The Puerto Rico Sales Tax Financing Corp. plans to sell $3 billion to $4 billion of sales tax bonds in May in the U.S. and local market, potentially including Build America Bonds.
Puerto Rico officials boosted the total borrowing size to up to $4 billion from $500 million after learning that both markets will have the capacity to take on larger sales tax deals.
The sales tax transaction will follow the release of the commonwealth’s first-ever multi-year budget proposal that will include fiscal 2010 through fiscal 2013. Gov. Luis Fortuño will submit his four-year budget plan to the Legislature on April 29.
Carlos Garcia, president of the Government Development Bank for Puerto Rico, the commonwealth’s financing arm, yesterday announced the bigger deal size during a Municipal Forum of New York event in midtown Manhattan. The new sales-tax bonds will be subordinate to Puerto Rico’s existing $5.2 billion of sales tax debt, known as COFINA bonds under its Spanish acronym.
While officials will utilize both the U.S. and the local market in Puerto Rico to sell the bonds, Garcia said his team is still working on how they will split the nearly $4 billion of debt between the two marketplaces. The GDB’s strategy is to play the two markets off of each other to get the best yields.
“We’re finalizing the tax analysis to see how many of the bonds can qualify for the [tax-exempt] market, so it’s pending that final analysis,” Garcia told reporters after his presentation. “It’s going to depend on the depth of each market and we’re hearing from both markets that there may be more appetite than what we thought before. So that is encouraging, but we will also take a look at the comparable yield cost of each market so we’re going to be sure that we make both markets compete with each other.”
The upcoming COFINA deal may include BABs, as officials are reviewing whether those taxable bonds are cost effective for the commonwealth.
“As part of the COFINA, were also analyzing whether we could use a part of the COFINA with the Build America Bonds ... We’re looking at that program in a lot of detail,” Garcia said.
The GDB will meet with rating agencies in early May regarding the new subordinate transaction, followed by an investor road show to spark interest in the bonds.
In addition to the sales tax transaction, the GDB and administration officials are working on a budget proposal for fiscal 2010, which begins July 1, and will include spending plans for three additional fiscal years.
The administration plans to reduce recurring expenses below the current $9.48 billion budget, but the fiscal 2010 budget will include temporary spending measures. For instance, officials implemented a $1 billion employee-reduction program to encourage voluntary workforce reduction and offer job training to boost economic activity and help Puerto Rico emerge from a three-year recession.
“You have to account that there will be certain items that will be extraordinary in this budget, but the recurring budget will be lower than the current budget for sure,” Garcia said.
The GDB president stressed that a multi-year budget plan will help the commonwealth meet its goal of structurally balanced budgets by fiscal 2013 and offer projected results of current spending strategies.
“This will be the first multi-year budget that the government of Puerto Rico does,” he said. “And we want to be sure that on the fiscal responsibility side, that the decisions that we’re taking for this fiscal year are decisions that we can measure its effects for in the next three fiscal years.”
Earlier this month, Garcia met with federal officials to discuss potential loans that the GDB is seeking from the Federal Reserve and the Troubled Asset Relief Program. The GDB is looking for a total $5 billion in loans for private sector development funding.
“I am very hopeful and I think our case is very strong,” Garcia said. “We have used all the resources available to Puerto Rico to be sure that we deal with the fiscal situation. We are fortunate to have the federal stimulus plan, but the federal stimulus plan only does so much and only for a short period of time. And if we want to be sure that we provide for economic development on a long-term basis, we need to be sure that we obtain additional funds to do that.”