Puerto Rico lawmakers are set to confirm a $3.5 billion bond bill on March 3 that would entice investors by allowing them to sue in a U.S. court rather than on the island, said General Assembly Representative Rafael Hernandez.
The commonwealth plans to issue as much as $3.5 billion of general obligations in the next few weeks, according to Moody’s Investors Service. It’s the first such borrowing for the U.S. territory in two years, data compiled by Bloomberg show. Puerto Rico bonds have been trading at junk levels since at least September as investors speculated that a contracting economy will strain the territory’s ability to repay its debts.
Hedge funds seeking to participate in the sale have been requesting that Puerto Rico give up its sovereign immunity, allowing bondholders to sue in a New York court in case of a default and avoid the commonwealth’s judicial system, two people with knowledge of the preliminary talks said.
The legislation “gives an opportunity for investors to sue in New York and have that venue and those laws,” Hernandez, who chairs the island’s House Treasury Committee, said in an interview from San Juan.
Proceeds will balance budgets and give the Caribbean island enough liquidity through June 2015, according to David Chafey, chairman of the Government Development Bank, which handles the island’s debt transactions.
Moody’s assigned the bond deal a provisional Ba2 rating, two steps below investment grade. The New York-based company cut the island’s credit to junk this month, as did Standard & Poor’s and Fitch Ratings.
“Failure to raise sufficient funds in this transaction for Puerto Rico’s pressing liquidity needs would have severe implications for the commonwealth’s credit profile,” and could result in a multi-level downgrade, Emily Raimes, a Moody’s analyst, wrote in a report today.
With the downgrades out of the way, some investors stepped up purchases, sparking a rally in Puerto Rico borrowings.
Puerto Rico general obligations maturing in July 2041 traded today with an average yield of 7.6 percent, or about 3.83 percentage points above benchmark munis, Bloomberg data show. The yield is the lowest since October.
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