Puerto Rico seeks more sales tax bonds to beat rising yields
SAN JUAN (Reuters) - Puerto Rico finance officials on Wednesday proposed to expand the borrowing capacity of one of the U.S. commonwealth's strongest credits in an attempt to get around sky-rocketing interest rates.
Treasury Secretary Melba Acosta and Government Development Bank interim President Jose Pagan said they were filing legislation to boost the financing capacity of the government's Sales Tax Financing Authority that carries better ratings than the government itself.
"The commonwealth's revised financing strategy has shown that their financial flexibility has been reduced," said Moody's Investors service on Wednesday, adding that refinancing risks for Puerto Rico have multiplied after the Caribbean island's yield spreads have widened.
Amid a general run-up in interest rates and market fears after Detroit filed for the U.S. largest municipal bankruptcy, the yields on the debt of the Caribbean island peaked. The government, a major issuer of municipal debt, said privately placed short-term deals would help keep financing costs at bay.
Known as COFINA, the authority issues bonds backed by the Caribbean island's 7 percent sales and use tax, or IVU. If approved, the amendments would allow half of the revenue from the IVU to be pledged toward COFINA debt. The proposal aims for a portion of 3.5 percent to be used towards payments on these bonds up from the current 2.75 percent.
COFINA bonds, which are considered more secure because of the sales tax revenue pledge, are less expensive for Puerto Rico. The GDB's Pagan said total net savings by selling COFINA rather than GO issues would be between $66 million and $132 million for each $1 billion borrowed.
On Wednesday, a COFINA bond due 2036 with a 5.375 percent coupon traded higher and closed with a 7.30 percent yield, after ending on Tuesday at 7.50 percent. Wednesday's close was 335 basis points over AAA-rated issues, or 15 basis points tighter than on Tuesday.
Other Puerto Rico debt fell, with a 2039 general obligation carrying a 6 percent coupon yielding 8.7 percent on Wednesday, up from a 8.16 yield on Tuesday. The taxable yield on a GDB 2020 maturity with a 5.5 percent coupon shot up to 14.43 percent from 12.44 percent on Tuesday.
"The existence of COFINA gives Puerto Rico added financial flexibility to raise needed capital ...," analyst Richard Larkin of investment firm HJ Sims & Co., Inc said. "This should have no immediate impact on outstanding bond ratings for Commonwealth debt, but should allow for some liquidity cushion that has been a recent concern."
If passed, the legislation will enable the government to borrow up to $2 billion at rates which fluctuate between 50 and 100 basis points below the island's high-yielding GO debt.
But, the officials said, the government still plans to issue between $500 million and $1.2 billion of debt for the rest of 2013. Earlier this month, after some long-term Puerto Rico debt yielded more than 10 percent, the government throttled down its borrowing plans then totaling about $3 billion.
Acosta said Puerto Rico's government needs to refinance $1.223 billion in debt and finance $820 million for the current 2014 fiscal year's budget.
Moody's last year downgraded $16 billion of outstanding COFINA bonds, with analysts saying they worried that Puerto Rico's economy would lag that of the mainland United States. Senior COFINA bonds were lowered one level to Aa3 and subordinate bonds were lowered two notches to A3.
But Moody's and other U.S. credit ratings agencies have Puerto Rico's general obligation rating at near junk levels and have warned they may reduce the GO rating to non-investment grade. Lower ratings generally require issuers to pay higher interest rates on any borrowing.
The announcement in San Juan came as top government officials, including Gov. Alejandro Garcia Padilla, met in New York with Moody's analysts, government officials said. Puerto Rico's fiscal team also met with Moody's and the two other ratings agencies - Standard & Poor's and Fitch's - last Friday.
Puerto Rico's $70 billion debt load and sputtering economy have Wall Street's municipal bond market worried. Last month, the Puerto Rico Electric Power Authority raised $673 million through a Wall Street bond issue but paid tax free yields between 6.73 percent and 7.12 percent on long-term bonds.
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