August 15, 2013 / 5:41 PM / 6 years ago

Puerto Rico mulls up to $600 mln GO deal in late Sept-sources

* Near $600 million deal’s yields seen topping 7 percent

* Puerto Rico offering to come after financial report’s release

* U.S. commonwealth also plans other debt sales

Aug 15 (Reuters) - Puerto Rico is targeting late September for the sale of as much as $600 million of general obligation debt, a source told Reuters, a deal on track to require yields of 7 percent, in line with recent debt issued by the Caribbean island.

The GO sale would come about two weeks after publication of Puerto Rico’s Comprehensive Annual Financial Report (CAFR) for fiscal year 2012, according to a finance official, who asked not to be named.

The publication of the CAFR has been repeatedly pushed back, but is now expected by Sept. 16, according to spokeswoman Betsy Nazario of the island’s Government Development Bank.

An accounting of the heavily indebted island’s finances that worry many in the United States’ $3.7 trillion municipal bond market, the fiscal 2012 CAFR was most recently expected to be released this month.

Puerto Rico needs to undertake the GO refinancing as well as a $175 million refinancing of its Public Building Authority to repay the island’s Government Development Bank, which provided interim financing to plug a hole in the fiscal year 2013 budget that closed June 30.

Robert Donahue, managing director of Municipal Market Advisers, said he expects the GO deal to be priced at par or higher than last week’s Puerto Rico Electric Power Authority (Prepa) issue, which offered investors eye-popping tax-free yields of as much as 7.12 percent on 30-year bonds.

“Many investors believe that Puerto Rico entities are at parity because of linkages through lines of credit and transfers between them, and the ratings agencies have confirmed this, with their ratings converging at the GO level,” Donahue said. “So people may be demanding higher yields for the GO bonds because it is coming after the Prepa deal.”

Wall Street’s three major credit ratings agencies all rate Puerto Rico’s debt at barely investment grade and have cautioned that downgrades into junk-bond territory are still possible.

“If the GO came to market today, it would probably price where Prepa is, in that 7 percent range,” said Alan Schankel, managing director at Janney Capital Markets. “Prepa set a new level. And I think if things don’t change dramatically, they would be hard-pressed to borrow at anything below 7 percent.”

Puerto Rico, with a higher per capita debt load than any U.S. state government and absent as a borrower in the muni market for more than a year until the Prepa deal, may be asking a lot of investors, according to Donahue.

“Demand is either stable or declining at a time when Puerto Rico is increasing supply, with $3 billion or more of Puerto Rico paper being planned,” Donahue said. “So prices and yields are going to have to go up to attract buyers.”

Puerto Rico also has plans before year-end to raise $2.2 billion for the Highways & Transportation Authority, likely in more than one deal, so that it can retire an outstanding GDB financing loan and then work to refinance $400 million in Ports Authority bonds.

Troubled by a long ailing economy and a jobless rate of around 13.2 percent, Puerto Rico already pays the highest rates of any major issuer in the U.S. municipal debt market.

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