The document recommends selling 21-year Puerto Rico general obligation (GO) bonds based on several distressed debt triggers that indicate increased credit risk for Puerto Rico. Specifically, it cites the high coupon rate demanded for recent short-term debt issuance, an underpricing of default risk for Puerto Rico's Highway and Transportation Authority bonds, and a municipal credit risk model that assessed a higher spread than the bonds are currently trading at. The recommendation is to sell the bonds with a target price of $82.75, down from the current price of $88.75.

1. Sponsored by
Puerto Rico
Distressed Debt Strategy
Goldman Sachs FEP Competition
FTB CAPITAL MANAGEMENT
Julio Cesar, Matt Ochs, Repton Salisbury

2. Recommendation: Sell 21yr GO Current Price: 88.75 / Target Price: 82.75
Distressed Debt Triggers:
•Highest coupon payment ever demanded by investors for a 1year
TRANs note for Puerto Rico. This points towards a possible inversion of
an already flat yield curve.
•Market has underpriced default probability of Puerto Rico’s Highway
and Transportation Authority (PRHTA)
•Bloomberg’s statistical Municipal Credit Risk (MRSK)
model assessed a higher credit spread than the adjusted market
spread is currently traded at.
Trade Thesis
Capital
Market Access
PRHTA Default Credit Risk
Yield Curve
Risk
Return
Overall Assessment: Bearish on creditworthiness of Puerto Rican government
$88.75
$30.71
GO Bond Price Time Series vs. High Yield Benchmark
Source: Bloomberg Terminal
1

3. ● Municipal Finance Corporation Act (Jan. 2014)
● General Obligation Bond Issuance (Mar. 2014)
● Puerto Rico Public Corporation Debt Enforcement &
Recovery Act (Jun. 2014)
● TRANs 1 yr. Issuance (Oct. 2014)
○ $1.2 billion in TRANs notes to be issued in
October (Maturity- June 2015)
○ Coupon rate 7.75%
○ Underwritters including JP Morgan, Bank of
America and Morgan Stanley won’t sell the debt
and have agreed to hold until maturity
Relevant Legislation
“A major difference between Puerto Rico’s balance sheet and those of the states is the presence of large, heavily
indebted, corporate-like entities that continue to lose money and increase borrowing. For any financial reform agenda
to be successful, it must confront this issue head on”
FOMC Vice-Chairman William Dudley
Unsettled Legal Disputes with Investors
● U.S. Solicitor General Theodore Olson has been hired by
hedge fund (with large holding in PREPA debt) to fight
recent restructuring law.
● Doral Bank has an ongoing $229 million tax refund
dispute with Treasury. The PR Supreme Court is
expected to rule on the lawsuit this month (October
2014).
Trade Thesis
Capital
Market Access
PRHTA Default Credit Risk
Yield Curve
Risk
Return
2

4. 0
10000
20000
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40000
50000
60000
70000
2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4
TOLLGATE TAX REVENUEDistressed Debt Trigger:
● PRHTA credit rating downgraded from Ba3 to Caa2 in
July 2014 (Moody’s)
● PRHTA issued bonds are secured in part by
● Tollgate revenues of the Authority’s traffic facilities
● Excisetaxes levied on specific petroleum commodities
● 1968 Resolution Revenue Fund
● Total debt outstanding $4.6 billion
● Constitutional claw back provision: all tax revenues of
PRHTA (excluding tollgatetaxes) are firstavailable to the
Treasury for Commonwealth GO debt servicepayments
Source: Government DevelopmentBank of Puerto Rico
Trade Thesis
Capital
Market Access
PRHTA Default Credit Risk
Yield Curve
Risk
Return
3

5. • The issuance of GO bonds underscores Puerto
Rico’s dependency on continued access to
capital markets for plugging budget deficits
and gaining operational short-term liquidity
• $14.2 billion of GO bonds outstanding
Intent of GO Issuance:
TRANs:Tax and RevenueAnticipated Notes
Source: BloombergTerminal
Credit Risk:
GO Performance after TRANs Issuance 10/07/2014
$88.75
• GO bonds are only secured by the good faith, credit
and taxing power of Puerto Rico
• Total GO debt cannot exceed 15% of the average
annual revenues in the two fiscal years preceding the
current fiscal year.
• As of now, total GO bonds outstanding have reached
12.44% of the average annual revenues in 2012 and
2013
Trade Thesis
Capital
Market Access
PRHTA Default Credit Risk
Yield Curve
Risk
Return
4

6. Bloomberg Municipal Credit Risk (MRSK) Model
Credit Risk DS5
Model Spread 847.53
Adjusted Market Spread 798.45
Market Risk DS5
Model Inputs (USD)
Total Assets 2,771 MM
Total Liabilities 44,724 MM
Excess Rev over Exp 1,347 MM
Other Sources of Funds 504 MM
Property Tax Revenues 58 MM
Building Permits 474
House Price Index 136
Median Income 19,183
Non-farm Employment 904
Unemployment 13.50%
847.53 bp
Source: BloombergTerminal
Trade Thesis
Capital
Market Access
PRHTA Default Credit Risk
Yield Curve
Risk
Return
5

7. Island’s Political Outlook
9.225%
9.98%
7.75%
8.422%
0
2
4
6
8
10
12
14
16
18
20
1 year 21 year
• Fed short term rate hike before April 2015 can lead to an inversion of
borrowing costs. (i.e. next short-term TRANs coupon rate rises at a faster pace
than the 21 yr. GO bond
“The time is right to make some of the tough
decisions. You can be in a much better place
even six months or a year from now”
FOMC Vice-Chairman Dudley
• Privatization of currently held public
utility companies could inject medium to
long term liquidity into Treasury
• Our political outlook until the next
general election in 2016 is that structural
reforms are highly unlikely. Labor unions
have stronghold on the ruling party’s voter
base
TRANs note vs. GO bond borrowing costs
Global Interest Rate Risk
Overall Hedge:
Sell Interest Rate Swap
(if political outlook changes on the ground)
Trade Thesis
Capital
Market Access
PRHTA Default Credit Risk
Yield Curve
Risk
Return
6

8. Bond Price Expected Return
82.75 6.76%
Expected GO Bond Yield 9.983%
Returns to Maturity
Principal 1,000,000.00 MM
Coupon Price 1,680,000.00 MM
Reinvest@ 9.23% 3,717,369.05 MM
Total Income 6,397,368.05 MM
Expected Return on PRHTA default
Before April 2015
GO Performance after PREPA imminent default
GO Bond Price Time Series
PREPA: Puerto Rico Energy Power Authority
Source: Bloomberg Terminal
$83.50
$89.875
Trade Thesis
Capital
Market Access
PRHTA Default Credit Risk
Yield Curve
Risk
Return
7