Puerto Rico had plenty of fiscal problems on its plate already before the municipal market took a turn in late 2007 with monoline bond insurer credit rating downgrades, followed by auction-rate failures earlier this year, and an illiquid market after Lehman Brothers Holdings Inc. declared bankruptcy in mid-September.
The commonwealth was just getting back on its feet last year after a partial government shutdown in spring 2006 due to a history of budget imbalances and a political standoff between Gov. Anibal Acevedo Vila, a member of the Popular Democratic Party, and the Legislature, which is controlled by the New Progressive Party.
That impasse, along with the island's dependence on oil, a growing unemployment rate, now at 12%, and other fiscal challenges have held the island in recession for almost three years, longer than the current U.S. recession that began one year ago.
Against that backdrop, Jorge Irizarry has been at the center of dealing with Puerto Rico's economic difficulties and the effects of the credit crunch in the U.S. municipal market .
Irizarry joined the Government Development Bank for Puerto Rico, the island's fiscal adviser and financing agent, in April 2005 as the bank's executive vice president and financing director.
In that position he worked under GDB's former acting president Alfredo Salazar and structured the island's first-ever $4 billion sales tax bond deal as well as brought the island's water authority back to the municipal market after a 20-year hiatus with a $1.6 billion bond transaction in March, among other financings.
Since becoming GDB's president after Salazar's departure last December, Irizarry and his team have weathered the unexpected Wall Street shakeups and ushered the commonwealth out of the auction-rate market.
Luckily, Puerto Rico sold the sales tax bonds in July 2007 before the market troubles began, with $563 million of that deal maturing in 2057 yielding 4.90% on a 5.25% coupon. Yet after that transaction, municipal spreads widened.
"A 50-year bond yielding 4.90% was an extraordinary accomplishment, I think," Irizarry said. "It was something that was difficult to believe for Puerto Rico to achieve and we did it, but after that things started falling apart and the stock market year-on-year [dropped] as much as 47%. Muni spreads went through the roof and from spreads prior to that for Puerto Rico that had dipped under 50 basis points, the spread to [the Municipal Market Data]. Now we're looking at 180 basis points, 150 basis points, so the spread tripled or quadruped almost."
For example, on 29 June 2007 the yield on the MMD Puerto Rico general obligation yield curve scale in 30 years was 4.74% versus 4.44% on the triple-A GO scale. On Tuesday, the equivalent maturity on the Puerto Rico scale was yielding 7.91% with the GO scale at 5.71%, a spread of 220 basis points.
It's a volatile market that Irizarry's successor, Carlos Garcia, will need to maneuver through. Garcia, president of Banco Santander of Puerto Rico, and his team will inherit a planned tax receivable bond deal that the commonwealth has been working on to help fill a $2 billion deficit in the current budget. The tax receipts are delinquent tax receivables from prior years. The GDB has held off on pricing the transaction due to unfavorable market conditions.
"This administration is going to face very difficult market conditions, very high credit spreads, and limited access," Irizarry said. "There's no demand for a tax receivable deal right now - the market just isn't there."
Irizarry believes one of the best ways to help deal with the illiquid market is to maintain constant contact with bondholders, rating agencies, and the media, advice that he has already passed on to Garcia.
In addition, the island faces underperforming revenues, a large $2 billion shortfall, and, like all jurisdictions, fiscal measures that must move through a legislative body. That process has been somewhat contentious between the current PDP administration and the NPP legislature. Yet Governor-elect Luis Fortuño is a member of the NNP party.
"You have to maintain calm and be very deliberate in the way you address the fiscal challenges," Irizarry said. "And they have the advantage - the huge, enormous advantage - that the Legislature is on their side. So, they will be able to come up, hopefully, with some quick and clear solutions to get through the next couple of years of deficits because no one anticipates that we are going to have a surplus for awhile. So, they have a huge advantage in that and that should give everyone some confidence that the situation will be managed."
Other issues that Garcia and the incoming Fortuño administration will take over include whether to offer the island's lottery system in a public-private partnership or expand the system and leverage additional lottery revenue along with a potential P3 deal involving Route 22, the island's main east-west tollway.
In addition, the Acevedo Vila administration opted to sell $3 billion of taxable pension bonds in the local Puerto Rico market as the retirement system would have run out of funds in 2015 without additional support. The new administration must decide whether to move forward with additional pension bond sales, increase employer and employee contributions, or implement some other alternative to help keep the system afloat.
In response to NPP criticism of the pension bonds, Irizarry said the risk of issuing pension bonds outweighs the dangers of a bankrupt pension system that would have cost the central government and municipalities $1 billion in total pay-go contribution costs per year, starting in 2015.
Along with the large sales-tax transaction, the GDB did have other financing highlights. The island's water authority and electric companies now operate without subsidies from the central government after officials increased water and power rates to support bond deals.
The GDB was one of the first issuers in the U.S. to use floating-rate notes, which are tax-exempt bonds based off of the taxable, London Interbank Offered Rate, and the bank generated $450.8 million of net present-value savings for the commonwealth and various authorities by refinancing more than $10 billion of debt from fiscal 2005 through fiscal 2008, according to GDB documents.
In addition, Puerto Rico was one of the first issuers to bid on its own auction-rate securities, due in part to the commonwealth's ability to tap into GDB liquidity.
And the bank was successful in replacing Lehman Brothers Special Financing Inc. with RBC Capital Markets, Deutsche Bank, and Barclays Capital as counterparties on two swap agreements after Lehman Brothers declared bankruptcy in September.
"One of our virtues has been that we move very quickly and get things done in response to radically changing market conditions," Irizarry said. "We have the right team in place with our bankers, with our legal counsel, and with our management where we can be very effective, very quickly."
After nearly four years of working on Puerto Rico debt financings and running the GDB, Irizarry said he is ready for some time off before moving on to other endeavours.
"There are a number of different possibilities, which I will decide in January, because the first thing I'm going to do is take a month vacation," he said. "But then when I come back from that I will decide what I'm going to do. There's no rush. I need a break first of all and then I think there's some really interesting possibilities in a wide variety of things."
