Puerto Rico will do what it takes to honor debts

NEW YORK Tue Oct 15, 2013 8:24pm EDT

NEW YORK (Reuters) - Puerto Rico will do whatever it takes to honor its debt, Governor Alejandro Garcia Padilla said on Tuesday, as local officials tried to reassure investors the U.S. territory can and will meet its obligations after a jump in yields shut it out of capital markets.

A host of officials from the Government Development Bank (GDB), the departments of treasury and economic development, the budget office, and others joined Padilla in a wide-ranging call with investors that lasted nearly two and a half hours. The message: Puerto Rico is not going to default on its debt.

"We will do everything, and I repeat everything, that is necessary for Puerto Rico to honor all its commitments. It is not only a constitutional but also a moral obligation," Padilla said at the start of the conference call and webcast that contained 72 pages of slides.

Puerto Rico's bonds have been trading at around 60 cents on the dollar, pushing yields above 9 percent and forcing Puerto Rico to rely on private debt sales to banks instead of issuing debt on capital markets.

Officials from Puerto Rico's Government Development Bank said they have enough liquidity to finance the commonwealth through at least the end of the current fiscal year in June 2014, allaying fears that the government could face a refinancing crunch later in the fiscal year.

"We feel it is a very manageable situation right now," said David Chafey, president of the board of the GDB, pointing to $2.3 billion of net assets at the bank, most of which is held in liquid assets such as money market funds and U.S. Treasury and agency debt.

A major issuer on the United States municipal bond market, Puerto Rico has $70 billion in outstanding debt that has been very popular with investors and fund managers because it is exempt from federal, state and local taxes. Puerto Rico debt represents nearly 2 percent of the $3.7 trillion municipal bond market.

But investors - spooked after Detroit filed the largest municipal bankruptcy in history in July and worried about rising interest rates - have largely ignored a series of reforms aimed at kick-starting the economy and reigning in Puerto Rico's public finances, instead treating the Caribbean island's debt as a potential default risk.

Yields on its 30-year debt have spiraled from just over 5 percent in mid-May to more than 8 percent currently.

Puerto Rican officials have expressed frustration at their rising borrowing costs, saying investors are not recognizing the painful reforms to the pension and tax systems and are unfairly punishing the commonwealth in comparison with U.S. states in similar or worse situations.

In a separate interview with Reuters on Tuesday, Treasury Secretary Melba Acosta Febo said Puerto Rico might tap America's municipal bond market with a new issue of sales tax bonds if yields on the secondary market fell below 7 percent.

A COFINA bond, as the sales tax revenue bonds are known, traded at 61.346 cents on the dollar and a yield of 9.085 percent on Tuesday.

When asked what yield level would represent the right conditions to tap the market, Acosta Febo said, "less that 7 percent would be good." The Commonwealth, which had planned issues for between $500 million and $1.2 billion in bond sales, will have to keep monitoring market conditions, she said.

Dan Berger an analyst with Municipal Market Data, a unit of Thomson Reuters, said an imminent return to capital markets at a yield under 7 percent was "wishful thinking."

A major issue for Puerto Rico is the lack of economic growth even as a sharp decline in the Caribbean island population leaves fewer people to bear the cost of a growing debt.

Officials outlined plans to increase development in key industries such as pharmaceuticals, biotech, medical devices, high tech manufacturing and agriculture through incentives and tax cuts. An expected 9,280 new jobs will be created in those sectors over the next 12 months based on ongoing negotiations, officials said.

The unemployment rate, at 13.9 percent, is already the highest of any U.S. state or territory.

Dick Larkin, director of credit analysis at HJ Sims & Co, gave the conference call a cautious welcome but expressed some reservations that Puerto Rico was doing enough.

"It shows that they have been thinking and planning for economic growth, and not just focusing on the deficit," he said. "I am glad to see there exists a coherent, thought-out plan, still (there is) no guarantee that they will get the desired results, but they are trying."

Puerto Rico has a projected deficit of $820 million for this fiscal year, and plans to cut it in half for fiscal 2015 and to reach a balanced budget for the year after that.

Larkin said he would have liked to hear an announcement that Puerto Rico was moving up its goal of eliminating the deficit to 2015 instead of reiterating its 2016 target.

Chris Mier, chief strategist at Loop Capital, said he was generally impressed with what he heard.

"They are an impressive 'management' team. They have a better understanding of what bond investors want and need than almost any issuer I have heard," he said. "I think their economic forecasts are lofty but cannot be dismissed out of hand."

(Editing by Ken Wills)

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