Puerto Rico Said to Offer $3 Billion at 8.625%-8.875% Yield

Puerto Rico, which had its debt cut to junk last month, began offering $3 billion of general-obligation bonds at yields ranging from 8.625 percent to 8.875 percent, according to a person with knowledge of the sale.

Barclays Plc (BARC), the lead underwriter, is taking orders today on the tax-exempt deal, which matures in 2035, said the person, who requested anonymity before final levels are set tomorrow. Puerto Rico’s finances affect the $3.7 trillion municipal market because 70 percent of U.S. muni mutual funds hold its securities, according to Morningstar Inc.

The sale would show that the U.S. territory can borrow through the capital markets after the three largest rating companies cut it to speculative grade, citing a shrinking economy and limited market access.

“By all indications, it’s getting demand and everyone’s been waiting for a while for them to do this,” said Daniel Solender, director of munis at Jersey City, New Jersey-based Lord Abbett & Co., which oversees $15.5 billion of state and local debt. “It will be a big obstacle out of the way if they can get it done.”

Proceeds will go toward balancing budgets and repaying debt, and will give the self-governing island enough cash to pay bills through June 2015, according to David Chafey, chairman of the Government Development Bank, which handles the commonwealth’s borrowings.

Record Yield

The initial yield range is higher than where Puerto Rico bonds of a similar maturity trade in the secondary market.

Commonwealth general obligations maturing in July 2039 traded today with an average yield of 7.53 percent, the lowest since August and down from a record 10.59 percent on Jan. 2, data compiled by Bloomberg show.

For investors in the highest tax bracket, an 8.875 yield sale is equivalent to a taxable 14.7 percent, Bloomberg data show. Similarly rated corporate debt maturing in seven years yields about 4.79 percent, according to Bank of America Merrill Lynch data.

“It’s mouthwatering in comparison,” said David Tawil, co-founder of New York-based hedge fund Maglan Capital. “The average high-net worth person cannot find anything like this in the corporate world.”

The debt is being offered with a coupon of 8 percent. It will be callable in July 2020, which may make it easier for Puerto Rico to refinance should interest rates be lower in the future.

Puerto Rico is selling general obligations for the first time in two years and as its debt is off to its best annual start since at least 1999. Record-high yields blocked plans to issue sales-tax bonds last quarter.

Commonwealth bonds have earned about 10 percent this year, according to S&P Dow Jones Indices. That’s more than three times the 3.1 percent advance in the broader market.

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

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Mark Tannenbaum, Alan Goldstein

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