Puerto Rico next week will begin addressing the high interest rates it pays on more than $600 million of auction-rate securities as the commonwealth plans to buy its own auction-rate bonds in upcoming bids.

The island has $213.5 million of floating-rate public improvement refunding debt that will reset on April 9 and April 16 and that the Government Development Bank for Puerto Rico, the island's debt financing agent, anticipates bidding on to generate lower interest rates for the commonwealth.

"The GDB seeks to purchase all of the bonds in each of said auctions and it will submit its bid in an auction at one or more interest rates no lower than 2.75% or, if higher, the municipal swap index published by SIFMA on or immediately preceding the day of the particular auction to help avoid an auction result of a below market interest rate," according to a GDB notice of intent located on the DAC Bond Web site at www.dacbond.com.

Puerto Rico is joining a list of issuers who are buying their own outstanding auction-rate securities after the U.S. Treasury Department on March 25 announced that it would allow state and local governments to purchase their auction-rate debt on a temporary basis. That decision gives municipal issuers more options in their search to achieve lower interest rates on auction-rate securities, which skyrocketed in early to mid-February when broker-dealers failed to buy unsold auction-rate bonds, forcing issuers to pay a higher penalty interest rate. Historically, broker-dealers have purchased any remaining bonds to help balance the sale, yet many banks have had to scale back due to liquidity issues.

Besides purchasing their own auction-rate securities, issuers may opt to convert auction-rate debt into variable-rate bonds that carry a letter of credit, although obtaining a LOC has become a competitive process as banks over the past few weeks have been flooded with requests for qualifications to extend liquidity on such transactions. Another option is to refinance the auction-rate debt into fixed-rate bonds.

Attached to the auction-rate securities are floating-to-fixed-rate Libor swap agreements in which the GDB pays a fixed-interest rate to a counterparty and receives a payment based on the London Interbank Offered Rate index, according to the official statement for the bonds. Those documents do not detail the fixed rate that the GDB pays or the percentage of Libor it receives.

April 9 is the next auction date for Series 2004 B-1 and B-4 bonds for $51.6 million and $55.97 million, respectively, and Series 2007 A-8 for $50 million. The B-1, 35-day bonds currently carry an interest rate of 6.5%, its highest reset rate during the past few months, while the B-4, 7-day bonds reset at 5.5% on April 3. Interest on those securities reached as high as 12% on March 20. Lehman Brothers is the remarketing agent on the B-1 and B-4 securities, which are insured by Financial Security Assurance Inc.

The A-8, 7-day bonds carry a rate of 5.5% and reset as high as 11.72% on March 13. Lehman Brothers is also the remarketing agent for those securities and Assured Guaranty Corp. insures the debt.

The GDB also plans to bid on April 16 on $56 million of Series 2004 B-2 auction-rate bonds which reset every 35 days. Since March 13, the commonwealth has been paying a 12% interest rate on the securities, its highest rate during the past few months. Lehman Brothers is the remarketing agent for the B-2 bonds, which are insured by FSA.

Standard & Poor's and Moody's Investors Service rate the commonwealth BBB-minus and Baa3, respectively. Fitch Ratings does not rate Puerto Rico.


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