| WASHINGTON, March 5
WASHINGTON, March 5 Puerto Rico is being careful
to make investors aware of all the possible risks lurking in its
upcoming massive bond sale, including the chance the U.S.
territory could pursue emergency measures akin to filing for
A draft of the bond issue's preliminary offering statement
that was posted on the Internet by Stone & Youngberg, a division
of one of the deal's underwriters Stifel Nicolaus, warns a
variety of fiscal and economic challenges "may place the
Commonwealth in a position where it may be unable to honor its
obligation to pay principal of and interest on the bonds in full
or in a timely manner."
Details of the sale have been thin, and the draft dated Feb.
28 does not have a pricing date or even total borrowing amount.
Among its list of numerous risks, though, the draft includes
actions similar to filing for bankruptcy if Puerto Rico "is
unable to address the lack of sufficient resources through the
application of the 'priority norms.'"
"Under current law, the Commonwealth is not eligible to
seek relief under Chapter 9 of the United States Bankruptcy
Code, which is the only chapter under which a 'municipality' can
seek relief," the draft notes. "While no specific contingency
plan has been adopted to address any such situation, GDB, as
fiscal agent to the Commonwealth, is evaluating alternative
courses of action."
The GDB, or Government Development Bank, acts as Puerto
Rico's central repository, borrower and lender.
"For example, the Commonwealth could seek relief under
existing law or under laws enacted in the future regarding
restructuring, moratorium and similar laws affecting creditors'
rights," according to the draft.
Official statements from Puerto Rico and the GDB for past
issues do not include such an exhaustive list of risks -
including that the GDB may not have enough cash to help the
territory meet its obligations in the next couple of years.
If the GDB cannot provide assistance, the commonwealth could
have to turn to other funding sources, the draft said, adding
there is no assurance it would be able to find sufficient
funding to meet its obligations.
The draft also said that the legislation authorizing the
bonds gives New York courts, as well as Puerto Rico ones, legal
jurisdiction over any disputes that may arise. But it was
unclear how a court would apply New York law and if a judgment
from a New York court could be enforced in Puerto Rico.
RISKS COULD LEAD TO HIGH YIELDS
In recent years, the Securities and Exchange Commission has
cracked down on municipalities and states for not fully
disclosing financial problems in bond documents, saying the lack
of disclosure was tantamount to defrauding investors.
But Puerto Rico is also a special case, as it is currently
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 on low liquidity and persistent
economic troubles. The territory has roughly $70 billion in
outstanding debt and has endured nearly eight years of
The bond issue, which could price as soon as Tuesday, will
likely total $2.8 billion, but could be as much as $3.5 billion.
The bonds will refinance existing debt and bring in new
money, all with the aim of preventing the territory from taking
the more dramatic step of formally restructuring all of its
"While we maintain that restructuring isn't on the horizon,
it isn't possible to dismiss that outcome altogether," wrote
Citi Analyst Vikram Rai in a special research note on Tuesday.
"On the other hand, the Commonwealth does have the potential
to navigate its way out of this crisis and become a turnaround
story, in our view. As such, the yields, and the liquidity,
offered by various forms of PR debt are attractive."
Yields on the deal could top 9 percent, which could appeal
to investors in the current environment of low yields and low
supply, Rai said.
The territory said last month the deal will be its only bond
sale this fiscal year, which ends on June 30. But Citi
anticipates Puerto Rico will return to market sooner to pay next
fiscal year's bills.
"The new money means cash needs are met for the next two
years and no default occurs on most of the present bonds. Be
careful here. Most is not all," wrote David Kotok chairman of
Cumberland Advisors in a special note on Wednesday, projecting
bonds in the longest maturities in the sale will yield 9
Cumberland recently started a fund consisting solely of
Puerto Rico bonds.
Municipal Market Data's Puerto Rico yield curve on Tuesday
showed yields topping out at 8.88 percent on Tuesday for bonds
due in 2023. That yield is 665 basis points over MMD's benchmark
scale for triple-A-rated bonds. MMD is a Thomson Reuters