Puerto Rico Authority Plans Biggest Muni Sale of 2012

The Puerto Rico Aqueduct and Sewer Authority, which carries the lowest investment grade by Standard & Poor’s, plans to issue $1.25 billion in tax-exempt revenue bonds tomorrow in the year’s biggest muni sale.

The authority, which provides water to 1.2 million households in the U.S. territory, will also issue about $350 million of taxable debt to island residents, Jose Otero, vice president of financing at the Government Development Bank for Puerto Rico, said in a telephone interview. The bank is the authority’s fiscal agent.

The tax-exempt portion will be the largest offering in 2012, eclipsing $1 billion deals by the Government Development Bank and Washington state, according to data compiled by Bloomberg.

“This is the big liquid deal of the year so far,” said Mark Paris, a New York-based senior portfolio manager for Invesco Ltd., which owns $5 million of the authority’s bonds. “You’re going to see people be a little bit more willing on the credit side to invest in this.”

S&P rates the bonds BBB-, one level above so-called junk status, citing the authority’s unwillingness to raise rates and its deferred capital needs, according to a report.

5 Percent Range

Yields on the 25-year-and-longer portion of the sale will be in the low 5 percent range, said Paris, who manages the Invesco Van Kampen High Yield Municipal Fund. That’s high enough to interest funds that manage speculative-grade debt, he said. Revenue bonds with an average rating of BBB maturing in 25 years yield 6.6 percent, according to a Bloomberg Fair Value index.

Puerto Rico debt has returned 3.61 percent this year, the most of any U.S. state or territory and more than the total market, general obligations and revenue bonds, according to Barclays Capital Indexes tracking prices and interest income.

Proceeds of the sale will be used primarily to refinance lines of credit extended by the Government Development Bank, according to a preliminary official statement. The authority may also fund the capital-improvement needs for the next fiscal year, Otero said.

The deal may be increased, Otero said. “We have more capacity than $1.25 billion if investors have the appetite,” he said.

(Corrects spelling of Otero starting in second paragraph in story published Feb. 13.)
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