SAN JUAN Jan 8 Puerto Rico is readying a return
to the U.S. municipal bond market as early as this month after
shelving plans for a much-needed capital raising in the final
quarter of last year amid a vicious selloff of its bonds.
Government Development Bank of Puerto Rico spokeswoman Betsy
Nazario said that a bond deal will depend on market conditions
but that plans are under way to return to the market later in
January or in February. Puerto Rico bond prices have stabilized
in recent weeks but remain at depressed levels.
Plans for the sale, which officials previously have
estimated will range from $500 million to $1.2 billion, come as
the Caribbean island's government pursues fiscal reforms under
the wary eyes of rating agencies worried about its wobbly
It is part of a campaign by the commonwealth's government to
retain its investment-grade credit ratings despite concerns over
its $70 billion debt load and weak economy that have sent yields
on Puerto Rico bonds skyrocketing.
Three major U.S. credit agencies rate the commonwealth
government's general obligation and related debt at a single
notch above junk debt. Two of them, and Moody's Investors
Service and Fitch Ratings, have put Puerto Rico on watch for
Puerto Rico suffers from chronic budget gaps, an economy in
or near recession for eight years, and interest rates far higher
than those paid by any U.S. state. Yields shot up in 2013 on
concerns about ratings cuts, with its 10-year yield now 700
basis points over a comparable AAA-rated muni bond.
On Wednesday, a 10-year Puerto Rico general obligation bond
with a 5.25 percent coupon traded at 66.25
cents on the dollar to yield 10.63 percent. The bond had been
trading near 63 cents on the dollar in late December.
Details of the deal were pending, Nazario said. But
officials have said they will likely issue debt through Puerto
Rico's sales tax agency, one of its stronger-rated borrowers.
The sale would come after the Puerto Rico government passed
reforms targeting the Teachers Pension Fund for public school
teachers and another reform aimed at a separate retirement fund
for the judicial branch of government. The reforms are being
challenged in court and by teachers planning a strike.
Other reforms aimed at strengthening the government's fiscal
position will be taken up when the island's legislature begins
its new session on Jan. 14.
One measure would direct government entities to transfer
about $2.8 billion in deposits from Puerto Rico's private banks
to the Government Development Bank (GDB) to shore up its
liquidity. That is roughly 6 percent of the $47 billion on
deposit in island banks as of Sept. 30, according to the Office
of the Financial Institutions Commissioner. The measure also
orders government agencies and public corporations to refinance
their debts with the GDB, which has $9 billion in outstanding
Another measure would cut town governments' share of the 7
percent island sales and use tax (known as IVU) to 1 percent
from 1.5 percent, with the extra 0.5 percent going to the
Related legislation would create a GDB subsidiary called
Municipal Finance Corp, based on the model established by the
Sales Tax Financing Authority (known as Cofina), which appears
to be the leading candidate for the imminent bond sale.
The new agency would control and distribute a portion of the
IVU tax revenue granted to municipalities and issue bonds on
their behalf. The proposals would eliminate plans to cut the IVU
tax rate to 6.5 percent from 7 percent.
Island mayors have come out against the measures but are in
talks with lawmakers on amendments to win support. House Speaker
Jamie Perello predicted quick passage next week of the measures.
In signaling the potential for a downgrade to junk, Wall
Street rating agencies say they worry over Puerto Rico's access
to capital because it turned to short-term borrowing recently.
Moody's said last week it would be analyzing the
"commonwealth's ability and willingness to access long-term
capital markets," as well as GDB liquidity, budget performance
and economic activity indicators.
A downgrade to junk by any agency would result in Puerto
Rico having to repay about $1 billion in outstanding loans,
through collateral calls and accelerated debt service terms,
Island public school teachers plan a two-day strike next
week over the reform of their pension plan, and the Puerto Rico
Supreme Court is slated to hear oral arguments Jan. 15 in a
challenge to the judicial system's pension reform.
(Reporting by a Reuters reporter in San Juan; Additional
reporting and writing by Michael Connor in Miami; Editing by