Puerto Rico May Skirt New Debt Sales to Avoid High Costs
Puerto Rico debt is poised to climb after the commonwealth’s Government Development Bank said the island may skip borrowing before June because of adequate funds.
Puerto Rico and its agencies still plan to sell as much as $1.2 billion of debt by Dec. 31 to balance budgets, although the territory has the flexibility to postpone issuance, the bank said. Officials released the information yesterday in a webcast investor briefing on the finances of the commonwealth, whose general-obligation bonds are rated one level above junk.
The presentation, sponsored by the Development Bank, follows a four-month rout that drove yields on some commonwealth debt to record highs amid investor doubts over Puerto Rico’s ability to repay. A delay in borrowing means it won’t have to shoulder the higher costs, while reduced supply of new debt may help existing bonds gain in value, said Daniel Solender, municipal securities director at Lord Abbett & Co.
People are selling because “they’re worried about the impact of a potential large issue,” Solender said by phone after the webcast. His Jersey City, New Jersey, firm oversees $16.5 billion of munis. “That may change now.”
Puerto Rico officials are seeking to ease investor concern that repayment may be threatened as the economy has slumped this year for the longest stretch since 2010. The commonwealth’s fiscal stability affects the $3.7 trillion municipal market because 77 percent of muni funds hold its bonds, according to Morningstar Inc. (MORN) The securities are tax-exempt for U.S. holders.
“We are very comfortable with the financing alternatives still available to the commonwealth through the GDB,” David Chafey, chairman of the Development Bank, said on the webcast. “We prefer to go to the capital markets to issue long-term debt, but we would only do so when conditions are appropriate.”
With the jump in yields, a Standard & Poor’s index tracking Puerto Rico debt is at its lowest since July 2009. The index fell almost 22 percent this year through yesterday, the worst performance since at least 1999 and more than six times the losses in the broader municipal market.
Governor Alejandro Garcia Padilla, 42, who took office in January, has implemented new tax measures to help reduce Puerto Rico’s recurring budget deficits and keep the commonwealth’s bond rating above junk. The governor, a member of the Popular Democratic Party, also boosted the retirement age and increased workers’ retirement contributions to help sustain a pension system with a funding level weaker than any U.S. state.
Lawmakers plan to work on legislation this year that would help the retirement plan for public-school teachers avoid running out of assets.
“We will do everything, and I repeat, everything, that is necessary for Puerto Rico to honor all its commitments,” Garcia Padilla said in the webcast, referring to the island’s bonds. “It’s not only constitutional, but also a moral obligation.”
Puerto Rico officials still plan to borrow using sales-tax bonds by Dec. 31, even as yields for the securities have increased this year. Holding off may lower the commonwealth’s costs, according to Solender.
Yields fell today on some Puerto Rico debt backed by sales-tax revenue.
Bonds maturing in August 2039 and rated four steps below top-rated munis traded with an average yield of 8.57 percent, or about 0.13 percentage point less than yesterday’s level, which was a record high, data compiled by Bloomberg show.
The commonwealth’s government is dealing with fiscal challenges while also trying to restore growth. An index that tracks economic activity on the island fell for nine straight months through August, the longest contraction since 2010, according to the Development Bank.
Puerto Rico expects to use $6.5 billion of federal funds in fiscal 2014, which began July 1, according to a financial report yesterday from the Development Bank. A partial U.S. government shutdown that started Oct. 1 may delay access to those funds.
While Puerto Rico’s federal programs will continue uninterrupted through this month, “the commonwealth may be disproportionally affected by an extended delay in the approval of the necessary federal legislative appropriations,” according to the report.
The commonwealth won’t use deficit financing to help balance the fiscal 2015 budget, even as officials project a $400 million shortfall that year, officials said during the webcast.
Garcia Padilla’s five-year economic plan calls for creating more than 90,000 jobs that would add as much as $7 billion to the economy by 2016, and another 130,000 jobs and as much as $12 billion of growth by 2018, officials said. The governor has said he plans to have a balanced budget no later than fiscal 2016.
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