Puerto Rico seen waiting out market storm before big deals
* Island yields topped 10 percent
* Short-term borrowings give some liquidity
* Sickly economy a key driver
By Michael Connor
Sept 12 (Reuters) - Puerto Rico's policymakers are expected to weather with short-term borrowings a storm of worry in America's $3.7 trillion municipal bond market that has whipped the Caribbean island's interest rates into the double digits, analysts said.
Three deals privately placed on Aug. 29 for $1.4 billion in bank anticipation notes (Bans) and other short-term notes give the Caribbean island some liquidity, but carry the risk of further spikes in interest rates.
"Often times the reliance on shorter-term debt exposes issuers to greater risk," said Robert Donahue, managing director of Municipal Market Advisers.
"The Bans deals were a plus for cash flow at Puerto Rico's Government Development Bank, the island's bond vendor and lender to its governments, but "could spell difficulty down the road," Donahue said.
Yields on the municipal bond market have risen to levels unseen in nearly 30 months amid anticipation the Federal Reserve may soon throttle back its expansionary monetary policy. On Wednesday, when it will wrap up a two-day meeting, the Fed may start trimming its bond-buying stimulus program.
A big borrower, with $70 billion of outstanding debt, as well as large unfunded pension promises, Puerto Rico this week saw some of its tax-free interest rates skyrocket to over 10 percent and was forced to dramatically scale back its planned 2013 issuance of an estimated $3 billion or more.
The island, which sold more than $7.6 billion of long-term debt in 2012, according to Thomson Reuters data, is planning bond sales of between $500 million and $1.2 billion before the end of the year.
Just over three weeks ago, Government Development Bank interim President Jose Pagan announced a $400 Bans deal with RBC Capital Markets, another $400 million Bans deal with Barclays Capital and $600 million of tax and revenue anticipation notes (Trans) with a group of banks.
"Liquidity has been improved," Janney Capital Markets analyst Alan Schankel said, though noting the borrowings come with rollover risk and the two-year Barclays agreement calls for interest rates of 11.4 percent over Libor in its final months.
By contrast, in fiscal 2012, the GDB issued more than $4 billion of notes, according to Morningstar Inc analyst Candice Lee. The pullback will pressure the GDB, the U.S. commonwealth's central government and agencies, she said.
"We do believe these plans could potentially exacerbate the cash shortfall that the commonwealth expects to face in the current fiscal year," Lee said in a commentary.
A U.S. territory, Puerto Rico and its 3.7 million people have endured a shrinking economy since the mid 2000s that may again be tumbling back into recession as government tax increases and pensions overhaul kick in.
The economy, which contracted by 5 percent in July from a year earlier, remains a key worry for bond investors, Lewis and other analysts said. Puerto Rico's jobless rate is higher than any U.S. states.
But the government's moves, which shrank chronic budget deficits and were praised by Wall Street analysts, did little to stop the climb in the island's interest rates that are far higher than any other big municipal issuer.
U.S. credit agencies have hailed the government's fiscal reforms but rate the island's debt at near junk-bond status and have warned of possible downgrades of Puerto Rico bonds.
Puerto Rico finance officials gave no details of the island's near-term issuance plans, with GDB Board President David Chafey and Treasury Secretary Melba Acosta this week saying its financing plans were being altered because of market volatility.
The GDB was set to tap the munis market at the end of this month for a $600 million general obligation (GO) refinancing, as well as a $175 million public building authority financing. The island's electricity authority last month sold $673 million of revenue bonds.
The island's Highways Authority also planned to issue as much as $2.2 billion in debt to pay off credit lines with the GDB.
Additionally, the island's fiscal 2014 budget, which started July 1, contemplates a $500 million refinancing and authorizes a $200 million GO bond for public works projects.
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