By Kanika Sikka and Lisa Lambert
Feb 11 Puerto Rico said on Tuesday it plans to
issue general obligation bonds to refinance debt and ease its
liquidity crunch, but the island did not offer details as to the
timing or how much debt it plans to sell.
The U.S. territory, which has $70 billion in tax-free debt
outstanding, is mired in a multi-year recession. It has been
downgraded to junk status by all three major U.S. credit rating
agencies in the last week and is struggling to avoid default.
"We have completed significant measures in the past month to
improve our fiscal health and are ready to access the market
with a new issuance of GO bonds," David Chafey, chairman of
Government Development Bank for Puerto Rico, said in a
The statement did not specify when Puerto Rico would sell
bonds or how much it planned on selling. Barclays, RBC Capital
Markets and Morgan Stanley have been named as lead underwriters.
The issue would be the first time since August the territory has
tapped the municipal market.
A source familiar with the deal said Puerto Rico needs to
raise about $2.3 billion, which would allow it to refinance some
variable-rate bonds, a $290 million outstanding GO bond, and
more than $1 billion in debt service restructuring, as well as
borrow $100 million in new money. Hedge funds are expected to
show the biggest interest in the deal.
Puerto Rico Governor Alejandro Garcia Padilla said on Monday
that he had asked the legislature for approval to borrow up to
$3.5 billion in general obligation bonds.
A spokesperson for the territory said specifics of the sale
would be announced during its quarterly webcast, which was
rescheduled to Feb. 18 from this Wednesday - an indication that
the sale will take place toward the end of the month.
A member of the Barclays public finance department was not
available for comment.
In January the Government Development Bank of Puerto Rico
said it was planning to return to the bond market that month or
February, with a deal officials estimated would range from $500
million to $1.2 billion.
The island's legislature has also authorized more borrowing
through the Sales Tax Financing Authority, known by its Spanish
"Should Puerto Rico decide to issue general obligation
bonds, we believe they will have to pay a substantial yield
premium," said Morningstar, Inc. in a special municipal research
note on Tuesday. "Full details about how Puerto Rico will
structure its planned issuance are not yet available, but we
expect it to involve some combination of GO, third-lien COFINA,
and private placements."
In recent weeks, financial markets have grown increasingly
worried about the fate of the territory, specifically that
downgrades could push it toward default.
Fitch Ratings became the final major rating agency to
downgrade Puerto Rico's credit rating, cutting it to "BB" with a
negative outlook on Tuesday, citing the island's large debt
levels and pension liabilities. It also cut Puerto Rico's
employees retirement system to "BB" from "BBB".
Standard & Poor's slashed Puerto Rico's rating last week and
said the territory could see a further downgrade if it did not
raise additional funding by the end of this month. Moody's
Investors Service lowered the commonwealth's credit rating to
junk status two days after S&P and also cut the rating of the
Puerto Rico Electric Power Authority on Monday.
The rating changes could force Puerto Rico to pay more than
$1 billion on interest rate swaps, collateral, variable-rate
bonds and debt acceleration.
The $3.7 trillion municipal market has long priced in the
credit risk of Puerto Rico bonds, but the downgrades helped push
up yields on the debt in secondary trading over the last week.
As of Monday, 10-year Puerto Rico GO bonds yielded 10.27
percent on Municipal Market Data's benchmark scale. That was 34
basis points higher than the previous Monday. A year ago, Puerto
Rico bonds yielded 4.88 percent, according to MMD, a unit of
Yields frequently topped 20 percent in small trades on
Tuesday, with a buildings authority revenue bond that matures
this year trading at 25.771 percent in the morning, according to
Municipal Securities Rulemaking Board data.
Some large U.S. mutual funds that accumulated large holdings
of Puerto Rico debt because of its rich yields and special tax
treatment have recently sold off the bonds.
In recent months, the Puerto Rico government has taken steps
to put its finances and economy in order, with mixed results. In
December, an index tracking its economic activity fell 1
percent, snapping a three-month run of monthly increases.
. In January, the commonwealth took in revenue of
$664 million, $1 million less than in January 2013, though sales
tax collection hit a record high.
The island paid off a $400 million loan to Barclays last
year, but still has a second $400 million bond anticipation
notes issue with RBC Capital Markets taken out in
The Puerto Rico power authority brought a $673.15 million
deal to market in August, which was underwritten by Morgan
Stanley and had top yields of 7.12 percent for debt maturing in
2043 with a 7 percent coupon.