Puerto Rico Plans $2.86 Billion Offering for 16 Months of Cash

Puerto Rico is planning to offer about $2.86 billion of general-obligation bonds next month, providing the island with sufficient liquidity through June 2015, Government Development Bank officials said.

The GDB, which handles the commonwealth’s borrowings, offered details for the tax-exempt general-obligation bond sale in an investor webcast yesterday. The bank had $2.7 billion of cash and investment securities as of Dec. 31, said Jose Pagan, its interim president.

Puerto Rico’s first debt sale since August will gauge investor demand for its debt after the three largest ratings firms cut the island’s credit grade to junk this month. Hedge funds and other alternative investors have been buying the Caribbean getaway’s securities since at least September as yields soared to speculative-grade levels.

“We will continue our aggressive agenda to create jobs, expand our industrial base and attract foreign investment in order to shape and diversify our economy,” David Chafey, chairman of the GDB, said during the webcast.

Investors are showing concern that Puerto Rico may struggle to repay its obligations with its economy contracting in six of the last seven fiscal years. Hedge funds seeking to participate in the sale have requested in preliminary talks with underwriters that the island raise enough funds to meet its needs for two years, two people with knowledge of the discussions told Bloomberg News last week.

Balance Budgets

Puerto Rico’s finances have an influence beyond the island’s shores. About 70 percent of U.S. mutual funds that focus on municipal bonds hold the securities, which are tax-exempt nationwide, according to Morningstar Inc.

Proceeds from the sale will balance budgets and refinance debt. While the GDB enumerated potential components from deficit financing to restructuring of existing debt totaling less than $3 billion, lawmakers are working on legislation that would give the commonwealth borrowing capacity of up to $3.5 billion.

The commonwealth won’t borrow again until fiscal 2015, which begins July 1, Pagan said during the webcast.

The potential for low double-digit yields on next month’s sale may attract hedge funds and investors who typically buy taxable securities, Matt Fabian, a managing director at Concord, Massachusetts-based research firm Municipal Market Advisors, wrote in a Feb. 18 report. The expectation is that investors may sell the bonds to traditional municipal-bond buyers within a few years.

‘Opportunistic Investors’

“The appetite among opportunistic investors appears to be significant,” Fabian wrote. “And we see a high likelihood that a bond issue of several billion can be completed.”

Governor Alejandro Garcia Padilla, who took office in January 2013, is set to release in April a budget for the fiscal year beginning July 1 that doesn’t use borrowing to balance the spending plan. It would be the first time since at least 2000 that the island’s operating budget didn’t rely on deficit financing, according to the GDB.

Puerto Rico and its agencies had $71.9 billion of debt as of Dec. 31, according to a quarterly report dated Feb. 18 posted on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access, or EMMA, website.

Principal and interest payments account for $1.2 billion, or almost 13 percent, of the $9.6 billion revised budget for the fiscal year ending June 30, according to the report. Such costs are projected to exceed $1 billion every year through fiscal 2030, climbing to a high $1.4 billion in fiscal 2016.

Bonds Rally

General obligations due July 2041 traded yesterday with an average yield of about 8.02 percent, or about 4.13 percentage points above benchmark munis, according to data compiled by Bloomberg. While the yield is the lowest since November, it’s up from about 5.1 percent a year ago.

Debt sold by the commonwealth and its agencies have earned 2.9 percent this year through yesterday, compared with 2.5 percent for the entire $3.7 trillion municipal market, according to Standard & Poor’s data. The securities are rallying after losing about 20 percent last year, the worst annual performance since at least 1999.

S&P lowered the island’s general-obligation rating to BB+, one step below investment grade, on Feb. 4, citing its limited ability to access capital markets. Moody’s Investors Service and Fitch Ratings followed with downgrades.

To contact the reporter on this story: Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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