Regional News

A Return To New Money

Puerto Rico will issue its first new-money general obligation bond sale in nearly three years, a $304 million offering that will help finance transportation infrastructure upgrades.

JPMorgan will price the Series 2011 public improvement GO bonds on Wednesday following a one-day retail order period on Tuesday.

The transaction will offer maturities out to 2041, and a portion will be wrapped with Assured Guarantee Corp. bond insurance, according to Jose Otero-Freiria, executive vice president for finance at the Government Development Bank for Puerto Rico. The GDB is the commonwealth's financing arm.

Officials are hoping spring and summer coupon redemptions and the light volume of municipal issuance will help the commonwealth grab lower interest rates.

"We take advantage of market conditions to go to market when we think the time is right — both from an interest rate standpoint and also from the supply that's going into the market that particular week," Otero-Freiria said. "And of course we also pay attention to money flow to make sure that we capitalize on that opportunity."

Puerto Rico had $9.68 billion of GO debt outstanding, as of March 31, according to the preliminary official statement.

Moody's Investors Service rates the Series 2011 GO bonds A3. It placed the credit on watch list for possible downgrade on May 3, affecting a combined $28 billion of outstanding debt that is linked to Puerto Rico's full faith and credit pledge. Moody's expects to complete its review of the credit by the end of August.

Otero-Freiria said GDB officials will meet with Moody's in the next couple of weeks to discuss long-term fiscal goals of the commonwealth, including proposed pension reform measures. Puerto Rico's retirement system will run out of funding in fiscal 2019.

Fitch Ratings and Standard & Poor's rate the commonwealth BBB-plus and BBB, respectively. They had not issued ratings for this week's sale as of Friday afternoon.

The GDB last week held a conference call with investors to educate them on the GO transaction, and present the latest revenue and economic data. In addition, the Legislature is set to approve the fiscal 2012 budget by the end of the month. Fiscal 2012 begins July 1.

Yields on outstanding Puerto Rico GO debt ranged from 1.43% in 2012 to 5.78% in 2041, as of June 23, according to Thomson Reuters.

Yields are closest to the triple-A Municipal Market Data curve in 2012, at 120 basis points above the triple-A benchmark. Maturities are widest from 2017 through 2019, with yields 230 basis points above the MMD scale.

Joe Rosenblum, senior vice president and head of municipal credit research at Alliance Bernstein, said the deal should gain a fair amount of interest in part because Puerto Rico hasn't sold new-money GO debt since 2008. But he also noted that it won't be the only bond sale pricing in the market.

"I would tend to think it will be fairly favorable … and there's an issue of supply in the market in general," Rosenblum said. "And this always enjoys triple tax exemption, so it's a big plus in their favor."

GDB officials have yet to decide if Puerto Rico will issue another new-money GO bond deal in fiscal 2012.

"It is a possibility, but right now we're focused on this GO sale and we'll see whether we have the capacity to issue again in fiscal 2012," Otero-Freiria said.



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