UPDATE 2-Puerto Rico says $3 bln bonds will price Tuesday

Thu Mar 6, 2014 5:57pm EST

By Lisa Lambert

WASHINGTON, March 6 (Reuters) - Puerto Rico has confirmed next Tuesday as the tentative pricing date for its $3 billion general obligation bonds, a sale that will be geared to large institutional buyers.

In preliminary deal documents released on Thursday, the territory said the bonds will follow a sinking schedule with maturities ranging from 2022 to 2035 and make interest payments every January and July.

The bonds will be sold in denominations starting at $100,000, according to the preliminary offering statement, a price tag that would exclude most individual buyers.

At the same time, the underwriters, led by Barclays Capital, "may over-allot or effect transactions that stabilize or maintain the market prices" and also privately sell some of the bonds to dealers and banks at prices lower than the publicly offered ones.

The sale was announced last month, but details were hard to come by. Even the preliminary statement lacks many key facts, giving underwriters and buyers room to negotiate before the official statement is released and pricing begins.

"We would like to see more transparency, more disclosure. ... It's not in there. I think that's what the market was asking for," said Adam Buchanan at Ziegler Capital Markets in Chicago, which is not planning to participate in the deal.

For example, some of the bonds will be callable, but the document does not say which maturities will have optional redemptions, mandatory redemptions or will not be subject to redemption.

The commonwealth's legislature recently approved a deal of up to $3.5 billion and the market has expected it to mostly attract hedge funds, with yields topping 9 percent. Interest paid on the bonds will be exempt from taxation by Puerto Rico, any U.S. state and the federal government.

"There should be a fair amount of interest. There's talk they might even borrow at less than 10 percent, which would be a great win for the commonwealth," said David Tawil, co-founder of Maglan Capital. "For investors, a 9 or 10 percent yield on a triple-tax free basis is very compelling in this environment."

As of Wednesday on Municipal Market Data's Puerto Rico yield curve, the territory's general obligation bonds maturing in 2022 yielded 8.77 percent and those maturing in 2035 yielded 7.67 percent.

Much like a draft statement from last week, the deal documents included a long list of risks to the bonds, including a restructuring of the commonwealth's entire debt portfolio that would resemble filing for bankruptcy. The territory cannot file for bankruptcy under U.S. law, but on Wednesday it announced it had hired a restructuring expert as its financial adviser.

Puerto Rico is considered the riskiest debt issuer in the $3.7 trillion U.S. municipal bond market. All three major rating agencies recently cut its credit score to junk, citing low liquidity and persistent economic troubles. The territory has roughly $70 billion in outstanding debt and has endured nearly eight years of recession.

The downgrades kicked a hornet's nest for the territory, triggering the termination of some interest-rate swaps and the posting of some collateral.

The proceeds will go toward paying off internal loans, refunding some variable-rate bonds, cover termination fees for some interest-rate swaps, repay sales tax bonds and pay interest.

The money will also go toward repaying loans and credit facilities from Barclays, which provided credit support to $188.7 million of the debt to be refunded, and from J.P. Morgan Chase, which holds $59.8 million of the debt to be refunded.

In the past, the territory's Government Development Bank had invested part of its debt service fund in highly rated financial products or collateralized instruments. But starting on July 1, it will invest only in the redemption fund, according to the preliminary statement.

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