Puerto Rico Borrowing Measure Would Repay $2 Billion to GDB

Puerto Rico lawmakers are working on a plan to allow the island’s Infrastructure Financing Authority to sell as much as $2.2 billion of bonds backed by petroleum-tax revenue to repay loans to the Government Development Bank.

The bill would transfer revenue from tax increases implemented last year on petroleum products to the Infrastructure agency, called Prifa, from the Highways & Transportation Authority. Prifa, which has sold bonds backed by rum-tax revenue, would issue debt secured by the petroleum-tax receipts, General Assembly Representative Rafael “Tatito” Hernandez said in a telephone interview from the island.

Prifa would take on the loans the highway agency owes the GDB, and repay them with the bond proceeds. The Development Bank lends cash to the commonwealth and its agencies to help balance budgets. As the struggling island tries to revive its economy, repaying the GDB and increasing its available funds is a priority for the self-governing U.S. territory, Hernandez said.

“If we have a healthy GDB, then we have a healthy government,” said Hernandez, who chairs the island’s House Treasury Committee.

Safeguard Move

The bill is a proposal from Governor Alejandro Garcia Padilla, Hernandez said. It’s a move by Puerto Rico to safeguard its direct debt and strengthen the GDB’s balance sheet. The three largest rating companies cut Puerto Rico to junk in February. The commonwealth and its agencies owe $73 billion, making the island the third-largest municipal debtor, behind California and New York. Its bonds are tax-exempt nationwide.

The island’s economy has struggled to expand since 2006 and its population has declined for eight straight years as residents leave for the U.S. mainland, according to Census data.

The proposal would also help shield the GDB from a debt-restructuring law passed last month, which allows certain public corporations to reduce their obligations by negotiating with lenders, including the Development Bank.

The highway authority, which oversees most of the island’s roads and bridges, can still restructure its $4.6 billion of bonds under the law passed in June, although there are no plans to do so, the GDB said in a July 17 conference call with investors. Prifa, like the commonwealth’s general obligations and sales-tax bonds, is exempt from the debt-restructuring law, boosting the GDB’s chance of repayment.

Class Distinction

“It does appear that the intent of the bill is to isolate the GDB from the impact of any impairment on the Highways & Transportation Authority loan, which could threaten the bank’s solvency,” Robert Donahue, a managing director at Concord, Massachusetts-based Municipal Market Advisors, wrote in an e-mail. “Existing Highways & Transportation Authority bondholders should be concerned that the commonwealth has taken an action that appears to disadvantage one class over another.”

While investors holding highway bonds wouldn’t have access to the new petroleum revenue, the bigger stress to those securities is the highway agency’s ability to restructure its obligations, Horacio Aldrete, a Standard & Poor’s analyst, said in an interview. Prifa last sold bonds in 2010, according to the GDB.

“The main factor when it comes to the highway authority debt at this point is not as much the actual revenue flowing into the various funds for repayment, but the fact that there’s a likelihood that they could file or seek relief under the recently approved law,” Aldrete said.

New Credit

A bond sale backed by petroleum-tax revenue would be a new credit for the island. Moody’s Investors Service rates Prifa’s rum-tax bonds B3, six levels below investment grade. It grades the roadway authority one step lower at Caa1.

S&P rates the rum-tax bonds BB, two steps below investment grade. It rates the Highways & Transportation Authority three steps lower at B.

The bill revises a plan from last year to repay the Highways & Transportation Authority’s GDB loans. Lawmakers in 2013 increased the levy on petroleum products to $9.25 per barrel from $3 and transfered cigarette taxes to the roadway authority so it would be able to issue debt to repay the GDB.

The GDB is working with the highways authority to make the agency “financially self-sufficient” without using the debt-restructuring law, the bank said in an e-mailed statement.

Prices on Puerto Rico securities fell to record lows after the debt-restructuring law was proposed June 25. Since then, hedge funds and nontraditional buyers of munis have bought the debt, driving prices back to pre-June 25 levels.

Debt sold by the commonwealth and its agencies has earned 3.8 percent through July 23, down from a 10.7 percent year-to-date advance on May 30, according to S&P Dow Jones Indices. The entire municipal market has gained 6.4 percent this year.

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