Oct 24 Puerto Rico's beaten-down debt is
rallying, and the Caribbean island's sales-tax bonds now sport
yields that could be low enough to entice government finance
officials to sell new bonds.
Puerto Rico's $70 billion of municipal bonds are widely held
by mutual funds dedicated to tax-free debt. But the commonwealth
has been forced to pay high yields because of its faltering
economy and chronic budget gaps.
A spokeswoman for was not immediately available on Thursday
to comment on possible bond sales.
Tax-free yields on long-maturity COFINA bonds, named for the
Spanish-language acronym for the commonwealth's sales-tax
agency, sometimes trade well below 7 percent, or more than 1
percentage point lower than early last week.
Puerto Rico Treasury Secretary Melba Acosta Febo last week
told Reuters that the island, which throttled back its issuance
plans amid steep increases in interest rates demanded by
investors, might consider new debt deals when yields dipped
under 7 percent.
COFINA, whose debt is backed by sales taxes collected in
Puerto Rico, is one of the island's best-regarded credits, even
after Moody's Investors Service three weeks ago downgraded $6.8
billion of senior sales tax revenue bonds to A2, around the
middle of the investment-grade scale. By contrast, Moody's rates
Puerto Rico's $10.6 billion of general obligation bonds at Baa3,
just one notch above junk, and other U.S. ratings firms have
Two weeks ago, Puerto Rico expanded COFINA's borrowing
capacity by $2 billion.
On Thursday, yields on a 2046 COFINA maturity with a 5
percent coupon traded to yield 6.43 percent, down from 7.4
percent on Oct. 16, a day after Puerto Rico finance officials
briefed institutional investors on the island's spending,
borrowing and issuance plans.
"A strong rally in Puerto Rico's COFINA bonds followed a
recent investor call," said institutional investor Robert Amodeo
at Western Asset. "Despite all munis performing well recently,
COFINA outperformed the general market."
A COFINA zero-coupon issue maturing in 2054 traded on
Thursday to yield 6.55 percent, down from 7.35 percent a week
ago, according to Municipal Market Data.
In the week through Wednesday, yields on Puerto Rico's
10-year GO bonds narrowed 2 basis points to 8.63 percent, as
comparable AAA-rated issues tightened 12 basis points to 2.53
percent. Puerto Rico's 30-year GO yield has dropped to 7.85
percent since Oct. 1, when it was 8.12 percent.
Analysts at Citigroup Global Markets credited much of the
rally in Puerto Rico's debt to last week's investors briefing
but warned that any new issuance by the island "would require
high single-digit yields to clear the market."
Mikhail Foux and other Citigroup analysts said in a research
note that Puerto Rico's rates, which are by far the highest of
any big U.S. municipals issuer, would be eased if the island's
Government Development Bank was given access by Washington
policymakers to the U.S. Federal Reserve's discount window.
Such an action, or putting in place a program like 2008's
Temporary Liquidity Guarantee Program for U.S. corporations,
"would restore investor confidence overnight, buying time for
recently introduced reforms to work out," the Citigroup analysts
So far this year, facing a spike in the yields on the U.S.
municipal bond market, the Caribbean island has relied on
short-term private placement loans, a strategy that could prove
to be risky, said Peter Hayes, head of the municipal bond group
"If Puerto Rico can't access the market or if the rate they
pay is too high, that becomes a problem," he said. "Short-term,
private placement loans is a worry in so much as they rely on
other areas of financing to keep funding operations."
(Reporting by Michael Connor in Miami; additional reporting by
Tiziana Barghini in New York; Editing by Dan Grebler)