Puerto Rico cuts planned debt sales after bond sell-off
(Reuters) - A day after a Puerto Rico bond sell-off pushed yields above 10 percent, the Government Development Bank said on Tuesday it is scaling back bond sales planned for the rest of 2013.
The GDB, which sells bonds for the Caribbean island, its agencies and local governments, said it will cut back planned debt issuance to between $500 million and $1.2 billion because of current market conditions and recent private transactions.
A big issuer of tax-free bonds, Puerto Rico had been planning to issue about $3 billion in bonds before year's end and has recently sold debt in private placements and $673 million of electricity revenue bonds.
"In light of the volatility in the market and the private transactions that we have recently closed, we expect to scale down our plan of financing for the rest of the year," Jose Pagan, interim president of GDB, said in a statement.
It was unclear which anticipated bond sales, such as a $600 million GO offering expected this month, would be reduced or cut back after Pagan's announcement.
Investors on Tuesday again pushed up many yields on Puerto Rico's debt, with the yield on a 2039 general obligation maturity carrying a 6 percent coupon trading briefly at 10.8 percent before falling to 9.43 percent, according to Municipal Market Data. The 10.8 percent yield was 636 basis points over MMD's scale of best debt. A week ago the bond yielded 9.2 percent.
A 2041 Puerto Rico GO maturity with a 5.75 percent coupon also briefly traded above 10, yielding 10.4 percent before dropping back to 9.3 percent, according to MMD.
Fears of tighter monetary policy by the Federal Reserve and credit concerns after Detroit in July filed for the largest U.S. municipal bankruptcy have pushed prices of municipal bonds down sharply.
In addition, some investors in America's $3.7 trillion muni market worry that Wall Street credit agencies will soon downgrade their Puerto Rico bond ratings because of the island's weak economy, population loss and $70 billion of outstanding debt. Puerto Rico's GO ratings are just above junk-bond status.
"It's always alarming when rates move up this quickly," said Alan Schankel, managing director at Janney Capital Markets. "But I don't think the ratings agencies are going to downgrade in the near term. Puerto Rico has done a lot of what they wanted - raised taxes, raised water rates. Wall Street will wait and see how the revenues come in."
Puerto Rico's government finances were generally better than a year ago and the $1.4 billion worth of private placements and bank transactions enhanced Puerto Rico's liquidity and allowed a slowing of bond issuance, according to Schankel.
"UNFAIR COMPARISON" - GDB
Pagan said that the territory's debt has been punished particularly hard by "the ripples created by the Detroit municipal bankruptcy, which has raised borrowing costs for all issuers of municipal debt, not just Puerto Rico."
Puerto Rico's so-called credit yield spread over MMD's scale for triple A rated bonds rose to record high levels on Monday, with the 10-year spread at 440 basis points from 360 basis points at the end of August.
Troubled by a long ailing economy and a jobless rate of 13.5 percent, worse than any U.S. state, Puerto Rico already pays the highest rate of any major tax-free issuer. Its per capita debt burden is higher than any U.S. state's.
"Puerto Rico's capacity to service its public debt is being unfairly compared to that of the 50 states without taking into consideration Puerto Rico's fiscal autonomy," Pagan said.
He also stressed that Puerto Rico GO bonds are set apart from most other GO bonds as they have a first claim on the U.S. territory's general fund revenues.
The GDB, which is currently evaluating all alternatives, expects to hold an event open to all investors in the next few weeks to discuss in detail the island's fiscal and economic plan and the financing plan, Pagan said.
Puerto Rico is ineligible for Chapter 9 municipal bankruptcy protection because any debt overhaul would have to be treated as a foreign obligation, analysts say.
A lesson for the municipal bond market could come from what happened to New York City in 1975, when the New York state legislature created a State Financial Control Board led by the governor to oversee its finances when the city was swamped by $3.3 billion of debt and near bankruptcy, an analyst said.
"If you did not panic, your investment in NYC general obligation debt was rewarded; if you sold into a market which was in a panic, you lost big time," Dick Larkin, director of credit analysis at HJ Sims & Co., Inc., said in an email to Reuters.
None of the recent developments, "changes my opinion on Puerto Rico as a sound investment for income," Larkin said.
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