Feb 5 Puerto Rico is teeing up sizeable debt deals that may include securities from an untested borrowing agency, financial industry sources said, a move that could take on new urgency after Standard & Poor's cut the island's credit rating to junk.
The deals, which may total as much as an estimated $2 billion, are seen by analysts and many investors as vital to ensuring the big borrower has adequate financial liquidity to pay its bills and debts.
Government officials, courting potential investors wary of possible financial engineering, aim to position the newly created Municipal Financing Corp as a distinct entity among the commonwealth's stable of municipal bond issuers, even though it will tap sales-tax revenues as does the island's mainstay, COFINA.
COFINA, which is the Spanish acronym for Puerto Rico's Sales Tax Financing Corp, is among the U.S. territory's strongest credits and may also sell debt as part of the sale expected this month. With $15.5 billion of bonds outstanding, it is rated AA-minus by Standard & Poor's and Fitch.
If the new entity wins a similar rating, that could prove crucial for Puerto Rico's ability to attract investors now that S&P has cut the island's overall credit rating to BB-plus, one level below investment grade. The ratings agency cited Puerto Rico's limited ability to access funds in the years ahead.
COFINA's rating was not changed.
The downgrade could oblige some institutional investors to sell holdings of Puerto Rico's high-yielding bonds while keeping others from participating in any new offering this month.
Government officials have hired a mainland law firm to develop a legal opinion arguing that the new corporation will be separate from COFINA and not subordinate to it, according to the sources. That could help the corporation secure better interest rates in the municipal bond market.
The new corporation was created to benefit Puerto Rico's 78 municipalities, which have total debt of about $590 million. It joins more than a dozen Puerto Rico issuers that will pay $3.44 billion of debt service in 2013, according to Moody's Investor Service.
Legislation passed last month increased the central government's share of a 7 percent sales and use tax by 50 basis points to 6 percent. The Municipal Financing Corp can refinance and borrow off the 1 percent portion of the tax set aside for municipalities.
But the new agency could add confusion to the market.
"It is another layer of complexity over Puerto Rico's COFINA credit and general obligation credits," said one financial industry source. "The markets are very concerned with the financial engineering ... and that this will only complicate things further with a new credit."
Yields on Puerto Rico bonds soared last year amid concerns that the island's long-struggling economy, declining population and high debt load would force it to restructure some $70 billion in tax-free debt.
The financial sources said details of the legal opinion were expected to be made public during an investors teleconference by officials of the island's fiscal agent, the Government Development Bank, that is expected by mid-February.
The government, which has already cut spending, raised taxes and reorganized worker pensions to try to shore up the budget, announced new measures on Wednesday that included additional cuts by commonwealth agencies.
Puerto Rico officials are also in discussions with local banks about providing the government financing, as large U.S. banks have cooled on providing direct lending to the Puerto Rico government, the sources added.
Local banks also don't have sufficient capital to provide all the money they could step up with some lending, the sources added.
Puerto Rico needs to raise between $800 million and $2 billion to meet its obligations, said Robert Donahue, managing director at Municipal Market Advisers.