Puerto Rico’s Upcoming Sale Snags Ratings

Puerto Rico’s upcoming $3.6 billion sales tax revenue deal, the island’s largest bond sale to date, yesterday snagged credit ratings higher than the commonwealth from rating agencies. Moody’s Investors Service assigned a A1 rating to Puerto Rico’s first ever sales tax revenue transaction. Fitch Ratings and Standard & Poor’s each rate the sale A-plus. All three give the deal a stable outlook.Standard & Poor’s downgraded Puerto Rico’s $8.16 billion of general obligation debt to BBB-minus from BBB last month and changed the credit’s outlook to stable from negative. Moody’s rates the island Baa3 with a negative outlook. Fitch does not rate the commonwealth.A new independent government agency, the Puerto Rico Sales Tax Financing Corp., will issue the bonds. Current plans call for $2.6 billion of Series 2007A tax-exempt debt and $1 billion of Series 2007B taxable debt, according to the preliminary official statements.Co-lead managers Goldman, Sachs & Co. and Lehman Brothers will price the transaction the week of July 9. Hawkins, Delafield & Wood LLP is bond counsel. Insurance will be offered.Analysts say the ratings reflect the security of the deal, with the commonwealth pledging the first cent of its 5.5% sales tax toward the dedicated sales tax fund before the general fund receives the remaining portion. The fund will receive a minimum of $185 million of revenue, regardless of how the sales tax performs, to cover debt service costs, with that floor increasing by 4% annually. That minimum amount will supply debt service coverage of five times.“As the base amount is set at approximately one-fifth of the expected sales tax collection for fiscal 2008, this provides over five times coverage in the first year,” according to a Moody’s statement.In addition, the government will not be able to tap into the sales tax revenue stream to cover general obligation debt, called a claw-back feature, as is the case with hotel tax and petroleum tax revenues that back bonds sold to finance Puerto Rico’s convention center and highway projects, respectively.“The legal structure is as solid as it can be meaning that it does separate the revenues securing the bonds from the commonwealth’s claw back and the general fund,” Standard & Poor’s analyst Horacio Aldrete said.Officials anticipate that the sales tax fund will receive at least $203 million of revenues in fiscal 2008. In the current fiscal year, the fund has collected $95.2 million of sales tax revenue from mid-November through the end of April.Challenges to the credit include the deal’s long maturity structure, with bonds extending out over 50 years, and the short time frame the commonwealth has had to evaluate its sales tax performance.“One of the reasons why the rating is not higher than A-plus is that there is a short track record of sales tax collections, so there is not the historical track record of seeing how the sales tax collections perform during the different parts of the economic cycle,” Aldrete said. “So that is a limitation, but having said that, the structure is such that even if sales tax collections were performing at the level that they’ve been performing at for the past five months and never increased, the debt service coverage on these sales tax bonds would still be sufficient to pay debt service.”The transaction will help refund a portion of the commonwealth’s $7.1 billion of extra constitutional debt, or appropriation debt, made up of $4.2 billion of Public Finance Corp. debt and another $2.8 billion of debt the commonwealth owes to its fiscal adviser, the Government Development Bank for Puerto Rico.