implementation of the expense and revenue measu-
res in the FEGP – totaling approximately $20.6 billion in revenue increases and
$13.8 billion in expenditure reductions over the next ten years – are projected to
reduce the Commonwealth’s projected cumulative fiscal deficit for the next deca-
de to approximately $34.0 billion.

However, during the next ten years, the Commonwealth faces more than $33
billion of payments on its tax supported debt. The voluntary exchange offer is
intended to restructure those payments to allow the Commonwealth to catch up
withits stretched suppliers and taxpayers and implement the FEGP’s fiscal and
economic initiatives and, over the long term, make its tax-supported debt sustai-
nable. In addition, the Commonwealth is instituting a fiscal control board to pro-
vide necessary oversight and ensure the Commonwealth complies with the FEGP
and the terms of the exchange offer.

“Last June, we began to directly address the Commonwealth’s fiscal and econo-
mic crisis through the development of a comprehensive set of solutions to grow
the Island’s economy while protecting the health, welfare and safety of the people
of Puerto Rico,” said Victor A. Suarez, Secretary of State. “This proposal is a re-
flection of our commitment to work with our creditors on a sustainable solution
that does not place the burden on one stakeholder group alone. A crisis of this
magnitude must be addressed in concert, otherwise we risk our ability and the
opportunity to escape the spiral of a stagnating economy, endless deficits and in-
creasing debt.”

Specifically, the restructuring proposal contemplates that creditors will exchange
their existing securities for two new securities: a “Base Bond,” with a fixed rate
of interest and amortization schedule, and a “Growth Bond,” which is payable
only if the Commonwealth’s revenues exceed certain levels. The new securities
would also provide creditors with enhanced credit protections, such as a Common-
wealth Guarantee and statutory liens and pledges with respect to certain revenues.

Under this proposal, the $49.2 billion of tax-supported debt would be exchanged
into $26.5 billion of newly issued mandatorily payable Base Bonds and $22.7 bi-
llion of newly issued Growth Bonds. Interest payments on the Base Bonds would
begin in January 2018, scaling up to 5% per annum by FY 2021, when principal
payments would begin. The Growth Bonds would be payable only to the extent
the Commonwealth’s revenues exceed its current baseline projections as a result
of real economic growth on the Island. By sharing in the Island’s economic reco-
very, creditors would have the opportunity to recover the principal amount of
their investments. The first such payments, if any, would be made beginning in
the tenth year after the close of the exchange offer. In any given year in which the
Growth Bond would be payable, creditors would receive payment of up to 25%
of such revenues.

The proposal also seeks to lower the Commonwealth’s debt service-to-revenue
on tax-supported debt to approximately 15%, a level consistent with the debt li-
mit contemplated by the Constitution of Puerto Rico, from the current unsustai-
nable ratio of 36%. Although at a ratio of approximately 15% Puerto Rico would
still remain at levels exceeding the most heavily indebted of the U.S. states, debt
service on the Base Bonds has been structured to give the Commonwealth the
opportunity to further reduce that ratio as a result of economic growth and deve-
lop into a stronger credit over time. A successful exchange offer, along with the
implementation of the measures recommended in the FEGP, should improve the
Commonwealth’s credit-worthiness, and, if the Commonwealth’s economy is able
to grow in line with the growth assumed for the United States, investors will be
able to recover the full principal amount of their investments through payments
on the Growth Bonds.

The exchange offer is predicated upon a number of key assumptions, including
very high participation levels from the creditor groups as well as the U.S. Federal
Government maintaining at least its current percentage levels of programmatic su-
pport for the Commonwealth. If very high participation levels cannot be achieved
or the U.S. Fe-deral Government allows the level of programmatic support for Pu-
erto Rico to materially decline, then the terms of the exchange offer will have to be
revisited and creditor recoveries adjusted accordingly. The Commonwealth of Puer-
to Rico, the Government Development Bank and the Working Group acknowledge
and value the active participation of the Commonwealth’s creditors in the restruc-
turing process. Further, the Commonwealth recognizes the continuing contribution
of the cooperatives in the ongoing discussions regarding Puerto Rico’s Fiscal and
Economic Growth Plan. Those discussions have focused on the terms of the restruc-
turing and the key role the cooperatives play in promoting social and economic de-
velopment on the Island.

The proposal is available at http://www.bgfpr.com/.

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