Regional News

Puerto Rico Puts Off $3B Pension Deal

Puerto Rico officials Friday postponed a $3 billion taxable pension deal originally set to price this week due to market volatility.

Jorge Irizarry, president of the Government Development Bank for Puerto Rico, the commonwealth's financing arm, said a contraction in the taxable market and widening credit spreads contributed to the decision to hold off on the pension deal at this time.

"Taxable market volume has declined 75% since Jan. 31, and already high credit spreads widened another 20 basis points in the past two weeks," Irizarry said in a press release. "Although we have indications of interest in the issue from investors throughout the world, this is the prudent course for now, given the level of interest rates and market activity. We will continuously monitor the market in order to offer the bonds when conditions improve."

GDB spokeswoman Maria Rosario declined to say when Puerto Rico may go back to the market with the $3 billion taxable sale.

Matt Fabian, managing director at Municipal Market Advisors, had stronger words than Irizarry's regarding current market conditions, and said recent write-downs on Wall Street have contributed to a lack of liquidity for underwriters.

"It's a terrible sellers' market. It's one of the worst sellers' markets in a decade," Fabian said. "Not only that, you also have underwriters without a lot of capacity to underwrite. The bank balance sheets tell the story, you need balance sheet to underwrite and if they don't have balance sheet capacity it's hard to get real excited about underwriting."

Merrill Lynch & Co. is the lead manager on the pension bonds. The bank reported a $10.29 billion loss in the fourth quarter of 2007 and a $8.63 billion loss for the entire year, according to Merrill's Web site.

Along with less liquidity, Fabian said increased rates in auction-rate deals and changes in the marketplace make it more difficult for an issuer to come forward with a sizable offering.

"It's a liquidity problem. It's a fact that auction rates are so attractive," Fabian said. "We've had real under performance versus Libor and Treasuries, so it's hard to get crossover investors interested. People are afraid of tender-option bond underlyings, they're afraid of auction-rate restructurings, there's a lot of reasons to fear holding bonds right now."

The $3 billion taxable deal includes serial, term bonds, and capital appreciation bonds with maturities extending out to 50 years, according to the preliminary official statement. Merrill will lead both the U.S. syndicate of 22 banks and the international syndicate of 16 banks. Insurance for all or a portion of the bonds has yet to be determined. Mesirow Financial Inc. is the financial adviser and Fiddler Gonzalez & Rodriguez PSC is bond counsel.

While officials could change the structure of the bonds, market analysts said it may be difficult for Puerto Rico to achieve lower yields in the future on the 50-year maturities.

"The question is the sensitivity of the 50-year yield, and in a market like this where the economy's getting softer, the [Federal Reserve is] more likely to cut [rates], which would raise the risk of longer-term inflation which would raise eventually long-term yield," said Richard Ciccarone, managing director and chief research officer at McDonnell Investment Management LLC. "That's all a risk that they're playing with right now and they're going to have to finesse their entry into the market with that risk in mind."

The deal carries a Baa3 municipal rating and a A1 global scale rating from Moody's Investors Service. Fitch Ratings and Standard & Poor's assign the bonds a BBB-minus municipal rating.

While investors will have to wait for the taxable pension bonds, the island still plans two sales within the next few weeks, including a tax-exempt $1.5 billion Puerto Rico Aqueduct and Sewer Authority deal and a $150 million taxable Puerto Rico Tourism Co. transaction.


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