Puerto Rico bond spreads widened in secondary trading on Wednesday amid concern over the restructuring plans of the island's power authority and the possibility of heightened competition for tourists as U.S. normalizes relations with Cuba. Prices of high-quality municipal bonds were weaker, according to Municipal Market Data.
In the quiet primary sector, two issues from Massachusetts sold in the competitive market as dealers worked through their inventory of the week's new supply.
Puerto Rico Trading
The Puerto Rico Electric Power Authority said on Tuesday it is taking steps to improve bill collections and looking at possible rate changes. PREPA also has released a confidential preliminary five-year business plan to its forbearing bondholders. This news came after the commonwealth approved an oil tax increase to support the Government Development Bank for Puerto Rico and the Highway and Transportation Authority.
Data from the Municipal Securities Rulemaking Board show that Puerto Rico GOs were trading lower.
According to the MSRB's EMMA website, Puerto Rico GO 8s Series 2014A of 2035 traded eight times on Wednesday on volume of $14.05 million with a high/low price of 82.5/84.125 and a high/low yield of 9.811%/9.671% compared to trading on Tuesday 33 times on volume of $73.8 million with a high/low price of 85/83.75 and a high/low yield of 9.859%/9.697%. In contrast, on Monday the bonds traded 14 times on volume of about $19.12 million with a high/low price of 86.125/84.625 and a high/low yield of 9.745%/9.553%. The bonds were issued in March at an initial offering price of 93.0 with a yield of 8.727%, according to EMMA.
Looking at other recent market activity, PREPA power revenue bonds Series 2013A 7s of 2043 traded three times on Wednesday on volume of $3.29 million with a high/low price of 50.25/50 and a high/low yield of 14.283%/14.214%, according to EMMA. In contrast, on Monday the bonds traded one time on volume of $335,000 with a price of 50.01 and a yield of 14.279%. The bonds were issued in August 2013 at an initial offering price of 98.51 and yield of 7.12%.
Puerto Rico public improvement bond 5 1/2s of 2016 traded 11 times on Wednesday on volume of $320,000 with a high/low price of 104.58/104 and a high/low yield of 2.803%/2.422%, according to EMMA. In contrast, on Tuesday the bonds traded three times on volume of $70,000 with a high/low price of 104/102.777 and a high/low yield of 3.621%/2.815%. The bonds were issued in June 2001 at an initial offering price/yield of 107.332.
Spreads on Puerto Rico general obligation bonds have been widening in the past few weeks, according to Municipal Market Data.
"It should be noted that much of this news is focused on PREPA, not the commonwealth," said MMD Senior Market Strategist Daniel Berger. "That is because this obligor, which is embarking on a restructuring of its debt, is widely viewed as a candidate for default sometime in 2015."
MMD looked at the Puerto Rico GO 8s of 2035 and saw that spreads from the MMD triple-A scale widened on Tuesday to 719.9 basis points from 681.1 basis points on Dec. 3.
"We feel that in the foreseeable future spreads might widen even further," Berger said.
The commonwealth's problems were put very succinctly by Janney Capital Markets Managing Director Tom Kozlik. "What is the macro-problem with Puerto Rico? There is still too much debt and weak economic results have persisted," he said in a research note.
Meanwhile, market participants are eyeing the possible economic and credit effects that a possible easing of U.S. travel restrictions with Cuba will have on Puerto Rico tourism, after President Obama announced plans to loosen a trade and travel embargo
"Puerto Rico has been working hard to increase tourism," says Cate Long, Principal of the research firm Puerto Rico Clearinghouse. "As the U.S. normalizes relations with Cuba, Puerto Rico will face increased competition for U.S. tourists."
Secondary Market
High-grade municipal bonds weakened on Wednesday. The yield on the benchmark 10-year general obligation rose three basis points to 1.99% from 1.96% on Tuesday while the yield on 30-year GOs were up one basis point to 2.87% from 2.86%, according to the final read of Municipal Market Data's triple-A scale.
Treasury prices were lower as the two-year note yield rose to 0.59% from 0.56% on Tuesday. The 10-year yield rose to 2.12% from 2.07% while the 30-year rose to 2.74% from 2.69%.
The 10-year muni-to-Treasury ratio was calculated on Wednesday at 93.2% versus 94.9% on Tuesday; the 30-year muni to Treasury ratio was at 104.8%, compared with 106.0% on Tuesday.
MSRB: Previous Session's Activity
The Municipal Securities Rulemaking Board reported 39,555 trades on Tuesday on volume of $9.593 billion. Most active on Tuesday, based on the number of trades, were the California Statewide Community Development Authority's Loma Linda University Medical Center Series A revenue 5 1/4s of 2044, which traded 95 times with an average price of 109.58 and an average yield of 4.069%. The second most active were the New Jersey Transportation Trust Fund Authority transportation program bonds, Series AA 4 1/4s of 2044, which traded 94 times with an average price of 100.721 and an average yield of 4.147%.
Primary Market
In the competitive arena on Wednesday, Massachusetts sold $202.895 million of SIFMA-indexed general obligation refunding bonds in two separate sales of $58.435 million Series D and $144.46 million Series E bonds. The issue is rated Aa1 by Moody's Investors Service and AA-plus by Standard & Poor's and Fitch Ratings.
The Series D bonds were won by Citigroup Global Markets with a true interest cost of 0.1090%. The bonds were priced at par to yield the SIFMA rate. The Series E bonds were won by Wells Fargo Securities with a TIC of 0.2249%. The bonds were priced at par to yield 0.22% in 2017.
