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Barclays, RBC to Manage P.R. Bonds

Puerto Rico chose Barclays and RBC Capital Markets to underwrite its bond sales in the rest of the year, after secondary market yields for its debt soared to double digits.

Puerto Rico will sell between $500 million and $1.2 billion in bonds by January, depending on market conditions, Treasury Secretary Melba Acosta Febo and Government Development Bank interim president José Pagán Beauchamp said in announcing the underwriters Thursday. Puerto Rico will only sell COFINA bonds this year, they said. COFINA bonds are backed by Puerto Rico’s sales tax and have the highest ratings of the commonwealth’s bonds.

The announcement came a day after Puerto Rico Gov. Alejandro García Padilla signed a bill that expanded the percentage of the sales and use tax allocated to the COFINA bond fund. Use of COFINA bonds rather than general obligation bonds may save the commonwealth 50 to 100 basis points on bond yields, García Padilla said.

The expansion “marks another step forward in our fiscal progress by establishing an additional source of cost-effective financing as the commonwealth continues to strengthen its fiscal position and build a solid foundation for economic prosperity and development,” Acosta Febo said.

Puerto Rico’s COFINA bonds are rated AA-minus by Fitch Ratings and Standard & Poor’s and A2 by Moody’s Investors Service. By comparison, all three ratings agencies rate the commonwealth’s GO bonds at BBB-minus or the equivalent.

RBC was the fifth ranked senior underwriter of municipal bonds by par value in the third quarter. Barclays, which will be the senior underwriter on this deal, was the eighth ranked. Puerto Rico’s announcement came after critical media coverage, Detroit’s bankruptcy and its weak economy lowered its bond prices on the secondary market over the last several months. There was a further weakening of its bonds in the secondary market on Wednesday and Thursday, with one bond trading at a yield near 17%. Through Wednesday the S&P Muni Bond Puerto Rico Index was down 19.4% for the year.

The decision by Massachusetts secretary of the commonwealth William Galvin to investigate the sales of Puerto Rico municipal bonds by three major financial firms on Wednesday contributed to the weakness of Puerto Rico bond prices.

On Thursday in response to Bond Buyer inquiries, the secretary’s spokesman said that the secretary had received no complaints about these firms’ behavior before the secretary started the inquiry.

One of the three firms, OppenheimerFunds, said that its mutual funds’ investments in Puerto Rico municipal bonds, “are disclosed and discussed at length in the funds’ public disclosures. OppenheimerFunds has contacted the secretary’s office and is cooperating fully with its inquiry.”

The two other firms, UBS and Fidelity, declined to comment on the secretary’s inquiries.

Perhaps in response to the bond prices’ weakness, on Wednesday the Government Development Bank of Puerto Rico saidit would host an investor webcast at 2 p.m. Tuesday. “Puerto Rico continues to take significant steps to strengthen our fiscal situation and spur economic growth and we look forward to updating the financial community on these measures, as well as recent tax revenues, our liquidity position, and our financing plans through the end of the year,” Pagán Beauchamp said.

H. J. Sims senior credit analyst Richard Larkin said recent financial news and general media coverage of Puerto Rico has been filled with “bombast.” What has been lost is that Puerto Rico’s first quarter revenue collections were just 0.4% below projections, he said.

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