By Lisa Lambert
WASHINGTON, March 6 Puerto Rico has confirmed
next Tuesday as the tentative pricing date for its $3 billion
general obligation bonds, a sale that will be geared to large
In preliminary deal documents released on Thursday, the
territory said the bonds will follow a sinking schedule with
maturities ranging from 2022 to 2035 and make interest payments
every January and July.
The bonds will be sold in denominations starting at
$100,000, according to the preliminary offering statement, a
price tag that would exclude most individual buyers.
At the same time, the underwriters, led by Barclays Capital,
"may over-allot or effect transactions that stabilize or
maintain the market prices" and also privately sell some of the
bonds to dealers and banks at prices lower than the publicly
The sale was announced last month, but details were hard to
come by. Even the preliminary statement lacks many key facts,
giving underwriters and buyers room to negotiate before the
official statement is released and pricing begins.
"We would like to see more transparency, more disclosure.
... It's not in there. I think that's what the market was asking
for," said Adam Buchanan at Ziegler Capital Markets in Chicago,
which is not planning to participate in the deal.
For example, some of the bonds will be callable, but the
document does not say which maturities will have optional
redemptions, mandatory redemptions or will not be subject to
The commonwealth's legislature recently approved a deal of
up to $3.5 billion and the market has expected it to mostly
attract hedge funds, with yields topping 9 percent. Interest
paid on the bonds will be exempt from taxation by Puerto Rico,
any U.S. state and the federal government.
"There should be a fair amount of interest. There's talk
they might even borrow at less than 10 percent, which would be a
great win for the commonwealth," said David Tawil, co-founder of
Maglan Capital. "For investors, a 9 or 10 percent yield on a
triple-tax free basis is very compelling in this environment."
As of Wednesday on Municipal Market Data's Puerto Rico yield
curve, the territory's general obligation bonds maturing in 2022
yielded 8.77 percent and those maturing in 2035 yielded 7.67
Much like a draft statement from last week, the deal
documents included a long list of risks to the bonds, including
a restructuring of the commonwealth's entire debt portfolio that
would resemble filing for bankruptcy. The territory cannot file
for bankruptcy under U.S. law, but on Wednesday it announced it
had hired a restructuring expert as its financial adviser.
Puerto Rico is considered the riskiest debt issuer in the
$3.7 trillion U.S. municipal bond market. All three major rating
agencies recently cut its credit score to junk, citing low
liquidity and persistent economic troubles. The territory has
roughly $70 billion in outstanding debt and has endured nearly
eight years of recession.
The downgrades kicked a hornet's nest for the territory,
triggering the termination of some interest-rate swaps and the
posting of some collateral.
The proceeds will go toward paying off internal loans,
refunding some variable-rate bonds, cover termination fees for
some interest-rate swaps, repay sales tax bonds and pay
The money will also go toward repaying loans and credit
facilities from Barclays, which provided credit support to
$188.7 million of the debt to be refunded, and from J.P. Morgan
Chase, which holds $59.8 million of the debt to be refunded.
In the past, the territory's Government Development Bank had
invested part of its debt service fund in highly rated financial
products or collateralized instruments. But starting on July 1,
it will invest only in the redemption fund, according to the