The Puerto Rico Electric Power Authority will kick off its $2.2 billion revenue bond sale today, with roughly $1.51 billion generating refunding savings and the remaining new-money portion potentially helping the island reduce its fuel dependency by 23% over the next two years.
JPMorgan will offer a one-day retail order today before institutional sales begin tomorrow. The Government Development Bank for Puerto Rico is the financial adviser and Squire, Sanders & Dempsey LLP is bond counsel. CIFG Assurance NA, Financial Security Assurance Inc., and MBIA Insurance Corp. will insure most of the debt.
Fitch Ratings and Moody’s Investors Service rate the transaction A-minus and A3, respectively. Standard & Poor’s assigns its BBB-plus rating to the sale. PREPA has about $5 billion of outstanding debt, according to the authority executive director Jorge Rodriguez.
Not only will this be PREPA’s first bond offering since March of 2005, it will be the authority’s largest bond transaction to date.
“This is basically the biggest bond sale in the history of PREPA,” Rodriguez said.
Series UU for $1.51 billion will generate a net present-value savings of at least 5%, the commonwealth’s savings threshold on refunding transactions. The new-money, Series TT for $665 million will help finance infrastructure improvements, including new pipelines and upgrades to plants, that PREPA anticipates will help the authority decrease its dependency on oil, Rodriguez said. Capacity improvements will also help the authority gain 600 to 700 megawatts.
The deal will also include a newer derivative product where roughly $500 million of bonds from both the refunding and new-money portions will be priced based on 67% of the three-month London Inter-Bank Offered Rate, with the remaining amount pricing at a fixed rate. The structure is new to PREPA, but the GDB also used the product in a $2.18 billion bond sale for the Puerto Rico Highway and Transportation Authority, which priced on Feb. 15. In the PRHTA sale, about $400 million was priced using Libor, and gave the authority a much better rate, according to Jorge Irizarry, the GDB’s executive vice president and financing director.
“We did two things, we did [consumer-price index] bonds and those saved us 10 basis points and we did the floating-rate notes and those saved us 15 basis points, compared to what a fixed-rate bond of similar maturity would have cost us and we swapped both into a fixed rate,” Irizarry said. “So, it’s a synthetic fixed rate but it ends up being 15 basis points more efficient than a fixed-rate bond.”
PREPA has seven plants serving about 1.5 million electric customers that include a diverse revenue base consisting of 35% residential customers, 45% commercial clients, and 18% industrial customers, according to a Standard & Poor’s press release.
