UPDATE 2-Puerto Rico Electric sells $673 million in bonds
* Tax-free yields in deal top 7 percent
* Underwriters bump up offering
* Puerto Rico plans more deals
Aug 7 (Reuters) - Financially stressed Puerto Rico on Wednesday tapped the U.S. municipal market for the first time in more than a year and found that tax-free investors, shaken by Detroit's bankruptcy case, now demand the Caribbean island pay exceptionally high interest rates.
In a closely watched transaction, the first of a string of deals the island government plans for 2013, the Puerto Rico Electric Power Authority (Prepa) sold $673 million of electricity revenue bonds at tax-free yields of as much as 7.12 percent.
The bonds sold by Puerto Rico's sole electricity provider were priced to yield between 6.73 percent and 7.12 percent on maturities ranging from 2030 to 2043, according to a pricing sheet from lead underwriter Morgan Stanley & Co.
The Baa3-rated deal's top yield of 7.12 percent on the 30-year maturity with a 7 percent coupon far exceeded yields of 4.28 percent on 30-year, AAA-rated general obligation bonds at Wednesday's closing.
Baa GO bonds closed at 5.47 percent, according to Municipal Market Data.
In April 2012, when Prepa was rated Baa1 and brought a similar, $650 million deal to market, yields on its 30-year maturities priced at 5.08 percent, or more than 2 percentage points below Wednesday's sale. Over the same time, AAA yields rose by less than a full point, from 3.35 percent to 4.28 percent.
Finance officials in San Juan were unavailable to comment.
Demand for Wednesday's deal, which underwriters raised from $600 million, was strong. However, it was stung by Detroit's bankruptcy filing last month, which is forcing shaky issuers such as Puerto Rico to pay higher yields, according to Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management.
"The spreads they are being forced to pay are off the charts," Heckman said. "Puerto Rico has very severe debt levels. They have higher per-capita debt levels than any U.S. state."
Heckman, who did not buy the Prepa debt, said the biggest buyers were likely managers of high-yield municipal bond funds and calculated that the fat yields on the bonds would cost the utility an additional $30 million to $40 million a year.
"The market is penalizing Puerto Rico for its poor financial condition and its economy," Heckman said.
Troubled by a long ailing economy and a jobless rate of 13.2 percent, Puerto Rico already pays the highest rate of any major issuer in the U.S. $3.7 trillion muni market. Its GO ratings are barely investment grade and the three biggest U.S. credit ratings agencies have warned they may downgrade ratings to junk status.
"Detroit is messing up the market right now and this will continue until it does solve its problems," said Richard Larkin, director of credit analysis at HJ Sims.
The Prepa sale also came to market as investors anticipate that interest rates will climb much more once the Federal Reserve begins unwinding its expansionary policy.
The Prepa deal is the first in a series of planned Puerto Rico debt offerings expected to total more than $3 billion before year-end and come after a new government took painful pension reforms and raised taxes. The commonwealth last sold debt in July 2012.
In the broader muni market on Wednesday, secondary trading was overshadowed by primary deals such as Puerto Rico, according to MMD, which reported that nearly all AAA-rated maturities ended unchanged on Wednesday. Yields on scattered maturities rose 1 basis point, MMD said.
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