The Bond Buyer 100

Puerto Rico GDB Takes 7th Spot With $3.6B of Notes

The Government Development Bank for Puerto Rico, fiscal agent and financial advisor to the Commonwealth of Puerto Rico, ranked number seven among top issuers of municipal debt in 2011, taking advantage of market conditions to sell $3.6 billion of notes.

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All six issues sold by the bank last year were part of its senior notes program, which aims to provide it with liquidity.

In previous years the program’s notes were offered in Puerto Rico’s local market, where the bank typically could access low rates and a low cost of funding. But starting last May, the GDB was able to sell the notes — mostly for refunding purposes — in the United States at attractive rates, given low volume in the municipal market.

“We saw a very important opportunity to refund a lot of the outstanding notes at a much lower cost of funding,” said José Otero-Freiría, vice president for financing at the bank. “We have been doing that while simultaneously reducing the rollover rates for the cost of funding and leveling off that debt.”

About 72% of proceeds from last year’s deals went toward refunding previous notes for interest-rate savings.

The other 28% was issued as new-money debt and went toward supporting growth for the GDB’s loan and investment portfolio, as well as increasing liquidity.

Bonds from Puerto Rico are generally attractive to investors across the U.S., especially in states and localities with high income-tax rates, because of their triple tax-exempt status at the local, state and federal levels.

However, with such high demand last year, two out of the bank’s six deals were taxable.

The $650 million Series B offering in May marked the first time the GDB accessed the U.S. taxable market.

Otero said that the bank’s efforts to maintain frequent and transparent communication with investors have helped its bond sales.

He also cites the favorable market conditions and the GDB’s financial development.

“We have been moving in the right direction, both with the commonwealth and the bank. Specifically for the bank, we have been able to continuously, year after year, increase profitability,” Otero said.

The bank’s net interest margin— the difference between what it pays to borrow and receives to lend — is now stabilized at around 1.7%, up from below 1% in previous years, he said, and he expects to hit or surpass the net income goals for the fiscal year, ending June 30.

With ratings of Baa1 from Moody’s Investors Service and BBB from Standard & Poor’s, the bank, as well as Puerto Rico itself, are at the low end of investment-grade.

As the GDB and the commonwealth are connected in many areas, including their mission, governance and exposure to the island’s economy, they both have the same rating and outlook, Moody’s said in its report on the Series H notes.

The outlook is negative by Moody’s and stable by Standard & Poor’s. Fitch Ratings has not rated the bank, but rates Puerto Rico BBB-plus with a stable outlook.

Despite high demand last year for its debt offering, the bank’s notes offered attractive yields to investors when compared to higher-rated credits.

Its largest deal last year — $1.4 billion Series H senior notes — offered yields from 3.8% due in 2015 to 5.2% in 2026 at spreads ranging from 244 to 309 basis points over Municipal Market Data’s triple-A benchmark.

Deals out of Puerto Rico this year have continued to attract investors searching for yield.

Three recent debt sales were upsized to satisfy demand, including earlier this month when a $1.5 billion offering was increased to $2.3 billion.

Reports on Puerto Rico’s ratings have cited low pension funding, a high debt level and high unemployment levels, although Fitch said in its most recent report that there are signs the local economy is beginning to stabilize, with modest growth expected in 2012.

If demand remains high and market conditions remain favorable, Otero says the bank could go to market again this year.

It issued $1 billion of taxable senior notes in February.

“There’s no need to go to market with GDB notes for liquidity at this point, but if there is an opportunity to refund specific maturities we would continue to do so to reduce our cost of funding,” Otero said.

One of the public corporations for which the bank serves as financial advisor has a bond sale scheduled for next month. The Puerto Rico Electric Power Authority, operator of the commonwealth’s electric power system, will go to market with $455 million of new-money and refunding power revenue bonds on April 11, with retail pricing on April 10.

The underwriting team will be led by Morgan Stanley.



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