G25

Cooperativismo
Ahorro y Crdito
G25s Stance regarding the Agreement between
GDB and the AdHoc group of Hedge Funds
May 5th, 2016
At midnight on May 1st, 2006, the Government Development Bank (GDB) announced
the preliminary terms of a possible agreement to restructure the Banks debt. The terms agreed
to with a group of hedge funds, contemplate a bond exchange with a principal haircut of 47%.
The GDBs press release points out that the proposal contemplates the issuance of other par
value instruments, the specific terms of which have not been defined. The GDBs disclosure
acknowledges that the Banks restructuring will require the consent of the entirety of the Banks
bondholders, including the state chartered credit unions (Cooperativas de Ahorro y Crdito or
Cooperativas). Additionally, it recognizes that the hedge funds AdHoc group represents only
25% of the GDBs debt.
The terms disclosed by the GDB aiming to make principal haircuts correspond to the
proposals and financial expectations of hedge funds, for whom said haircuts do not imply capital
losses on account of them having acquired their bonds at a discount price in the secondary
market. This is in contrast with the situation that traditional investors confront. To traditional
investors, who typically bought their bonds at par in their original issuance, principal haircuts
represent material losses, both of capital and of current income. This is the same situation that
state chartered credit unions share with the rest of the Puerto Rican bondholders and traditional
investors in the United States.
The G25s position on this matter has been clear: (a) the restructuring of the bonds held
by State Chartered Credit Unions and the other Puerto Rican investors cannot be subordinated
nor be conditioned to the hedge funds negotiation perspective; and (b) Debt reduction cannot
be achieved blindly, without acknowledging the full financial realities of each group of
bondholders, especially those comprising a majority. Accordingly:
1. For a hedge fund that acquired its bonds at a discount price in the secondary market, a
reduction of principal is neither a losing transaction nor implies sacrifices of any sort.
Depending on the moment of acquisition, the principal haircut can in fact translate into
double digit gains for these speculative investors. On the contrary, for traditional
bondholders these principal haircuts represent a loss of capital and a loss of current
income.

2. The proposed agreement contemplates that the undefined par value instruments
(presumably to be received by the Coops and local bondholders) should have a Net
Present Value equivalence to the hedge funds discount instruments. However, said
formula leaves out the true yield that the hedge funds receive on account of their
discounted acquisition price. For example, to receive 53 cents in exchange for an
investment bought at 35 cents represents a yield of 151%, which, even if annualized over
a period of two or three years (the time period during which hedge funds have bought
their Puerto Rico investments), would represent extraordinary double digit yields.
In order for traditional investors to receive a truly comparable transaction, the GDB would have
to provide them with bonds that carry principal premiums and/or higher yields. As we can see,
the alleged comparability of the GDB/Hedge Funds agreement is not so comparable. A true
equivalence requires that the calculation take into account the true yield that the hedge funds
will receive based on the reduced principal amount invested upon acquiring bonds at a
discounted price. The GDB and its advisors cannot disregard this financial reality.
In view of the above, the G25s position regarding the agreement between the GDB and the
hedge funds is as follows:

The instruments that are offered as part of the restructuring have to acknowledge the
financial reality of the actual capital truly invested by each bondholder. Willful
blindness towards said financial reality is not admissible.

Objections to implement this comprehensive and realistic calculation on account of

alleged unworkability reveal an unwillingness to protect the capital of traditional
investors (both in Puerto Rico as well as in the US), and a tactical affinity in negotiating
with hedge funds, leading to an alignment of interests. By the same token, objections
due to alleged conflicts with bankruptcy principles (which have never been supported
with specific provisions or court decisions) are an artifice, as the restructuring under
negotiation is a voluntary process governed by the parties freedom of contract.

An agreement in good faith must be based on the interests of the majority of the
bondholders and not merely on the interests of that minority which facilitates
fulfillment of the goal of debt reduction at any cost. An agreement with such a slim
likelihood of real implementation and founded on the interests of a minority ends up
being a simulation. Even if that simulation has the purpose of lobbying Congress for
debt restructuring powers that allow imposition of principal haircuts, this exercise
lessens the restructuring negotiations and unnecessarily delays them.

With regards to the goal of reducing the amount of debt, we must express the following:
GDBs interest in achieving debt reduction is evident. However, to the extent that said reduction
impairs the capital of the Puerto Rican savers and investors --be them members of our state
chartered credit unions or direct holders of Puerto Rico bondsthe social benefit of reducing
government debt will be offset by the damage to our economy. The decapitalization that our
economy would suffer due to the principal haircuts will impair our prospects for economic
recovery, which is an essential pre-condition for a definitive solution to Puerto Ricos fiscal crisis.
It is for this reason that the principal haircuts that the government proposals contemplate -which deliver their greatest damage upon Puerto Ricos investors -- end up laying the foundation
for the trauma of a future default. This risk of future financial failure is especially dangerous when
we consider that debt restructuring is just but one piece of a decisive solution, which requires:

Adopting economic development policies that lead to growth (thus increasing

government revenues), and

Reform governmental structure and operations to ensure sustainable levels of spending

and increase public productivity and effectiveness.

In the absence of policies addressing these two fundamental components, debt restructuring
will only generate a Mega-deal, the effects of which will be brief and insufficient, forcing us to
repeat the process in the near future. Moreover, the principal haircuts and the prolonged legacy
of a Super Bond, the curtailed capital of which will be a long term reminder of the credit default,
will be an impediment to Puerto Rico regaining credibility and market access.
Finally, let it be clear that, in our current circumstances, the many calls to debt reduction do
not truly represent a dtente to the speculative interests of the hedge funds. On the contrary,
the governments desire to achieve debt reduction without acknowledging the different
circumstances in which each bondholder acquired his or her bonds and without taking into
account the material bond holdings of Puerto Ricans has created an unholy alliance between
the Commonwealth and the hedge funds. Furthermore, this has opened the door to hedge funds
and their business model finding their way into the United States municipal bond market, a
market from which they had been absent, until now.
When the government calls for a debt cut, it forgets that one fifth of said debt is, in fact, the
accumulated savings of decades of work of thousands of fellow Puerto Rican citizens. Likewise,
those who paradoxically call for a default and for a cutting of the debt as a defense of the national
wealth, are actually endangering a national capital that amounts to $13 billion and end up
advancing the interests of the hedge funds. This reality cannot be ignored. The defense of the
public interest, which is the essence of government officials ministerial duty, demands the
protection of that national capital. Public policy can neither be blind nor be rendered unarmed
in light of the politic, economic, social and moral imperative of defending that national capital.

In conformity with all of the above, the G25 reaffirms its commitment to advance
proposals that protect the public interest, which includes granting the Commonwealth
reasonable assistance to allow delivery of public services while protecting Puerto Rican wealth.
We are convinced that said balance is both achievable and necessary. We maintain our
continued discussions with the GDB to reach said goal.

This position is based on proposals presented by Jos A. Sosa Llorns, Esq. and Fernando Vias Miranda on
behalf of the G25 before Congress since February, 2016.

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 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
Masters of Economics from Penn State University (1979 1981).