A portion of Puerto Rico's $1 billion June refunding deal will come to market this week insured by MBIA Insurance Corp. even as Moody's Investors Service last week downgraded the insurer to A2 with a negative outlook from its previous triple-A rating.
Of the commonwealth's $1 billion refunding $195 million is pricing tomorrow with the remaining debt pricing on June 30. On that day, the government is scheduled to sell $275 million of MBIA-insured debt along with nearly $500 million of bonds insured by Financial Security Assurance.
Jorge Irizarry, president of the Government Development Bank for Puerto Rico, the island's financing arm, said last week's downgrade of MBIA will not directly affect the sale because all bonds backed by the insurer will be sold to a private investor and the $195 million portion of the debt will convert into fixed rate.
"Part of it we're selling to one buyer on a floating-rate basis and the other part we're fixing for the life of the bonds so they won't need MBIA insurance when they're not floaters," Irizarry said. "So we're fixing $195 million of it and the other $275 million we're selling to a buyer on a floating-rate basis. But they don't need the insurance, they don't want the insurance, so in effect were selling floaters without insurance."
Irizarry said having an investor, which he declined to identify, take on the variable-rate bonds with the MBIA insurance will help place the bonds.
"When bonds are variable-rate is when insurance is most critical that we couldn't sell without insurance, and now we have a buyer that will buy part of it on a floating-rate basis in spite of the insurance, if you will," he said.
In a separate issue, Puerto Rico legislators are considering a larger revenue-bond issuance than previously introduced to help fill a $1 billion deficit within the island's proposed $9.48 billion fiscal 2009 budget.
Legislative leaders said they expect that the House and the Senate will pass the 2009 fiscal plan by their June 25 deadline but officials are still working out details of how best to tackle the $1 billion budget gap. Lawmakers anticipate passing a budget that will include the use of bond proceeds. That borrowing involves the commonwealth leveraging delinquent tax receipts, an initiative that Gov. Anibal Acevedo Vila proposed when he submitted his fiscal 2009 plan in mid-March. Now lawmakers would like to include unpaid employer withholding fees along with the proposed pool of delinquent income, corporate, and sales-tax receipts.
Tagging on the withholding fees could generate a $4.5 billion to $5 billion fund from which the government can borrow against to help fill the fiscal 2009 deficit. Earlier, administration officials calculated that the island would have an estimated $2.9 billion to leverage, generating an anticipated $500 million of bond proceeds.
"We're trying to identify what would be the real present value of those debts," said Senate President Kenneth McClintock. "We've asked for some information on the aging of those debts and so forth, because if you take into account not only the tax but, for example, withholding debts employeers who withheld and haven't submitted their withholdings to the Treasury department we may be talking anywhere between $4.5 billion to $5 billion in total. And that would obviously have a much greater present value than the $2.9 billion of tax debts. So that's the main area we're exploring, but we haven't reached an agreement yet. But we will."
In addition to selling revenue debt secured by unpaid taxes, Acevedo Vila proposed filling the $1 billion budget gap with $500 million of funds generated from a potential long-term lease of the island's lottery system, which officials anticipate would bring in a total of roughly $3 billion. McClintock and Speaker of the House JosÃ© Aponte said they are not considering privatizing the lottery to help balance the 2009 budget.
"That is not on the table," McClintock said.
While lawmakers move forward with the fiscal 2009 budget, Puerto Rico's fiscal 2008 general obligation bond bill still has yet to pass the House. The Senate passed the annual borrowing plan in December, but the initiative continues to stall in the lower chamber. Typically, the island's yearly bond bill includes $175 million to the GDB to support payments toward Public Improvement bonds.
"There's no guarantee that the bond issue will go through, and in the Senate we're exploring ways of honoring our commitment with Wall Street of the $175 million," McClintock said.