By Steven C. Johnson and Hilary Russ
March 10 Puerto Rico is offering $3 billion in
general obligation bonds with an 8 percent coupon, according to
preliminary price talk obtained on Monday by Reuters, a far
lower rate than many thought the cash-strapped U.S. territory
would have to pay.
The sale, set for Tuesday, will be one of the biggest ever
of high-yield municipal debt, and is expected to help keep
Puerto Rico's troubled economy afloat for the next two years.
All of the bonds will be offered in a single 2035 term
maturity, and possible yields ranged from 8.625 percent to 8.875
percent, the wire indicated.
Many in the $3.7 trillion municipal bond market had thought
junk-rated Puerto Rico would have to pay closer to 10 percent or
higher to borrow, given its chronically weak economy and fears
that it may need to restructure its debt at some point.
"When the deal was developing, some estimates put the
potential yield as high as 11 percent," said Matt Fabian, a
managing director at Municipal Market Advisors. "The deal became
more assured as the underwriters were able to firm up demand in
the premarketing period," he said.
A rise in the price of outstanding Puerto Rican debt in the
secondary market over the last month has helped, said Michael
Comes, a portfolio manager at Cumberland Advisors.
Puerto Rico bonds have rallied in the secondary market over
the past month as high-yield and distressed debt funds have
snapped them up at a discount on the view that the island's
government would continue to press ahead with reforms. Over the
last year, it has cut its deficit and passed public pension
reforms, though these are still subject to court review.
"Nobody really anticipated how far Puerto Rico would rally.
Some of its general obligation debt is trading around 7.25
percent, so they will have to price the new bonds at something
of a concession to get people to come in," said Michael Comes, a
portfolio manager at Cumberland Advisors.
Tuesday's deal will have a tentative sinking fund schedule
beginning in 2022 for bond redemptions.
Hedge funds are expected to dominate the sale, with many
traditional, municipal bond institutional investors shut out by
restrictions on holding bonds rated below investment grade.
According to a draft deal document released last week, the
bonds will be sold in denominations starting at $100,000, a
level that would exclude most individual buyers.
The three largest Wall Street ratings agencies cut Puerto
Rico to junk status last month, citing worries about the U.S.
territory's ailing economy and its ability to finance itself.
The Caribbean island has long struggled with chronic
deficits, high joblessness and an economy that has been
shrinking almost continuously since 2006. It has about $70
billion of debt outstanding.
The draft offering document also included an unusually
lengthy list of risks to the bonds, including a possible
restructuring of the commonwealth's entire debt portfolio.
Puerto Rico said last week it had hired a restructuring expert
as its financial adviser.
The territory cannot file for bankruptcy under U.S. law.
Comes said none of those risks appear to be scaring off
potential investors, saying he has heard talk that the deal will
be as much as three times oversubscribed.
"Compared to the sovereign debt of some emerging markets in
Latin America, these yields are considerably higher, so that's
very attractive to distressed debt buyers and various types of
non-traditional municipal bond buyers," he said.