Amid brisk trading of Puerto Rico debt in the secondary market, analysts have mixed feelings about the prospect of the commonwealth selling new debt this year.
While many say it is a necessary step toward helping to close the $3.4 billion budget deficit, it may be challenging from a timing and demand perspective.
It has been six months since the Puerto Rico Public Buildings Authority sold $150 million on Sept. 10. That deal refinanced variable-rate debt backed by MBIA Insurance Corp. into fixed-rate bonds, and its final maturity in 2028 carried a 6% coupon priced to yield 5.20%. That came at a time when the generic, triple-A general obligation bond scale in 2028 was yielding 4.30% uninsured and 4.72% insured, according to Municipal Market Data.
Matt Fabian, a managing director at Municipal Market Advisors, said Puerto Rico's acceptance in the new-issue market will depend on deal size, price, and type. "It's also better for them to focus on non-GO sources so as to protect outstanding GO valuations as much as possible," he said.
"There is likely some price at which they could sell bonds," Fabian added. "It may approach late 2007 levels, but they will likely be able to get something done."
When the building authority sold $745.2 million of revenue refunding bonds with triple-B ratings on Dec. 5, 2007, the 2037 final maturity with a 5% coupon was priced to yield 5.11% at a time when triple-A GOs due in 2037 were yielding 4.29% on MMD's generic scale.
Ron Fielding, a senior investment strategist at OppenheimerFunds Inc., believes it is critical for the commonwealth to move ahead with proposed issuance of sales tax-supported debt and cost-cutting measures in order to maintain its investment-grade ratings and avoid an overreliance on federal assistance.
He noted that under preliminary legislation, Puerto Rico could receive up to an estimated $5 billion from the federal stimulus package over the next two years, which should offset any new bonding, sales tax increases, and other revenue-generating measures put in place in the meantime.
A new sales tax-supported deal would provide near-term cash and help alleviate some investors' credit anxiety, but Peter Delahunt, institutional sales manager at Raymond James & Associates Inc., said a new sale could be challenging from a demand perspective.
"The demand limits should open up to the new credit; however, the institutional demand universe continues to be constrained as it has been severely reduced through the loss of most all of the [tender-option bond programs] and their associated leverage, along with the lower appetite from many of the larger property and casualty companies," he said.
The success of a new deal will depend on the credit structure, rating, and the potential insurability of the financing, Delahunt said. Puerto Rico debt has been active in the market this year. Year to date, there have been 57,762 trades of Puerto Rico paper, with a total par value of $8.453 billion, according to Municipal Securities Rulemaking Board data compiled by BondDesk.
Others, meanwhile, said a new deal would be risky, given the timing.
"This is not a great environment to be marketing or trying to sell lower-rated credits that are generally acknowledged as being on the weak side," said Chris Mier, a managing director and municipal strategist at Loop Capital Markets LLC.
