Puerto Rico Gov. Anibal Acevedo-Vila, along with key officials yesterday in Manhattan, courted potential business investors with his government’s commitment to borrow nearly $10 billion for capital works over the next five years, with the commonwealth’s water and electrical utilities and its highway authority leading the charge.
While the island offers federal tax exemption for local businesses, a highly educated, bilingual workforce and some of the most advanced infrastructure in the Caribbean, near- and long-term bond sales will help finance upgrades to highways, water systems, and increase electrical capacity, among other improvements, which the government anticipates will attract more commercial development, beyond the island’s beaches and sunny weather.
“We are stepping forward like never before — using our money more effectively to invest in the areas that will offer maximum returns, to our people, and also to the businesses which will employ them for decades to come,” Acevedo-Vila said to the crowd of more than 250 attendees at the First Summit for Doing Business in Puerto Rico, hosted by the Puerto Rico Chamber of Commerce and held at the Waldorf-Astoria.
Next month the Puerto Rico Electric Power Authority and the Puerto Rico Tourism Co. will enter the market with two offerings. PREPA will sell $1.2 billion, half of which will be new money for plant upgrades and the other half refunding previous debt, while PRTC will offer $120 million of tax-exempt bonds in the local market for hotel development and tourism initiatives.
Those sales will act as a precursor to what could be the commonwealth’s largest bond sale ever. Merrill Lynch & Co. may price the government’s roughly $6.3 billion to $9 billion taxable and tax-exempt transaction as early as May. The deal will help the commonwealth pay down its $9.9 billion unfunded pension liability by leveraging Puerto Rico’s future pension contributions, a plan that took the Government Development Bank for Puerto Rico, the government’s financial adviser, and Merrill Lynch some time to map out.
“It was very interactive. It took us about six months of going back and forth. They [Merrill Lynch] brought us an initial idea and we said, ‘Well, we don’t like that idea so much,’” Jorge Irizarry, the GDB’s executive vice president and financing director, said during a break from the speakers. “So this went through four or five deliberations since early summer and finally they came back and we said, ‘That’s the one we want,’ which was basically to securitize the employer contribution for the next 50 years. So it was back and forth and it evolved over time.”
The government also anticipates a $2.4 billion sales tax deal in May to help pay down nearly $6.8 billion the government owes the GDB, from when the commonwealth used to tap into GDB’s liquidity to fix budget shortfalls. The GDB can no longer write checks to the government when Puerto Rico’s well runs dry, a change that lawmakers and officials say is the beginning of fiscal discipline and responsibility for the island.
The $2.4 billion deal will be backed by 1% of Puerto Rico’s new 7% sales tax, which the government implemented in mid-November. Current plans call for at least $170 million of sales tax revenue annually, regardless of sales-tax performance, to cover debt service, with the minimum amount increasing by 4% annually.
Summer deals include the Puerto Rico Aqueduct and Sewer Authority selling $930 million of bonds in July and the commonwealth entering the market with $875 million of tax and revenue anticipation notes the following month.
Over the next five years, PRASA, PREPA, and the Puerto Rico Highways and Transportation Authority will sell roughly $6.8 billion in the capital market. PRASA’s capital spending will total $2.4 billion for water delivery expansion, constructing reservoirs, and refurbishing water-treatment plants, including $850 million towards improvements relating to Environmental Protection Agency compliance, according to Irizarry. PREPA expects to sell $2.2 billion of debt for expansion to generate more capacity and accommodate more natural gas facilities, including a new 40-mile pipeline that will transport natural gas along Puerto Rico’s southern coast.
“The government’s commitment to lowering costs and reducing oil usage on the island is clear, and we are throwing our full weight behind this effort,” Acevedo-Vila said.
Road extensions and improvements will receive $2.2 billion of funds through the PRHTA’s five-year capital plan, while the commonwealth expects to sell $2 billion over that same time period.
