Morgan Stanley is approaching hedge funds and buyers of distressed debt to gauge interest in a possible Puerto Rico bond sale to boost the island’s cash flow, according to three people with knowledge of the matter.
The New York-based bank has been talking with investors in the past week to assess demand for a potential borrowing of as much as $2 billion, said the people, who requested anonymity because the conversations are private.
The U.S. territory, rated one step above junk, needs to borrow through the financial markets or face a possible cut to speculative grade. The island and its agencies have issued $70 billion of debt. Because the bonds are tax-exempt in all states, about 70 percent of municipal-debt mutual funds own the securities, according to Morningstar Inc.
Lauren Bellmare, a spokeswoman for Morgan Stanley (MS), declined to comment. The Government Development Bank, which handles Puerto Rico’s debt transactions, declined to comment, said Alix Anfang, a spokeswoman in New York.
Discussions about a potential deal were said to have revived this past week after talks in November and December sputtered when Puerto Rico officials didn’t show interest.
The taxable general-obligation deal said to be under discussion would have maturities of at least five to seven years. The funds would assist the commonwealth as it struggles to turn around its shrinking economy.
The discussions have cited possible yields of about 10 percent, the people said.
The New York Times reported the discussions between Morgan Stanley and the funds earlier.
Puerto Rico bonds are luring hedge funds and buyers of speculative-grade corporate and sovereign debt after the island’s securities posted their biggest annual decline since 1999. Commonwealth debt lost 20 percent in 2013, compared with a 2.6 percent loss for the entire municipal market, Standard & Poor’s data show.
The island’s strained finances have also drawn Wall Street banks and law firms trying to boost trading and advisory fees. The firms are typically acting on their own, without the involvement of Puerto Rico officials.
Governor Alejandro Garcia Padilla, who took office a year ago, has said the island of 3.6 million people will repay its obligations on time and in full. The territory’s officials have also said they have sufficient funds to last them through June 30 without selling bonds.
Puerto Rico debt has rallied this month as investors added the most money since September to high-yield muni mutual funds, Lipper US Fund Flows data show.
General obligations maturing in July 2041 traded today at an average yield of 8.82 percent, down from 9.2 percent at year-end, data compiled by Bloomberg show.
Puerto Rico officials plan to sell long-term debt this month or in February after they said rising interest rates last quarter prevented issuance of as much as $1.2 billion of sales-tax debt.
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