Puerto Rico officials are working on addressing nearly $600 million of auction-rate debt that will go up for auction within the next two weeks, with the Government Development Bank for Puerto Rico considering converting the bonds into variable-rate or fixed-rate debt.
The island has already felt the shakiness of the auction-rate market as $63 million of auction-rate general obligation debt failed on Tuesday and reset at 12%, the interest rate ceiling. Goldman, Sachs & Co. ran the failed auction and the debt is insured by CIFG Assurance North America Inc. The following day, $50 million of GO debt reset at 10.8% in a Lehman Brothers auction with bonds insured by Financial Guaranty Insurance Co.
GDB president Jorge Irizarry said he and his staff are looking into gaining letters of credit in order to convert "very quickly" the auction-rate bonds into variable mode or refund the debt into fixed-rate without insurance.
"We're already considering the alternative which is to refund them and turn them into fixed rate, that's one of the alternatives that we're talking about," he said.
Irizarry yesterday spoke before an audience of more than 200 muni bankers, lawyers, and analysts at a Municipal Forum of New York event about Puerto Rico's overall fiscal health and recent news regarding the island's sales tax. Afterwards, he addressed questions from the media regarding the recent upset in the auction-rate market.
"I think the market is obviously in a very jittery state," Irizarry said. "I think we'll get past that. We don't think it's going to [improve] in the next couple of weeks, but we can handle for a proven amount of time until we restructure that debt."
Mostly GO bonds and Puerto Rico Highways and Transportation Authority bonds comprise the government's $600 million of auction-rate debt. The commonwealth has $8.1 billion of outstanding GO debt and outstanding PRHTA debt totals roughly $6.2 billion.
While GDB officials address the island's auction-rate exposure, the commonwealth is also gearing up for a $3 billion taxable pension bond deal set to price on Feb. 26 or 27 with Merrill Lynch & Co. as lead book-runner.
The GDB travelled to Dublin and Boston to reach out to investors. While European banks are big buyers of taxable municipal bonds and pension debt, Irizarry said many foreign banks may not have the needed cash to participate as strongly in the sale as they normally would.
"I think most of it will price in the U.S. because a lot of the European banks have limitations right now," he said. "They have liquidity problems."
The $3 billion of bonds will carry 50-year maturities and comprise serial, term, and capital appreciation bonds. Merrill will lead both the U.S. syndicate of 22 banks and the international syndicate of 16 banks. Insurance for all or a portion of the bonds has yet to be determined.
The deal carries a Baa3 municipal rating and a A1 global scale rating from Moody's Investors Service. Fitch Ratings and Standard & Poor's assign the bonds a BBB-minus municipal rating.
During his speech, Irizarry mentioned Gov. Anibal Acevedo Vila's recent proposal to decrease the island's sales tax by 4.5% to help spark the island's economy and replace the revenue stream with a revamped excise tax. A 1% of dedicated sales tax revenue backs $2.6 billion of Puerto Rico Sales Tax Corp. bonds. The plan does not touch the 1% dedication, yet bondholders are watching whether the proposal takes affect.
While the municipal community is concerned about the proposal and other activities in the market, Irizarry gained a big laugh from the audience when he joked that Acevedo Vila's sales-tax announcement was a ploy to draw more people away from their offices and to yesterday's luncheon.
"With everything going on in the market, auction fails, the monolines on credit watch and the wide spread credit losses on subprime and other factors, we didn't think we could draw much attention," Irizarry said. "So then we said, 'Well, maybe the governor should say something that would attract some attention from the market?' So apparently it worked, because we have a big crowd." q