Puerto Rico is gearing up for a nearly $4 billion subordinate sales-tax bond deal this month as rating agencies yesterday boosted the commonwealth's $5.2 billion of existing sales-tax debt into the double-A category.
Standard & Poor's and Moody's Investors Service upgraded the outstanding senior-lien bonds to AA-minus and Aa3 from A-plus and A1, respectively. The outlook is stable for both ratings.
Carlos Garcia, president of the Government Development Bank for Puerto Rico, the island's fiscal agent, said the elevation to double-A from single-A should heighten investor confidence as the Puerto Rico Sales Tax Financing Corp. heads to market with its sizeable subordinate transaction.
Standard & Poor's and Moody's rate the upcoming Series 2009A bonds A-plus and A2, respectively. Fitch Ratings will release its assessment of the transaction today.
Garcia said the upgrade on the senior bonds helped the subordinate bonds secure single-A ratings and he anticipates the rating hike will help the subordinate bonds garner better interest rates at market.
"We think that it's something very positive that should also help the trading of the existing bonds, which should be lowering the yield curve and should be very favorable in terms of the interest costs for this transaction," he said.
Earlier this year, lawmakers increased the bond fund's dedication to 2.75 cents from one cent of the island's seven-cent sales tax. Officials anticipate the 2.75-cent dedication will generate $550 million annually.
In addition, new legislation makes it more difficult to end or repeal the unpledged portion of the sales tax in the future. By law, the sales tax bonds - called COFINA bonds due to its Spanish acronym - can tap into the unpledged sales tax revenue to help pay debt service, if need be.
Citi will price $3 billion to $4 billion of subordinate COFINA bonds this month in the local and U.S. markets. Barclays Capital is co-senior manager on the transaction.
Garcia would not pin down a deal size for the tax-exempt market as his team is still working on the tax analysis to see how many of the bonds will qualify as tax-exempt.
"We will try to do as much as we can, as much as there's appetite in the market and depending also on the interest costs in each one of the markets," Garcia said. "We have not targeted anything. Obviously, obtaining the rating upgrade changes that possibility in a positive way, so we're open and we're receptive to see what the markets have to offer."
A portion of the bond proceeds will help the commonwealth address immediate fiscal challenges through deficit financing. Officials anticipate using $1.3 billion of the sale proceeds to help close a budget deficit in the current fiscal year, which ends June 30 and tapping into another $2.5 billion for fiscal 2010. That will prohibit the authority from using Build America Bonds on non-capital investment projects. In the taxable BAB program, issuers receive a 35% subsidy from the federal government to pay for debt service costs.
Garcia said that the transaction will probably not include BABs, but the authority is leaving all options open.
"There's a portion that may qualify - but not the entire amount - for Build America Bonds," Garcia said. "That's why, although it is not part of the plan immediately, we have not discarded the option."
The GDB president has his eye on additional credit upgrades for COFINA. Currently, the collection rate for sales-tax receipts is low, as the commonwealth captures roughly 60% or less, depending upon the study, of its sales-tax base due to delinquent payments. Garcia said if the Treasury Department can improve its collection rate, that would increase COFINA's fund and strengthen the credit even more.
Any improvement in the sales-tax performance would also help offset declining sales-tax receipts in the current recession. Puerto Rico's sales tax revenues from July through March are $35.4 million less than the same period in fiscal 2008. Although rating analysts said Puerto Rico's slight drop in sales-tax revenue is much lower than sales-tax programs in other jurisdictions.
"Sales taxes in the commonwealth have only declined by 3.3% year-over-year which, relative to what we're seeing in the continental U.S., is actually a pretty good performance for that revenue source," said Standard & Poor's analyst, Horacio Aldrete.
"I think the flip side to that is there is a flexibility for the commonwealth or COFINA to increase its collection efforts and mitigate some of the downward pressure that collections may have because of their recession," Aldrete said. "So while it's true that there's room for improvement in collections, that the reverse of that is any additional effort to increase their collections will probably help mitigate any sort of impact on sales taxes that might be due to the economic recession."