Puerto Rico Doubles Offer on Demand for Rare Issue: Muni Credit

Puerto Rico, which has a credit rating lower than any U.S. state, almost doubled a debt offering after $1 billion in bids from investors for the commonwealth’s first new money general-obligation issue since 2008.

“It’s taken us a while to do the right thing and put the house in order, but now was the right time to go to market” as proved by demand which was about twice the amount offered, said Jose Otero, vice president of financing for the Government Development Bank, in a telephone interview.

The commonwealth added two refunding portions, totaling almost $300 million, to its planned $304 million general-obligation sale. It also brought forward institutional pricing because of market fluctuations related to Greece, Otero said.

The debt of Puerto Rico, a self-governing territory ceded to the U.S. in 1898 after the Spanish-American War, is exempt from federal, state and local taxes throughout the U.S. In many states investors have to pay levies on bonds sold by others.

Lower than normal issuance in the U.S. is “creating demand” for the offer, which has all the tax advantages of in-state debt, said Michael Schroeder, president of Wasmer, Schroeder & Co. in Naples, Florida. The firm manages about $4 billion of assets. Municipal issuance is about half of what it was last year, according to data compiled by Bloomberg.

Puerto Rico’s bonds with 30-year maturities were initially priced to yield 5.95 percent, compared with the 7.06 percent yield on a Bloomberg index of BBB rated bonds of comparable maturity yesterday.

JPMorgan Chase & Co led firms underwriting the deal.

Pension Problems

The securities are rated second-lowest investment grade at BBB by Standard & Poor’s, which raised it one step in March, citing Puerto Rico’s efforts to narrow its budget gap. Moody’s Investors Service ranks them fourth lowest, at A3. It placed the securities on a watchlist for a possible downgrade in May, citing problems with the territory’s public retirement system, which is 8.5 percent funded.

The governor hasn’t signed a budget for the fiscal year that begins July 1. Puerto Rico’s economy, which started shrinking in the fourth quarter of 2006, contracted 2.1 percent in April compared with a year earlier, according to its economic activity index released June 15.

Puerto Rico’s fiscal weaknesses have been mitigated because of steps it took to address its structural budgetary problems, said Alan Schankel, director of fixed-income research at Janney Montgomery Scott LLC in Philadelphia, which holds the territory’s debt.

‘Positive Perception’

“We have a generally positive perception of Puerto Rico as a work-in-progress moving in the right direction,” Schankel said.

General-fund revenue in the first 10 months of fiscal 2011 increased $125 million to $6.4 billion, from the same period last year, after Governor Luis Fortuno’s temporary 4 percent excise tax on foreign manufacturers was passed.

The territory has also narrowed its budget deficit to an estimated $610 million next year from $3.3 billion in 2009, in part by reducing its workforce by almost 20,000 though firings and attrition, according to the budget office.

It funds its annual budget gaps by issuing bonds backed by revenue from a sales tax, which was instituted in 2006 after Puerto Rico was effectively frozen from the market because of its low credit rating. The sales tax-backed debt is rated AA- by S&P and A2 by Moody’s, according to the website of Cofina, the government’s borrowing agency.

The general-obligation bonds, which will be used to fund infrastructure projects including repaving 361 miles (581 kilometers) of roads, are backed by government revenue including income, property, excise taxes, and the portion of the sales tax not allocated to Cofina.

Following is a description of a pending sale of U.S. municipal debt:

BUTLER COUNTY, where Ohio’s Miami University is located, will issue $155.6 million in revenue bonds as soon as today to build and equip Kettering Health Network hospital facilities, including an acute-care hospital. Construction of the hospital started in 2009 and is expected to finish in the first quarter of next year. The bonds are rated A, the sixth-highest investment grade, by S&P. Bank of America Merrill Lynch will lead underwriters in the sale. (Added June 28)

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