Puerto Rico officials plan in the next two weeks to announce an underwriting team for a sales-tax bond transaction of up to $500 million.
The bonds would raise funding for the commonwealth's $500 million local stimulus package and help balance fiscal budgets, among other plans.
The Government Development Bank for Puerto Rico continues to evaluate the best structure for the deal, including whether the new sales tax bonds will be subordinate to the $5.2 billion of existing sales tax debt.
The commonwealth plans to issue up to $4 billion of debt through the Puerto Rico Sales Tax Financing Corp. over the next few years, with the upcoming sale totaling $250 million to $500 million. The corporation's debt is known under its Spanish acronym as COFINA bonds.
"We're going to continue on with the financing plan in terms of working with the rating agencies and the bankers in trying to get the best structure we can," GDB president Carlos Garcia said in an interview last week at the bank's two-day credit conference in Puerto Rico. "Once we have that and we have executed, I think the market should be there for us."
GDB officials are reviewing 15 responses to the bank's request for proposals on the deal and will be finalizing a team in the coming weeks, said executive vice president of financing and treasury Fernando Batlle.
Garcia said the bank will hold off on pricing the deal until the commonwealth moves on decreasing its $3.4 billion deficit. The administration will release those details, which will included further spending reductions and tax increases, in the next two weeks.
In addition, Garcia said Puerto Rico needs to utilize the single-A credit to its best advantage - and if more time is needed to structure the deal properly and wait for better market conditions, then so be it.
"We want to be sure that we maximize the rating and the interest rates," Garcia said. "Given that this is the last significant capability that we have, if we issue at a higher rate than we should there will be less money available to us. So, I want to be sure - rather than rushing out to the market - I want to be sure that we get the best credit structure."
Lawmakers last month approved increasing the corporation's dedicated revenues. It will now receive two cents, up from one cent, from the island's seven-cent sales tax, which began in November 2006. The increase will help finance the new bonds, yet the existing $5.2 billion of COFINA debt may receive first claim to those revenues.
During an investor call on Feb. 10, Garcia said the new COFINA bonds would be subordinate to the existing sales tax bonds, but at last week's credit conference he said his team is still evaluating whether that is the best course of action.
Of the two-cent dedication, the corporation will receive a maximum of $1.85 billion of sales tax revenue per year. Even with the ceiling, Batlle said the existing sales tax bonds will continue to have debt service coverage of 5.5 times. Officials implemented the $1.85 billion limit in order to protect bond holders of general obligation and commonwealth-backed debt as sales tax receipts above the limit will flow into the commonwealth's general fund.
Yet the corporation, by law, has the ability to tap into an additional 3.5 cents from the full seven-cent tax to help pay debt service, if need be.
On a monthly average, the sales tax generated $95 million of revenue from December 2006 through June 2008. For the first six months of fiscal 2009, which began July 1, average monthly collections totaled $93 million, according to the GDB.
Fitch Ratings and Standard & Poor's rate the COFINA bonds A-plus. Moody's Investors Service rates the credit A1.
During his presentation, Garcia questioned the single-A rating, noting that other issuers' sales tax bonds have lower debt service coverage yet are rated higher.
Garcia said the Massachusetts Bay Transportation Authority sales tax bonds, which has two times coverage, and the Nassau County Interim Finance Authority sales tax debt, which has 4.5 times coverage, are rated AAA by Standard & Poor's and Fitch and Aa2 by Moody's.
Meanwhile, California's economic recovery bonds carry the same credit ratings as the COFINA bonds, yet its debt service level is 1.1 times.
"We still believe very strongly that the COFINA structure has a stronger structure than comparable products," Garcia said during his presentation. "It is hard for us to understand why the COFINA is rated A-plus."
Standard & Poor's analyst Horacio Aldrete said that his agency will evaluate the credit again once the corporation moves ahead with any future COFINA deals.
"It is clear that we know today a lot more about the sales tax than we did in 2007," Aldrete said. "That being said, it is also true that the commonwealth, the current economic recession, and the extent to which that can impact sales taxes is something that we'll be looking at as well."
