ETF News

UPDATE 2-Puerto Rico pays heavy price in $1.2 bln note sale

(Adds Moody’s quote, details of transaction)

NEW YORK, Oct 10 (Reuters) - Puerto Rico paid a steep price to complete a $1.2 bln short-term financing deal on Friday as bonds of the indebted commonwealth slipped to a three-month low and recent data showed the economy and tax revenues remain weak.

Puerto Rico paid an interest rate of nearly 8 percent to borrow from a syndicate of banks until next June, the commonwealth’s Government Development Bank (GDB) said on Friday, a hefty premium compared with top-rated municipal borrowers, who pay about 0.13 percent to borrow for a year.

Traditional muni investors are largely steering clear of Puerto Rico with its debt load of over $70 billion. The Commonwealth passed a law in June that enables it public corporations to restructure around $20 billion in debt, further spooking bondholders.

The exodus of traditional muni funds has left Puerto Rico’s financing needs in the hands of banks and hedge funds. Friday’s note deal was the first time the island had borrowed money since March when it issued $3.5 billion in general obligation bonds, a deal bought mainly by hedge funds.

“Clearly the commonwealth only has access to a very limited audience and that’s why they have had to pay such high rates,” said Triet Nguyen, an analyst at NewOak.

Hedge funds did not take any of the note sale on Friday, a person close to the transaction said. However, the banks could sell on the notes at a later date, according to another person involved in the sale. The people were not authorized to talk to publicly about the deal.

Puerto Rico’s benchmark general obligation bonds fell to the lowest since July on Friday. The bond, which carry an 8 percent coupon and mature in 2035, traded at an average price of 87.833 cents on the dollar and a yield of 9.336 percent, according to Municipal Market Data (MMD).

The notes sold on Friday have a general obligation guarantee, a sign of the more onerous borrowing conditions that Puerto Rico faces. Although they are treated equally with other GO debt they have a time seniority because of their short-term nature.

“The commonwealth still has market access but it is coming with increasingly onerous terms and at higher borrowing costs,” said Edward Hampton, an analyst at ratings agency Moody’s.

The deal “underscores the continued vulnerability on the liquidity front and the long running economic stagnation that has exacerbated its budgetary challenges,” he said.

The notes were Tax Revenue Anticipation Notes (TRANS), usually a standard cash management tool used to provide funds ahead of expected tax revenues.

Puerto Rico also had to waive sovereign immunity and agree to New York jurisdiction in the event of any legal disputes involving the notes.

The weakness in Puerto Rico’s bonds on Friday followed some disappointing tax revenue and economic data in recent weeks.

Puerto Rico’s tax collections fell unexpectedly in September and the first quarter take, of $1.77 billion, was $36 million below expectations, it said on Thursday.

The commonwealth also warned that it may cut its income tax forecast for the coming months.

The missed revenue forecast came after data showing ongoing weakness in the economy. Puerto Rico’s economic activity has slumped to its lowest level in two decades, according to an index released by the GDB at the end of September.

The GDB said $700 million of the notes are structured as a term note and carry an annual interest rate of 7.75 percent, while $200 mln of notes are structured as a revolving line and carry an annual interest rate of one-month Libor plus 7.55 percent. The GDB funded an additional $300 million in notes.

The lead underwriter on the transaction was J.P. Morgan. Morgan Stanley, Bank of America, Barclays, Banco Popular de Puerto Rico and Amalgamated Bank also took part.

J.P. Morgan and Morgan Stanley each took $250 million of the notes, Bank of America took $200 million, Banco Popular took $100 million, Barclays took $75 million, and Amalgamated Bank took $25 million, according to someone close to the transaction who was not able to talk about it publicly. (Reporting by Edward Krudy; Editing by Chizu Nomiyama and Marguerita Choy)