The municipal market will see more than $2.3 billion of new Puerto Rico debt by the end of 2008, including a $500 million deal backed by a new credit-revenue stream of delinquent taxes.
The $500 million offering will be a new credit for the commonwealth, leveraging $2.9 billion of unpaid income and corporate tax receipts that officials anticipate obtaining through an improved collection system. Bonding on that revenue stream could total $1 billion overall and officials are working on issuing the first $500 million offering before the end of the calendar year, according to Jorge Irizarry, president of the Government Development Bank for Puerto Rico, the island's financial adviser.
The GDB has yet to select a lead underwriter for the transaction and Irizarry said bankers who had informally pitched ideas on how to structure the bonds will need to alter their proposals to accommodate new details of the borrowing plan, including the 10-year maturity schedule, the larger bond offering, and the potential need to use a special obligation pledge on a portion of the bonds.
"Some of them had presented proposals prior to the final legislation and now we've got a pretty clear idea of how the structure should work," Irizarry said. "I think whoever proposed something before will have to go back to the drawing board based on the final structure of the legislation because it has some new features in there that weren't on the table before."
Lawmakers believe tapping into the full $2.9 billion of revenue will support $1 billion of bond proceeds, yet GDB officials anticipate creating two tranches, one backed purely by the delinquent tax revenues and another that also benefits from the commonwealth's special obligation.
"In case we can't structure it as a conventional tax-receiveable deal, we can add on certain other guarantees and features to it so it may be a two-tranche deal," Irizarry said. "One is your normal tax receivable structure, another would be a special obligation with other bells and whistles on it."
While the portion of the sale backed solely by the tax revenues would have its own credit rating separate from the government's credit rating, any tranche that uses a Puerto Rico guarantee would tie the bonds to the island's rating, according to Horacio Aldrete, an analyst at Standard & Poor's. Standard & Poor's and Moody's Investors Service rate the commonwealth BBB-minus and Baa3, respectively, both with a stable outlook. Fitch Ratings does not rate Puerto Rico.
"I haven't seen the details of how they're going to structure it, but from what I understand it will be a separate entity," Aldrete said. "I'm not sure that that has been absolutely defined by them because it could very well be that they structure it such that the bonds have actually a general obligation pledge of some sort."
Along with the $500 million of tax revenue bonds, the GDB is working on restructuring $150 million of Puerto Rico Public Buildings Authority variable rate demand bonds into fixed-rate debt. MBIA Insurance Corp. insures the bonds, but the monoline's recent downgrades have prompted officials to restructure the interest rate mode on the debt. The authority currently carries the same credit ratings as the commonwealth.
"Insurance just doesn't help nowadays because it creates greater spreads. We can trade better on our own credit than with the uncertainty of insurance," Irizarry said. "I think investors are more concerned about what's it going to be worth given the volatility of ratings. You never know what your bonds are worth, but if you buy it on our credit it's pretty stable. You're not going to get downgraded, you're not going to have all these gyrations in the credit spread on the paper."
Co-senior managers Lehman Brothers and Banc of AmericaSecurities LLC will price the $150 million restructuring in late August.
The GDB will follow the Public Building Authority deal in early September with the commonwealth's annual new-money GO offering, with Morgan Stanley pricing the $250 million offering. Typically, Puerto Rico issues $400 million to $450 million of GO debt each year, yet lawmakers decreased the fiscal 2008 bond bill by $175 million after the measure stalled in the House for several months. The bond bill currently sits on Gov. Anibal Acevedo Vila's desk.
Last year, the GDB offered the annual GO transaction in a competitive bid. This year, Irizarry said Puerto Rico will return to its usual pattern of issuing GO bonds via negotiation.
"Given market conditions and credit spreads where they are, we think we'd rather see what the market really is asking for rather than take a bid," Irizarry said. "Competitive sales are okay, but you have to have very normal market conditions for it to be transparent, that we would be comfortable considering it better execution than we can get with an actual pricing where we offer the bonds and see where levels are and so on. And maybe the competitive sale gets you a better rate - maybe not, not necessarily - and that's why we just decided to go with our normal routine."
Officials postponed the GO deal in late July in order to give more time to compile all of the commonwealth's financial information for the transaction's official statement.
The second September deal includes Merrill Lynch & Co. pricing $400 million of Puerto Rico Municipal Finance Agency bonds backed by property taxes. Ramirez & Co. and RBC Capital Markets will serve as co-senior managers on the deal. The new-money proceeds will help pay down GDB loans that the bank extended to municipalities over the past two or three years to support infrastructure projects throughout the island.
While the MFA bonds are secured through property taxes, the rating agencies currently align the authority's credit with the commonwealth. Aldrete said that arrangement could alter, depending on the details of the upcoming transaction.
"Once we look at the proposed structure, that could change if there's enough comfort in the structure to separate the rating on the MFA bonds from the commonwealth," Aldrete said.
Rounding off the sales will be a $1 billion tax and revenue anticipation note deal set to price in October with the Bank of Novia Scotia leading a syndicate of letter of credit providers. Puerto Rico typically issues $1 billion of Trans every fall.
