Regional News

New Puerto Rico Debt Czar Steps Into It

José Otero-Freiria was only into his second week as the new debt-financing chief at the ­Government Development Bank for Puerto Rico when the commonwealth headed to the market with a general obligation refinancing deal.

Otero-Freiria, 37, became the GDB’s executive vice president for finance on March 2, ­succeeding Fernando Batlle. The bank’s new president, Juan ­Carlos Batlle — Fernando Batlle’s brother — also started on the same day as Otero-Freiria.

While low interest rates in general continue to benefit bond issuers, borrowers have had to contend with an unsettled muni universe.

The market has been buffeted recently by some $4 billion of outflows from municipal mutual funds and headline risk about potential defaults.

Still, the GDB believed it could find sufficient buyers for the $250 million public improvement refunding deal on March 8 and 9. In the end, high yields drew investors and officials boosted the transaction by nearly $200 million, to $442 million. Retail was especially active.

“It was the biggest retail 103-market offering ever for Puerto Rico,” Otero-Freiria said in a telephone interview last week, referring to a bond sale that is available to investors outside of Puerto Rico. “So we’re very excited about that particular news and on the institutional side it was equally as strong.”

Retail buyers grabbed $260 million of the deal, leaving $182 million for institutional investors, according to Otero-Freiria.

Joining him at the pricing in New York City was his predecessor, Fernando Batlle, who is staying at the GDB in an advisory capacity until the end of the month.

Former bank president Carlos ­Garcia will also serve as board chairman until March 31, allowing for a smoother ­transition as Otero-Freiria and Juan Carlos Batlle begin their tenures at the bank.

The GDB is Puerto Rico’s fiscal ­adviser.

While in Manhattan, Otero-Freiria and Fernando Batlle took the opportunity to meet with rating agencies and investors in Puerto Rico debt in order for analysts and bondholders to pose questions and meet with Otero-Freiria face-to-face.

The Series 2011C bonds priced with yields ranging from 5.38% on a 5.25% coupon for debt maturing in 2026 to 6.25% with a 6.5% coupon for debt maturing in 2040, according to the official statement.

The 2040 maturity was priced at the 6.25% yield to the July 1, 2021, optional redemption date at a redemption price of 100%. A 2036 term bond for $127 million priced with a 6.25% yield on a 5.75% coupon. Some of the maturities are insured by Assured Guaranty Municipal Corp.

The bank increased sizing on all maturities and ended up with a total interest cost of 6.25%, Otero-Freiria said. Officials were hoping that Puerto Rico’s one-notch credit upgrade just two days before pricing would bring momentum to the refinancing sale. Standard & Poor’s on March 7 raised the commonwealth to BBB from BBB-minus.

“It’s been a difficult municipal market recently in 2011,” Otero-Freiria said. “So the fact that we were able to place $450 million was very telling of how confident and supportive people have been for Puerto Rico.”

While officials are happy with the results of the $442 million refinancing, the realities of the market — lingering headline risk, muni bond fund outflows, the year-end expiration of the Build America Bond program and its supply absorption at the long end — will keep the GDB and issuers assessing the market.

Otero-Freiria said the GDB continues to monitor the market for openings. As a major issuer, the commonwealth and its bonding agencies need to keep on top of pricing opportunities in the primary market when they occur.

“We understand the concerns that are out there with investors and we just have to take that into consideration as one more thing in how we’re going to execute financing plans,” he said. “If the market is not there, then we continue to re-evaluate our options and we’ll be ready to execute on our plan when the opportunity arises.”

GDB officials knew Otero-Freiria well even before his appointment, having already worked with him on fiscal policy issues. Prior to joining the bank, he served in Gov. Luis Fortuño’s administration as the adviser for economic development and finances and then assistant chief of staff for public policy.

Before joining the Fortuno administration, Otero-Freiria was director of institutional investment consulting services at UBS Financial Services in San Juan, where he monitored and analyzed portfolios that included municipal securities. He has also worked as a finance manager at Procter & Gamble and Guidant Corp., now Boston Scientific Corp.

He holds an MBA from Stanford University and is a certified public accountant. He earned his bachelor’s degree in economics, with a focus in finance and accounting, from the Wharton School of Business.

Otero-Freiria said he will continue the administration and the GDB’s goals of fiscal discipline to end Puerto Rico’s history of structural deficits, one-time budget balances, and deficit financing.

“We have different people here now at the GDB but the philosophy stays the same,” he said. “And we’ll continue to follow that public policy and execute the [fiscal stability] plan that Carlos and Fernando started to execute and completed quite a bit in the past two years.”



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