SAN JUAN, Puerto Rico Feb 12 (Reuters) - A top Puerto Rico lawmaker said on Wednesday he hoped to approve by the end of next week legislation that would authorize the cash-strapped U.S. commonwealth to borrow up to $3.5 billion through general obligation bonds.
Although the government will likely seek to raise less than the full $3.5 billion, the larger amount was meant to give it and investment banks “flexibility” in marketing the bonds, said Puerto Rico House Finance Committee Chairman Rafael Hernandez.
Puerto Rico announced on Tuesday that Barclays, RBC Capital Markets and Morgan Stanley would be lead underwriters on the deal, which could come in March. Hedge funds are expected to show the most interest.
A public hearing would be held next week and amendments would be forthcoming, Hernandez said. These will likely restrict the use of bond proceeds to deficit financing and refinancing that has already been contemplated in current and prior budgets, he said, adding that he saw no room for “new money” in the issue.
“We can’t keep wasting money and using borrowed funds to cover government inefficiency,” Hernandez said. “We are looking at everything right now to see where we can make cuts.”
A source familiar with the deal told Reuters on Tuesday that Puerto Rico needs to raise about $2.3 billion and speculated that $100 million in new money could be raised.
The focus on cost-cutting follows the downgrading of Puerto Rico’s general obligation credit to non-investment grade levels by the three Wall Street rating agencies.
The island has outstanding debt of about $70 billion, behind all U.S. states save California and New York. That debt load rests on an economy and population that have been shrinking almost continuously since 2006.
Gov. Alejandro Garcia Padilla has pledged to cut the current year’s deficit by $170 million and to deliver a structurally balanced budget proposal for fiscal 2015, which begins July 1.
Hernandez said one possibility is to have the debt sold at a discount so the government would wind up raising less money than the total of a bond offering. But that would push yields on the bonds higher, which could help attract investors.
Puerto Rico bonds have been popular among municipal bond investors because they are tax free in all 50 states.
David Tawil, co-founder of Maglan Capital, said underwriters have told him yields would likely be about 10 percent.
While he said Maglan would abstain - it already holds long-dated Puerto Rico bonds that have fallen to about 50 cents on the dollar - other less-exposed funds would likely take part.
“High-yield funds will be very interested. You can’t find anything that offers 10 percent in this atmosphere, on top of the fact that it comes with tax efficiencies as well,” he said.