UPDATE 2-Puerto Rico mulls changing auction-rate debt

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By Anastasija Johnson

NEW YORK, Feb 14 (Reuters) - Puerto Rico is considering restructuring approximately $600 million of its auction-rate debt after the market became the latest victim of the global credit crunch, officials said on Thursday.

The commonwealth will have to pay maximum 12 percent interest on $63 million of its debt after an auction of these securities failed on Tuesday, said Luis Alfaro-Martinez, financing director at Puerto Rico's Government Development Bank.

"We are already considering the alternatives," said the bank's president, Jorge Irizarry, adding that this debt could be restructured into fixed-rate bonds or variable-rate securities backed by letters of credit.

Irizarry and Alfaro-Martinez spoke to reporters after an industry luncheon.

Auction-rate debt are long-term securities with interest rates resetting periodically. An auction fails when not enough buyers emerge to purchase securities, forcing the issuer to pay a high penalty rate to bondholders until the yield resets lower or debt is redeemed.

Puerto Rico is among numerous municipal issuers that have been forced to pay stiff interest after their securities failed to attract new buyers this week and dealers did not want to commit their capital to the transactions.

Dealers traditionally provided liquidity to the $330 billion market but many started balking recently because their balance sheets are strained by subprime-related losses.