In response to recent yield increases on Puerto Rico bonds in the secondary market, the commonwealth plans to scale back issuance for the remainder of the year.
Government Development Bank of Puerto Rico President José Pagán announced the new plans in a press release Tuesday.
"We expect to scale down our plan of financing for the rest of the year," Pagán said. "While we originally expected to issue an amount of debt consistent with historic levels for the GDB and the commonwealth of Puerto Rico, we now expect that our financing plan will be limited to issuances that expect to raise an aggregate amount of proceeds in the $500 million to $1,200 million range, subject, of course, to prevailing market conditions."
In the aftermath of skeptical stories in Barron's and Forbes, Puerto Rico bond yields have surged in the secondary market in recent weeks.
On Tuesday Puerto Rico Electric Power Authority Bonds were trading around 8.47% in 14 year maturities, according to Dan Berger, senior municipal strategist at Municipal Market Data. Longer durations were trading about 20 basis points lower. General obligation bonds were trading around 8.78%. The figures are for trades of $5 million or more.
In the spring Puerto Rico completed some private placements, but otherwise did not borrow money in the first half of the year.
By comparison the commonwealth had sold $7.55 billion in bonds in 10 issues in the first half of the 2012.
In an investor presentation on July 18, GDB President David Chafey Jr. said Puerto Rico would sell $600 million in Puerto Rico Electric Power Authority bonds in August.
Chafey said these would be followed by a general obligation bond and then a Highways and Transportation Authority bond. The proceeds of the latter sale would be used to repay debt the HTA owed to the GDB, he said.
Since then PREPA sold $673 million on Aug. 7 in a deal that got more than $1 billion in orders, according to Municipal Market Advisors. However, the authority had to pay yields up to 7.12% for 30 year bonds.
In the last several weeks Puerto Rico has sold $1.4 billion in notes to state-side and island banks.
On Tuesday Pagán said the GDB is currently evaluating all alternatives and that it expects to hold an event open to all investors in the next few weeks to discuss in detail the Commonwealth's fiscal and economic plan, as well as the GDB's plan of financing.
Pagán said Detroit's recent bankruptcy has unfairly hurt investor appetite for Puerto Rico bonds.
In Puerto Rico, the GO bonds have first claim on general fund revenues, which is not the case in Detroit and for most other GO bonds, he said.
Puerto Rico's taxpayers do not generally have to pay federal income taxes and thus generally do not have to service the federal debt, unlike residents of the 50 U.S. states, Pagán said. And investor concerns have lingered about the financial needs of the commonwealth's Employee Retirement System, even though the cash flow needs of the system have been addressed, he said.
Pagán said that the commonwealth government of Gov. Alejandro García Padilla had made tough decisions to tackle long-term structural challenges and reduce the deficit, accomplishments the secondary market has ignored.
"The rise of yields [of Puerto Rico bonds on the secondary market] has accelerated at a breathtaking pace," Municipal Market Advisors managing director Robert Donahue said. "In order to arrest the market decline since mid-last week, Puerto Rico leaders have to get out in front of this quickly. The announcement of the delay begins the process of doing this. Generally, we think it's a wise decision that it has postponed going to the market with such large deals where rates continue to spiral upwards.
"While delaying bonds gives them some breathing room, there is a concern that some of these bond deals were to reimburse banks that had provided bridge loans and lines of credit that were due in the next few months," Donahue continued. Puerto Rico may have to roll over the loans to notes that may command high rates, depending on the bond provisions and bank appetite, he said.
The current situation is one in which a major headline in a widely read publication had an impact that, "snowballed, as can happen when retail investors wake up to problems that they had not considered," Donahue said.
Puerto Rico is currently facing technical factors that could push yields even higher, Donahue said.
These include: mutual fund outflows (particularly at funds overweight with Puerto Rico debt); concern that the Federal Reserve will reduce its bond purchasing program; the perception that the Puerto Rico government is not responsive to the crisis; economic concerns about Puerto Rico; and disappointing tax revenues.
Total tax revenues fell 1% in July from the same month last year, Donahue said. The Puerto Rico Treasury's recent statement that some tax revenues were above projections in July is impossible to evaluate because the projections were not released in advance, he said.
The municipal market has a history of not pricing bonds correctly, Triet Nguyen, Managing Partner at Axios Advisors wrote Friday.
"Nowhere is the muni market's inefficiency more evident than in its reaction to the Puerto Rico situation. The island's precarious fiscal and economic condition has been known and widely debated for years." he wrote.
The Barron's story "contained little new credit information, yet it has increased selling pressure on Puerto Rico paper."
"We've been among the toughest critics of Puerto Rico issuers," Nguyen wrote. "However, we've also given credit where credit is due. We've applauded the Padilla administration's efforts to deal with the commonwealth's revenue collection problem while still worrying about the continuing decline in economic activities. Certainly, anything less than a measured assessment of the risk and return merits of Puerto Rico bonds would be a great disservice to the individual investors that provide the foundation to our market."
