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Puerto Rico Sale to Aid Pensions

The upcoming sale of some $4 billion in taxable municipal debt to shore up Puerto Rico’s pension system is aiming to attract the attention of both traditional muni investors and those outside the typical base who are looking for yield or diversification.

The 50-year bonds carry a Baa3 municipal-bond rating and an A1 global scale rating from Moody’s Investors Service.

Roughly $1 billion of the bonds could price as early as next week in the local Puerto Rico market, with the remaining $3 billion to price on the mainland “shortly thereafter,” according to Moody’s analyst Emily Raimes.

Officials are also planning on issuing an additional $3 billion of pension bonds within the first half of this year, with the Moody’s ratings taking into account the full planned issuance of $7 billion, a Moody’s report said.

The volume bodes well for the liquidity of the deal, as taxable investors are often looking for sizeable deals. At $7 billion, these bonds would represent nearly 25% of all the taxable debt sold in the muni market in all of 2007, according to data from Thomson Financial.

Tax-free fund managers say they will not participate in the sale as the bonds are strictly taxable debt. Bob MacIntosh, co-director of Eaton Vance’s municipal bond group, said his muni fund will be observing from the sidelines.

“We’ll be watching it from afar and think of it from a perspective of the credit,” he said. “This hopefully will satisfy some of their outstanding obligations as a credit, but that’s all we’ll be doing.”

Leslie Highley, managing director at UBS Trust Company of Puerto Rico, said the local market is interested in the deal but has yet to see an investor roadshow on the sale.

The Baa3 municipal rating on the pension bonds matches the commonwealth’s rating of Baa3. The A1 global scale rating is a corporate-equivilancy rating that takes into account how the credit compares to non-municipal securities such as companies, banks, and non-U.S. government entities.

The taxable bonds, backed by future statutorily mandated government employer pension contributions, will help keep the island’s roughly $2.84 billion pension fund solvent and able to meet obligations. The bonds will carry 50-year maturities.

Currently, the plan is 19% funded — the lowest funded state-level pension system in the nation — and officials anticipate the system could be depleted as early as 2014. The total $7 billion of pension debt will maintain the fund until approximately 2027, no new employees have enrolled in the pension system since 2000.

While the bonds are a temporary fix on the island’s pension system, Raimes said eventually all government employees will collect a one lump-sum payment similar to a 401K, or a defined contribution plan, upon retirement. The current pension system is a defined benefit plan, such as a traditional pension program, where payments continue throughout an employee’s retirement. In 2000, Puerto Rico replaced the defined benefit plan andwith all new employees since then participate in the defined contribution plan.

“So people who come into the system now are not a problem for the future because they only get out what they put in,” Raimes said. “So there’s not that issue of the skyrocketing liability out in the future.”

The system has roughly 176,000 active participants and 99,800 retirees and beneficiaries.

The upcoming debt sales will transfer the island’s soft pension liability into a hard debt, but maintaining the pension system through 2027 will give Puerto Rico piece of mind.

“Keeping the fund going is without a doubt an important thing for them,” Raimes said. “The idea of this looming fund that was going to run out of money was really a pressing problem for them.”

Currently, the employer mandete is to appropriate at least 9.275% of government employee payroll to the system, which will be pledged to the bonds, a strength for the credit. The mandated contribution level has not changed since 1960, according to Moody’s.


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