In the largest municipal bond sale thus far in 2012, Puerto Rico sold $2.3 billion of its public improvement refunding bonds, upsized from an expected $1.5 billion priced ahead of schedule.
Barclays Capital priced the debt for retail investors Tuesday, and due to high demand, accelerated the institutional pricing a day, which was initially scheduled for Wednesday.
Orders for the bonds, attractive due to their tax-exempt status at the federal, state,and local level for all U.S. investors, exceeded $3 billion on Tuesday. In a concurrent $415 million offering to local investors in Puerto Rico, bonds were also oversubscribed. Underwriters for the local bond offering were led by UBS FS Puerto Rico. Greenberg Traurig LLP served as bond counsel for both offerings.
José R. Otero-Freiría, vice president for financing at the Government Development Bank for Puerto Rico, said he is very happy with results for both the U.S. and the local transaction. The GDB is Puerto Rico’s financing arm.
“We have come to market in the past and have had very good response from investors, so we were hoping to get the same response,” Otero said.
Last month, the Puerto Rico Aqueduct and Sewer Authority upsized its $1 billion offering of revenue bonds to $1.8 billion.
Tuesday’s deal, in addition to being the year’s largest, ranks number five among largest bond sales since the start of 2011.
Yields ranged from 4.00% with 4% and 5% coupons in 2020 to 5.32% with a 5% coupon in 2041. The bonds are callable at par in 2022, except those maturing in 2026, which are callable in 2018. Prices were bumped two to three basis points from preliminary pricing.
The high demand comes as investors are searching for higher yields in today’s low-rate climate, looking farther down the credit scale to find yield. Bonds from Tuesday’s sale maturing in 2041 were priced nearly 200 basis points over Municipal Market Data’s triple-A benchmark.
At Baa1 by Moody’s Investors Service, BBB by Standard & Poor’s and BBB-plus by Fitch Ratings, the bonds have some of the lowest credit ratings among municipal bond offerings in the past few weeks.
As basis for the ratings, both Moody’s and Fitch cite low pension funding, a high debt level and economic recession, although Fitch says there are signs the economy is beginning to stabilize.
A recent report from the GDB says the commonwealth’s activity has shown its first positive growth since March 2006.
While this is a good sign, it has no immediate effect on Puerto Rico’s rating, said Karen Krop, an analyst at Fitch.
Puerto Rico’s economic ties to the U.S. economy were listed among its strengths in both reports.
The public improvement bonds are general obligations of Puerto Rico, backed by a full faith-and-credit pledge.
Proceeds from the bonds will be used for debt-service restructuring and relief, to refund previous general obligation bonds and to pay capitalized interest on debt. Otero said Puerto Rico saved around $25 million in interest rates from the refunding piece of the transaction.