Puerto Rico officials have reduced an upcoming Puerto Rico Municipal Finance Agency bond deal by nearly $200 million, while at the same time the commonwealth's incoming administration prepares to evaluate the island's fiscal challenges.

In addition Gov.-elect Luis Fortuño yesterday announced his nomination of Banco Santander of Puerto Rico president Carlos M. Garcia as president of the Government Development Bank for Puerto Rico, pending board approval. Garcia will replace current GDB president Jorge Irizarry once the new administration begins in early January.

Merrill Lynch & Co. will price the PRMFA deal within the next few weeks. Earlier plans called for a $400 million to $455 million new-money bond sale, yet the transaction's preliminary official statement indicates a $240 million offering. Ramirez & Co. and RBC Capital Markets are co-senior managers on the deal.

The POS calls for $117.4 million of serial bonds that will mature annually from 2009 through 2018, with larger principal payments during the first six years. The deal includes $122.6 million, in total, of term bonds that mature in 2023, 2028, and 2033.

The GDB issues the bonds on behalf of the agency, with property tax revenues securing the debt. Through the program, the GDB and commercial banks extend loans to municipalities for capital projects, with bond proceeds then paying down the bank loans.

Moody's Investors Service and Standard & Poor's assign the transaction the same credit ratings as the commonwealth - Baa3 and BBB-minus, respectively - because the municipalities do not carry their own credit ratings. In addition, the GDB manages the program, and property tax collections are collected and distributed within the central government. Fitch Ratings does not rate the PRMFA or Puerto Rico.

The government extends its moral obligation on the debt in the event that property taxes fail to meet debt service requirements. A 1.03% special property tax dedicated to pay down debt service costs has generated enough revenue to meet debt service payments.

The program collected $218.6 million revenue from that 1.03% tax in fiscal 2008, which ended June 30, up from $216.6 million and $204.3 million in fiscal 2007 and fiscal 2006, respectively, according to Standard & Poor's.

The fund can also dip into other property tax revenue streams and local aid payments that municipalities receive from the central government, but that has not occurred in PRMFA's 30-year history, according to Moody's.

Conversely, the rating agencies note that the island's property tax revenues and the program's access to commonwealth funds are vulnerable to the island's overall economy, which has been in a recession for nearly three years.

Puerto Rico must close a $1 billion deficit in its current fiscal 2009 budget and the island has an 11.7% unemployment rate, higher than the 6.5% national average. A transition committee is currently holding public hearings to help Fortuño and his incoming administration take over those challenges.

In addition to the transition committee, Fortuño this week created a 14-member fiscal advisory and economic reconstruction committee headed by Banco Popular chief executive officer Richard Carrion.

That team includes three former GDB presidents and business leaders. The special fiscal panel will offer policy recommendations that pertain to fiscal reconstruction, public-private partnerships, and economic sustainability and will release their initial findings before the end of the year, according to a Fortuño press release. The team will submit a final report in March.

"The economy is our number one priority and we want to move promptly," Fortuño said in the press release. "We all have to work together with great determination and leave behind bitter partisanship for a common cause: the revitalization of the economy of Puerto Rico."

Standard & Poor's analyst Horacio Aldrete said it was too soon to determine how the special fiscal team might help Puerto Rico's fiscal challenges.

"The containment of the growth in expenditures and the continued emphasis on growing the revenue base for the commonwealth - the extent to which the incoming administration can hit the ground running on those areas is definitely a credit positive," Aldrete said.

Along with the Garcia nomination to head the GDB, Fortuño yesterday announced key cabinet positions. Jose R. Perez-Riera, a vice president of public finance at Barclays Capital will become Secretary of Economic Development and Maria A. Sanchez Bras will head the Office of Management and Budget. Sanchez Bras currently serves as principal finance officer and vice president at Marsh Saldaña, Inc., an insurance brokerage firm.

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