Puerto Rico Electric Agency Near Highest Yield Before Debt Sale

Bonds of Puerto Rico’s electric agency, which runs the biggest U.S. public-power system, are trading near historically high yields a week before the authority plans the first bond sale from the island in eight months.

Puerto Rico Electric Power Authority securities maturing in July 2040 and rated one step above junk by Moody’s Investors Service traded with an average yield of 6.85 percent today. The interest rate reached 7.37 percent last month, the highest since the debt sold in March 2010, data compiled by Bloomberg show.

The agency, which plans to sell $600 million of tax-exempt bonds, is the sole provider of electricity on the island of 3.7 million people. The economy shrank 4.5 percent in the year through June, the steepest contraction since 2010, according to Puerto Rico’s Government Development Bank. The fiscal health of the utility is linked to that of the commonwealth, which is ranked one level above speculative grade by the three major rating companies, said Lord Abbett & Co.’s Daniel Solender.

“People don’t always pay their bills,” said Solender, who helps manage $19.5 billion of local debt in Jersey City, New Jersey. “Will they need to get backup support from the commonwealth? Ultimately you hope they’re a stand-alone credit, but you don’t know if they’re necessarily going to be.”

Yield Pull

Next week’s sale may offer yields of about 6.75 percent, said Solender, along with portfolio managers Dennis Derby at Wells Capital Management, Tom Spalding at Nuveen Investments Inc., and Michael Walls at Waddell & Reed Financial Inc.

It’s the first borrowing from a Puerto Rico entity since November and the biggest in almost 16 months, Bloomberg data show. Debt sold on the island is tax-exempt in all U.S. states.

Morgan Stanley, the lead underwriter, declined to comment because the bank isn’t talking about the deal publicly yet, said Lauren Bellmare, a spokeswoman for the New York-based company.

Joele Frank, a New York communications firm that represents the Government Development Bank, didn’t immediately respond to requests for comment. The GDB handles the island’s capital-markets transactions.

The utility may need to offer yields above 6.75 percent to lure buyers given the deal’s size and withdrawals from municipal mutual funds, said Walls, who helps manage $2.2 billion of high-yield munis at Waddell & Reed in Overland Park, Kansas.

Cash Drain

Investors have pulled $14.7 billion from muni funds in the eight weeks through July 24, the most since February 2011, Lipper US Fund Flows data show.

The Puerto Rico agency’s securities are appealing when compared with corporate bonds, Walls said. For investors in the top federal tax bracket, the 6.85 percent yield equals a taxable return of 11.34 percent.

That’s more than double the 5.28 percent on an index of 30-year company bonds with similar ratings. The spread between the electric-authority bonds maturing in July 2040 and the corporate index is 1.2 percentage points, the most since the Puerto Rico bonds were sold in 2010.

Moody’s rates the agency’s debt Baa3 with a negative outlook.

Before it's here, it's on the Bloomberg Terminal.