| NEW YORK
NEW YORK Jan 22 Morgan Stanley, rebuffed late
last year by Puerto Rico officials over an offer to arrange a
high-cost loan of up to $2 billion for the cash-strapped
commonwealth, is now trying to pique investor interest in
backing the idea, according to people briefed on the matter.
The investment bank's pitch, aimed at hedge funds, private
equity firms and others with a possible appetite for the U.S.
territory's tax-free and high-yielding debt, comes as Puerto
Rico scrambles to retain its investment grade rating against the
threat of a downgrade by Moody's Investors Service, which could
trigger further financial pain for the Caribbean island's
"Under discussion is a 10-year deal with a non-call
five-year option priced slightly below 10 percent," said a San
Juan-based investment banker and former government official, who
has been briefed on the proposal by hedge fund investors.
Morgan Stanley's discussion with investors follows a pitch
directly to Puerto Rico officials in late 2013 for a loan of
roughly the same size and cost, according to two people familiar
with that proposal. Officials rejected the idea as too costly.
Puerto Rico, battling population decline, chronic recession
and perennial budget shortfalls, is under pressure to show it
can access the bond market after delaying a debt sale late last
year and promising to bring a deal to market by late February.
Puerto Rico has around $55 billion of tax-supported debt and
another $15 billion supported by other revenue streams, such as
water and power rates.
On Wednesday, a spokeswoman for the Obama administration
said the White House is not considering a bail out for Puerto
Rico. The administration has established a task force to work
with Puerto Rico on its economic and fiscal problems, and would
prefer to allow that group to do its work.
Unlike Detroit, which filed for the largest U.S. municipal
bankruptcy ever last year, Puerto Rico does not have the option
to seek a restructuring of its debt under bankruptcy protection.
Last month, Moody's placed Puerto Rico on notice that it was
considering cutting its credit rating to junk status within
three months. All three major ratings agencies have assigned the
island's credit their lowest investment-grade ratings. A drop to
junk could trigger accelerated repayments of debt and demands
for more collateral for interest rate swaps.
Speaking on condition of anonymity, the San Juan banker said
the high rates in the Morgan Stanley proposal may put off
government officials, who are actively weighing a sale of
municipal bonds worth between $500 million and $1.2 billion.
But they may have few other options, given how risky the
market believes its debt to be.
"Seeing how the secondary market is trading, it doesn't seem
they would do much better in terms of pricing ...," the banker
Intermediate and near-term Puerto Rico bonds on Tuesday
yielded over 9 percent. An eight-year maturity carried a yield
of 9.92 percent, even as maturities beyond 20 years yielded less
than 9 percent.
A deal worth $2 billion would allow Puerto Rico to
demonstrate to markets and ratings agencies that it has enough
liquidity for two years, which could translate into tighter
spreads on new bonds, the banker said.
The Morgan Stanley financing effort, which was first
reported by The New York Times, might also relieve pressure
around the possible ratings cut.
Both Moody's and Fitch Ratings have said that the government
needs to demonstrate its ability to sell new bonds if it is to
avoid being stuck with junk-bond ratings.
Yields on Puerto Rico's widely held debt have long been
among the highest of big issuers in America's $3.7 trillion muni
market, and shot up in September as worries about its finances
intensified, but have inched back from recent highs.
The credit spread for Puerto Rico's general obligation bonds
maturing in 10 years over top-rated municipal bonds, a measure
of the risk investors assign to owning its debt, was 680 basis
points on Tuesday, according to Municipal Market Data. That
spread has tightened since the start of the new year, when it
was 710 basis points, but a year ago it was about 300 basis
Morgan Stanley is targeting private equity and other large,
non-bank investors, according to a Wall Street source. "Banks
don't want to touch this with a 10-foot pole in terms of
providing financing," said the source, who also spoke on
condition of anonymity.
Prominent hedge funds that have been active in securities of
troubled municipalities, including Stone Lion Capital and Third
Point, declined to comment on the Morgan Stanley proposal. A
spokesman for the bank declined comment.
Morgan Stanley may also have a hard time getting a go-ahead
on a high-interest, $2 billion deal from Puerto Rico officials,
who were just stung by a temporary court halt to unpopular
reforms of the island's vastly underfunded teachers pension
Some analysts say the government is concerned about some of
the provisions being discussed, such as liens on revenue
streams, and don't want to weaken protections that current
"Raising money prior to receiving an official go-ahead from
authorities is unique," co-founder David Tawil of Maglan
Capital, a hedge fund that owns Puerto Rico debt, said in an
email. "Perhaps Morgan Stanley feels it's worth putting in the
time and effort because Puerto Rico will need to raise funds,
and the bank will then be top of mind when it comes time to
select an underwriter."
The effort to stir up investor interest in Puerto Rico's
debt has gathered steam recently. Last week, law firm Jones Day
sponsored a meeting attended by as many as 200 potential Puerto
Rico investors at its New York offices that featured one of the
firm's top restructuring attorneys as a speaker.