A Proposal To Rescue Puerto Rico

Senator Charles Schumer

322 Hart Senate Office Building

Washington, DC 20510

July 3, 2015

Dear Senator,

as a Fixed Income professional, I am writing to you today regarding your legislative proposal to allow the Commonwealth of Puerto Rico to declare Chapter 9, which it is currently forbidden to do. I would like to suggest another route, that to me, is far less disruptive, less costly, and will perhaps better serve all parties.

A lot of the Island's current outstanding issuance carries very high coupon rates compared to today's market rates. Puerto Rico could save a substantial sum by using a tool the United States government uses for foreign nations: a loan guarantee. By using this back up, old debt, with coupons as high as 6%, which cannot be rolled over due to the Commonwealth's lack of liquidity, can be rolled into new paper with perhaps half the cost of debt service. We already do this for Turkey and Israel. I see no reason why we cannot accommodate the Commonwealth in the same manner. This is far less disruptive to markets, and if a restructuring of $72 billion of debt can be done without going into the complexity, and what will surely be a massive cost, of a Chapter 9 proceeding, this should result in better outcomes for all. In theory, this is NIFA, but for Puerto Rico.

In addition, not all Puerto Rico credits share the same credit quality deficits. As an example, the Puerto Rico Power Authority, or PREPA, needs only a few minor tweaks to put it back on a more steady footing. Currently, the Authority is mandated to pass on any savings in oil costs to the consumer. A minor compromise in benefit sharing of lower oil prices, in addition to a loan guarantee, may be all that's needed to repair this segment of the Commonwealth's debt. Other credits, like the Highway and Transportation Authority (PRHTA) and Puerto Rico University may require more dramatic solutions, but I see no reason for putting the entire Commonwealth's debt under a Chapter 9 umbrella.

It is important for observers, who may not be familiar with the Island's debt structure, to note that all of these individual agencies face specific issues to their own credit impairments, and a blanket bankruptcy is more than likely uncalled for, and not a positive development for the Island, or the national municipal market. You need to tread very carefully here. Best of all, no one can call this a “bailout.”

I hope you will give my suggestion your fullest consideration. I see from the trade papers the Chapter 9 idea is gaining political momentum, but please understand this could result in an outcome that benefits no one.

Yours Truly,

Donald R. Davret

Investment Advisor Representative

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