SAN JUAN, May 17 (Reuters) - Puerto Rico plans to cut by as much as a third the $9.1 billion loan portfolio at its Government Development Bank as a way to bolster finances of the key lender to local governments and authorities on the Caribbean island, officials said Friday.
The reduction in the commonwealth-owned GDB’s loan assets would include municipal bond sales from some of the current borrowers, such as Puerto Rico’s Highways & Transportation Authority, which owes it $2.2 billion.
The move to bolster the GDB is part of a government campaign to steady Puerto Rico’s shaky finances - a main worry for the $3.7 trillion, U.S. tax-free market - Governor Alejandro Garcia Padilla and finance officials told institutional investors.
Puerto Rico, with net tax-supported debt of $54.5 billion, has endured ratings downgrades to near junk-bond status and pays the highest interest rates of any big municipal issuer.
But, in recent months, Garcia Padilla’s administration overhauled a weak pension system and put forth a series of tax increases that this week won praise from Moody’s Investors Service as “credit positive”.
GDB President Javier Ferrer said he aims to strengthen the GDB’s balance sheet by cutting its loan portfolio to between $6 billion and $7 billion during fiscal year 2014, which starts July 1.
Much of the GDB reduction will come through tapping bond markets later this year, officials said. Other planned offerings in 2013 are a $600 million general obligation deal, $175 million of Public Buildings Authority bonds, and $400 million of Ports Authority debt.
In addition to the Highways & Transportation Authority, other large GDB borrowers are the commonwealth’s Treasury Department and government authorities and San Juan’s municipal government.
Puerto Rico’s legislature, which is expected to approve before June 30 Garcia Padilla’s proposed $9.8 billion fiscal 2014 budget, was also expected take up measures such as an increase in gasoline taxes that are meant to lift revenue at the highway authority.
The highway authority had more $7 billion of outstanding bonds and GDB loans at the end of 2012.
“Our goal is to take out the $2.2 billion (of the Highway Authority) this year but we are not committed to doing it all at once. It will depend on market conditions,” Ferrer said.
The finance officials, who said they expect to deliver a balanced budget using no borrowed money in two to three years, also plan $1 billion in GO offerings during 2014, as well as a $200 million issue next year from the Municipal Finance Agency that will be partly used to pay off GDB borrowings.
“We are restoring the confidence of our people, the investment community and the credit agencies,” Garcia Padilla said in a speech. “We are aware of the challenges ahead, but we will work tirelessly to get the job done.”
Treasury Secretary Melba Acosta told investors she was in close contact with legislators over a proposed expansion of Puerto Rico’s sales and use tax that would raise revenue by $1 billion a year. It is central to the governor’s budget plan.
“We understand there will be changes, but the important thing is that the heart of the proposal, and the numbers, get passed,” Acosta said.
Garcia Padilla, in power since January, has proposed broadening the sales and use tax to include business-to-business transactions, a change opposed by many industry groups that claim the tax will hurt everyday shoppers.
Garcia Padilla’s proposed $9.8 billion budget marks a $750 million rise over the current budget. It includes a $200 million deficit and $500 million of bond refinancing, compared with a deficit of $333 million and $775 million of debt refinancing this year.
Moody’s on Wednesday said the governor’s budget plan “may prove politically challenging, and what form the final budget will take after legislative debates is uncertain.”