Puerto Rico to Sell Notes with 7.75% Coupon

Puerto Rico tax and revenue anticipation notes will carry a 7.75% coupon, more than double the coupon on similar notes it has sold in past years to meet short term spending needs.

Puerto Rico's Government Development Bank announced the information on the notes, which will mature on June 30, 2015, on the Municipal Securities Rulemaking Board's Electronic Municipal Market Access web site Monday.

Puerto Rico has said that it planned to sell about $900 million in notes. The commonwealth typically sells notes at the start of the fiscal year with a maturity at the end. The government does this because its spending needs are fairly steady in the fiscal year, whereas most of its revenue comes in late in the fiscal year.

JPMorgan will be the underwriter for the deal, a spokesman for the Government Development Bank for Puerto Rico said.

If Puerto Rico pays 7.75% it would be 762 basis points more than Municipal Market Data said was typical for a one year maturity of AAA general obligation debt sold Monday. The commonwealth doesn't plan a general obligation pledge on the debt.

Puerto Rico's House of Representatives passed a bill last month that would allow disputes about the note to be heard in courts in New York City. It states that Puerto Rico would waive immunity from suits concerning the TRANS.

The bill would also set up a special fund to receive monies dedicated to repaying the notes. A third party trustee would oversee the fund.

The Puerto Rico Senate hasn't yet passed the bill. The senate is not in session this week but will come back in session on Monday. Puerto Rico chairman of the House Treasury and Budget Committee Rafael "Tatito" Hernández Montañez said he expected the Senate will pass the bill when it returns.

The El Vocero web site posted a report Sept. 22 that quoted GDB Chairman David Chafey supporting the bill.

Hernández Montañez said he expected anyone to be able to purchase the notes.

Over the last seven years Puerto Rico's TRANS sales have varied in size, according to Thomson Reuters data. It sold a $1.01 billion TRANS on Oct. 18, 2007 with a 3.4% yield to maturity and a 4.25% coupon. It sold an $888 million TRANS on Nov. 7, 2008 with a 1.65% yield to maturity and a 3% coupon. Both TRANS matured on June 30 the following year, as the anticipated TRANS is expected to do.

Puerto Rico did not sell any TRANS in 2009, 2010, 2011, or 2012, according to Thomson Reuters data, though a spokesman for the GDB said he believed there had been short term financings in the period. In September 2013 Puerto Rico sold a $125 million TRANS with a maturity on June 30.

NewOak managing director Triet Nguyen said he thought a 7.75% interest rate would make the notes attractive to investors, given that they will be sold with New York court jurisdiction and the money being held in a separate account. They would be a good deal compared to the roughly 9% per year being offered for holding March's general obligation bonds for about 20 years, he said.

Nguyen said that a recent increase in Puerto Rico GO bond yields on the secondary market may be because people were making room to buy some of the notes.

The Puerto Rico GO issued in March is trading at about 644 basis points above the AAA. Municipal Market Data senior municipal strategist Dan Berger said the spread between the GOs and the notes shows that "the market perceives that there's much more risk in the short run than in the long run … and that should be no surprise to anyone."

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