* Tax-free yields in deal top 7 percent
* Underwriters bump up offering
* Puerto Rico plans more deals
By Michael Connor
Aug 7 Financially stressed Puerto Rico on
Wednesday tapped the U.S. municipal market for the first time in
more than a year and found that tax-free investors, shaken by
Detroit's bankruptcy case, now demand the Caribbean island pay
exceptionally high interest rates.
In a closely watched transaction, the first of a string of
deals the island government plans for 2013, the Puerto Rico
Electric Power Authority (Prepa) sold $673 million of
electricity revenue bonds at tax-free yields of as much as 7.12
The bonds sold by Puerto Rico's sole electricity provider
were priced to yield between 6.73 percent and 7.12 percent on
maturities ranging from 2030 to 2043, according to a pricing
sheet from lead underwriter Morgan Stanley & Co.
The Baa3-rated deal's top yield of 7.12 percent on the
30-year maturity with a 7 percent coupon far exceeded yields of
4.28 percent on 30-year, AAA-rated general obligation bonds at
Baa GO bonds closed at 5.47 percent, according to Municipal
In April 2012, when Prepa was rated Baa1 and brought a
similar, $650 million deal to market, yields on its 30-year
maturities priced at 5.08 percent, or more than 2 percentage
points below Wednesday's sale. Over the same time, AAA yields
rose by less than a full point, from 3.35 percent to 4.28
Finance officials in San Juan were unavailable to comment.
Demand for Wednesday's deal, which underwriters raised from
$600 million, was strong. However, it was stung by Detroit's
bankruptcy filing last month, which is forcing shaky issuers
such as Puerto Rico to pay higher yields, according to Dan
Heckman, senior fixed-income strategist at U.S. Bank Wealth
"The spreads they are being forced to pay are off the
charts," Heckman said. "Puerto Rico has very severe debt levels.
They have higher per-capita debt levels than any U.S. state."
Heckman, who did not buy the Prepa debt, said the biggest
buyers were likely managers of high-yield municipal bond funds
and calculated that the fat yields on the bonds would cost the
utility an additional $30 million to $40 million a year.
"The market is penalizing Puerto Rico for its poor financial
condition and its economy," Heckman said.
Troubled by a long ailing economy and a jobless rate of 13.2
percent, Puerto Rico already pays the highest rate of any major
issuer in the U.S. $3.7 trillion muni market. Its GO ratings are
barely investment grade and the three biggest U.S. credit
ratings agencies have warned they may downgrade ratings to junk
"Detroit is messing up the market right now and this will
continue until it does solve its problems," said Richard Larkin,
director of credit analysis at HJ Sims.
The Prepa sale also came to market as investors anticipate
that interest rates will climb much more once the Federal
Reserve begins unwinding its expansionary policy.
The Prepa deal is the first in a series of planned Puerto
Rico debt offerings expected to total more than $3 billion
before year-end and come after a new government took painful
pension reforms and raised taxes. The commonwealth last sold
debt in July 2012.
In the broader muni market on Wednesday, secondary trading
was overshadowed by primary deals such as Puerto Rico, according
to MMD, which reported that nearly all AAA-rated maturities
ended unchanged on Wednesday. Yields on scattered maturities
rose 1 basis point, MMD said.