The Puerto Rico Sales Tax Financing Corp. is gearing up for a roughly $500 million sales tax deal set for mid-May, and recently named Citi as book-runner and Barclays Capital as co-senior manager on the transaction.

Market participants said the Government Development Bank for Puerto Rico, the island's financing arm, is looking to sell a combined $500 million of sales tax bonds in the U.S. and local market. The deal size could increase depending on market appetite, bankers said.

Co-managers include Bank of America-Merrill Lynch, JPMorgan, Goldman, Sachs & Co, and Morgan Stanley, along with seven banks in the deal's selling group, according to the GDB.

Officials are still working on the structure of the sale, including whether the new sales tax bonds will be subordinate to Puerto Rico's existing $5.2 billion of sales tax debt. The corporation's debt is known under its Spanish acronym as COFINA bonds.

Bankers pointed to two recent deals that may indicate healthy investor interest in municipals that could bode well for Puerto Rico's anticipated sales tax transaction. California sold $6.54 billion of general obligation debt on March 25, with yields ranging from 3.2% with a 3.2% coupon in 2013 to 6.1% with a 6% coupon in 2038. The state carries A ratings from Standard & Poor's and Fitch Ratings, and an A2 from Moody's Investors Service.

Fitch and Standard & Poor's rate the existing COFINA bonds A-plus. Moody's rates the credit A1.

In addition, the Long Island Power Authority, which carries credit ratings below COFINA, sold $435.8 million of revenue bonds on Jan. 15, with yields ranging from 2.98% with a 3% coupon in 2014 to 5.87% with a 5.75% coupon in 2039. Moody's rates LIPA A3 while Fitch and Standard & Poor's rate it A-minus.

To finance the new debt issuance, Puerto Rico lawmakers this year approved directing an additional 1.75 cents from the sales tax to the corporation. The fund will receive 2.75 cents from the island’s 7-cent sales tax beginning July 1. That increased allocation will allow up to $7 billion of COFINA borrowing over the next few years, according to a banker working on the upcoming transaction.

According to the GDB, the $5.2 billion of prior sales tax debt will continue to have debt service coverage of 5.5 times, even with a new ceiling that caps the revenue from the dedication at $1.85 billion annually.

Lawmakers designed the $1.85 billion limit to protect investors of general obligation bonds and other commonwealth-backed debt as sales tax revenue flows into the general fund after debt service costs on the COFINA bonds have been met.

The Sales Tax Financing Corp., by law, has the ability to use an additional 2.75 cents from the full seven-cent tax to help pay debt service if necessary.

The island generated $538.5 billion of sales tax receipts from July through February compared to $572.7 billion collected during the same period the year before, a drop of $34.1 billion, according to the Puerto Rico Treasury Department's Web site.

Market participants are eager to see what ratings the new sales tax bonds will garner. At the Puerto Rico Credit Conference in February, GDB president Carlos Garcia questioned COFINA's single-A rating in comparison to similar sales tax bonds in other jurisdictions that have lower debt service coverage but are rated higher.

Garcia said the Massachusetts Bay Transportation Authority sales tax bonds, which have two times coverage, and the Nassau County, N.Y., Interim Finance Authority sales tax debt, which has 4.5 times coverage, are rated AAA by Standard & Poor's and Fitch and Aa2 by Moody's.

If officials choose to designate Puerto Rico's new sales tax bonds as subordinate to the $5.2 billion of existing COFINA debt, the rating agencies would most likely rate the new sales-tax bonds a notch lower than the existing debt, as those bonds would then be senior bonds.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.