Puerto Rico Governor Alejandro Garcia Padilla is seeking approval to borrow as much as $3.5 billion of general-obligation debt after Standard & Poor’s and Moody’s Investors Service cut the island to junk this week, Representative Rafael “Tatito” Hernandez said.
The U.S. commonwealth needs to sell debt to balance budgets and has been planning to borrow this month. Officials are seeking to raise $2 billion, Hernandez said. While Puerto Rico’s sales-tax bonds, known as Cofinas, have a higher rating, its general-obligation bonds have a first claim on general fund revenue. It’s that security that investors are seeking, Hernandez said.
“The market doesn’t want a Cofina right now,” Hernandez said in a telephone interview from San Juan. “They want a GO. For us, the purpose of this is to go to the market with the best financial tool that we have to find $2 billion.”
The Caribbean island’s finances affect the $3.7 trillion municipal market because about 70 percent of U.S. mutual funds that focus on state and city debt hold the securities, which are tax-exempt nationwide.
The legislation may pass within a week, he said. The borrowing bill has support from both the House of Representatives and the Senate, Hernandez said. The governor is a member of the Popular Democratic Party, which controls both chambers. The move was reported earlier by El Nuevo Dia.
S&P on Feb. 4 dropped the U.S. territory to BB+, its highest speculative grade, citing limited access to capital markets and warned the firm may lower the rating further if it is unable to raise funds in a few months. Moody’s followed today, cutting the island one level below S&P’s grade.
“This is a completely new scene for us,” Hernandez said about borrowing with a speculative rating.
Puerto Rico officials are working on refinancing debt and renegotiating contracts to ease $940 million of accelerated payments on debt and calls for increased collateral on swaps that were triggered by the S&P downgrade. Almost half may need to be arranged within 30 days,said David Hitchcock, an S&P analyst.