Puerto Rico Increases Bond Offering by 17% to $3.5 Billion

Puerto Rico, which had its debt cut to junk last month, set prices on $3.5 billion of general obligations after boosting the deal by $500 million as orders eclipsed the amount of securities offered. The bonds gained in initial trading.

The tax-exempt debt matures in July 2035 and priced at 93 cents on the dollar, to yield about 8.73 percent, data compiled by Bloomberg show. It traded at about 96 cents on average to yield 8.4 percent as of 3 p.m. in New York. The self-governing U.S. commonwealth will use the proceeds to balance budgets and refinance debt as it buys time to revive a shrinking economy.

The deal is the largest-ever junk-rated offer for the $3.7 trillion municipal market. The yield compares with the 4.8 percent interest rate on similarly rated company debt, according to Bank of America Merrill Lynch data. The levels have lured hedge funds and investors who typically buy taxable securities and are comfortable with the risk of junk bonds.

“The good news is that we’ve been able to attract a broader level of investor, but the bad news is we did have to go to those other investors in order to get the deal done,” said Tom Spalding, senior investment officer at Chicago-based Nuveen Investments Inc., which manages about $90 billion of munis. “So longer term, are they going to be there to support our market?”

Order Wave

Banks led by Barclays Plc received about $16 billion of orders from about 270 investors, according to Puerto Rico’s Government Development Bank, which handles the commonwealth’s debt transactions. Alternative investors such as hedge funds accounted for the bulk of the orders, though traditional muni holders also bid, said a person with knowledge of the sale who requested anonymity because information on buyers was private.

“This liquidity infusion, larger than originally anticipated, strengthens the GDB’s credit profile and its role as a provider of interim and long-term financing,” Jose Pagan, interim president of the GDB, said in an e-mail.

The yield on Puerto Rico’s new bonds compares with the 3.45 percent interest rate on top-rated munis with a similar maturity, Bloomberg data show.

The debt will carry a coupon of 8 percent. The bonds are callable in July 2020, which may make it easier for Puerto Rico to refinance should interest rates be lower in the future.

The sale gives the island of 3.6 million people enough cash through June 2015 as its officials struggle to turn around their economy and mend the territory’s finances.

Lawmakers have reduced pension benefits, increased taxes and trimmed budget gaps. Governor Alejandro Garcia Padilla, who took office in January 2013, has said he would release a budget for next fiscal year that doesn’t rely on deficit borrowing, ending a practice used in every spending plan since at least 2000.

Preliminary revenue collections show that the commonwealth’s budget for the fiscal year ending June 30 is on track. The island collected about $5.3 billion of revenue through February, $96 million more than budgeted estimates, according to Treasury Secretary Melba Acosta.

(Updates with bond trades in first two paragraphs.)
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