Puerto Rico Debt Rallies on Budget That Avoids Borrowing

Prices on Puerto Rico’s junk-rated debt rose to the highest in almost three weeks after an official said Governor Alejandro Garcia Padilla plans to balance the next budget without deficit financing.

A spending plan that doesn’t include bond sales would be the first for the commonwealth in 20 years, said the official, Ingrid Vila Biaggi, the governor’s chief of staff. Garcia Padilla, who took office in 2013, will release as soon as today his proposed budget for the fiscal year beginning July 1. He’s set to give his State of the Commonwealth speech at 5:30 p.m. local time.

The budget will rely most on spending cuts and some “revenue enhancements” to fill an estimated $1.5 billion gap, according to Vila Biaggi.

“It’s a step in the right direction,” said Daniel Solender, director of munis at Jersey City, New Jersey-based Lord Abbett & Co., which oversees $15.5 billion of munis. “It’s a positive that there’s an attempt to do things without relying on bond financing, but it all depends on the economy.”

The commonwealth sold $3.5 billion of tax-exempt general obligations at 93 cents on the dollar March 11 after the three largest rating firms cut Puerto Rico to speculative grade. The bonds traded today at an average price of 90.57 cents on the dollar, the highest since April 10, data compiled by Bloomberg show. The debt traded as high as 99 cents on March 12 and as low as 86 cents on April 11.

Shrinking Economy

Proceeds from the sale paid loans used to balance budgets for fiscal 2014 and fiscal 2013.

Puerto Rico’s economy has shrunk in five of the past seven fiscal years. It’s projected to grow by 0.2 percent in fiscal 2015, according to a release today by the Planning Board, which calculates the island’s gross national product. The economy will grow by 0.1 percent in the current year, a reversal from the board’s earlier projection that it would contract by 0.8 percent.

While the governor’s proposal won’t include a future debt sale to support operating expenses, the plan will use proceeds from last month’s borrowing to pay a portion of interest on the deal over the next two years, according to bond documents. About $422.7 million of proceeds will pay a portion of interest costs through July 1, 2016.

“What they’re doing now is structuring the budget knowing in advance they have” the bond proceeds, Solender said. “There’s not any new plans to do anything in the next year, which is a positive.”

Garcia Padilla will also release a capital-improvement plan and a four-year road map that will “transform” Puerto Rico’s economy and social demographics by 2018, Vila Biaggi said.

Puerto Rico securities have earned 5.79 percent in 2014 through April 28, beating the 4.77 percent advance in the broader municipal-bond market, according to S&P Dow Jones Indices.

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 Schoifet

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