December 16, 2013 / 10:11 PM / 6 years ago

Puerto Rico bond buyers want more yield as economic clouds gather

Dec 16 (Reuters) - Tax-free bond investors are demanding fatter yields for Puerto Rico debt, pushing prices for the Caribbean island’s battered municipal bonds lower after Moody’s Investors Service warned it may knock its credit rating below investment grade.

Puerto Rico’s yields, already the highest of any big municipal issuer, widened sharply last week after the Moody’s note, and after the government reported a shortfall in general fund revenue for November.

Prices of many Puerto Rico debt issues weakened again on Monday. The tax-free yield on island public improvement bonds carrying a 5 percent coupon and due in 2035 touched nearly 7 percent on Monday after closing at 6.268 percent on Friday.

The yield on a 2026 Puerto Rico infrastructure bond with a 5.5 percent coupon traded on Monday at 9.127 percent, up from a Friday close of 8.678 percent, according to Municipal Market Data.

With an economy in or near recession for eight years, Puerto Rico has some $70 million of muni debt outstanding. Although its yields already often compare to junk bonds, a downgrade from Baa3 by Moody’s or another ratings agency would be a big blow to the island, according to Alan Schankel, managing director at Janney Capital.

“The key issue noted by Moody’s is whether the Commonwealth is able to access long-term capital markets,” Schankel said in a research note.

The credit spread on Puerto Rico’s 10-year interest rate over AAA-rated debt issued by other governments rose 90 basis points last week to 710 on Friday from 620 for the week ended Dec. 6.

That spread is more than 80 percent wider than the average for Puerto Rico over the last year and contrasts with tightening last week in credit spreads for Illinois, another worrisome bond issuer that passed sweeping pension reforms.

Island finance officials last week said they were pushing back possible issuance to next year of as much as $1.2 billion in sales-tax bonds that had been expected to have been sold during 2013.

Puerto Rico’s debt, which includes bonds from a power utility and a roads agency, was also stung last week by release of the government’s Economic Activity Index showing economic contractions over 5 percent in both September and October.

“The most recent EAI data paints a worsening picture for Puerto Rico’s economy, which we continue to view as a major area of credit stress,” said Morningstar analyst Candice Lee.

Analysts and investors will be closely watching Puerto Rico’s revenue figures for December, when the government has said it expects to collect $911.3 million, or 26.1 percent more than December 2012, according to Lee.

“November and December economic activity will be key to avoidance of a downgrade to non-investment grade next year,” Schankel said.

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