Puerto Rico Reduces Financing Plan as Yield Penalty Doubles
The Government Development Bank for Puerto Rico said it expects to reduce its financing plans and meet with investors after the extra yield on some commonwealth bonds doubled in the past month.
Puerto Rico general-obligation bonds maturing in July 2040 and rated one step above junk traded yesterday to yield 10.08 percent, the highest this year, data compiled by Bloomberg show. The average yield was almost five percentage points above benchmark munis, twice the level on Aug. 6.
The GDB, which handles the island’s capital-market transactions, said in an e-mailed statement today that Puerto Rico’s debt “is being evaluated incorrectly,” and is suffering in part from higher borrowing costs marketwide after Detroit filed a record bankruptcy filing in July. The statement comes less than two weeks after the bank said it had closed two short-term loans.
“In light of the volatility in the market and the private transactions that we have recently closed, we expect to scale down our plan of financing for the rest of the year,” Jose Pagan, interim president of the bank, said in the statement.
New issues from Puerto Rico and its agencies won’t exceed $1.2 billion through year-end, Betsy Nazario, a spokeswoman for the GDB in San Juan, said via e-mail.
The commonwealth had previously announced plans to sell $600 million of general obligations as soon as this month to repay loans used to balance last year’s budget, and then market as much as $1 billion for the Puerto Rico Highways & Transportation Authority.
Debt sold in Puerto Rico is tax-exempt in all U.S. states, leading mutual funds nationwide to add it to holdings, including state-specific funds. Puerto Rico is on the brink of speculative grade amid recurring budget deficits and a pension system with a lower funding level than that of any U.S. state.
Governor Alejandro Garcia Padilla, 42, a member of the Popular Democratic Party who took office in January, has moved to bolster Puerto Rico’s finances.
He enacted a budget for the fiscal year that began July 1 that uses $750 million of deficit financing, the smallest amount since at least 2009, according to the GDB. He has raised taxes to help balance the budget, and pushed through laws to boost the retirement age and require public workers to contribute more to their pensions.
The yield jump shows investors aren’t recognizing that the commonwealth’s general obligations have the first claim on the island’s general-fund revenue, Pagan said. The bank plans to hold an investor meeting in the next few weeks to discuss Puerto Rico’s finances.
The commonwealth’s economy contracted 5 percent in the year through July, the steepest reduction since 2010, according to the GDB.
The island of 3.7 million people had about $70 billion of public-sector debt as of March 31, according to the GDB. Net tax-supported debt of $14,053 per capita last year was more than in any state, according to Moody’s Investors Service.
Investors are questioning whether Puerto Rico can reduce its debt without restructuring given the shrinking economy, said Peter Hayes, head of munis at New York-based BlackRock Inc. (BLK), which manages $114 billion of local debt.
“To grow your way out doesn’t seem likely,” Hayes said. “So they’re left with the potential for some type of restructuring and I think that’s what the market’s worried about.”
Munis sold on the island have lost about 19 percent this year, surpassing annual losses for the territory since at least 2000, according to Standard & Poor’s data. That’s almost four times the 5.2 percent loss for the rest of the $3.7 trillion municipal market.
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