Puerto Rico officials are looking to sell on Nov. 23 up to $350 million of tax-exempt general obligation bonds that will restructure debt and refinance variable-rate bonds.

The transaction comes as Moody’s Investors Service Tuesday revised its outlook to negative from stable on $1.38 billion of Puerto Rico Aqueduct and Sewer Authority senior-lien debt.

The Government Development Bank for Puerto Rico, the commonwealth’s fiscal agent, could issue the $350 million of GO public improvement refinancing debt as soon as next week, depending on market conditions and whether all the documentation is completed, said Fernando Batlle, executive vice president of financing and treasury at the GDB.

Batlle spoke with The Bond Buyer following a quarterly conference call that the GDB held yesterday with investors.

Gov. Luis Fortuño participated in the call, thanking investors for their support of Puerto Rico and pledging to restore fiscal stability.

The current plan is for Morgan Stanley to price the refinancing debt on Nov. 23 after holding a one-day retail order period. Barclays Capital is co-senior manager on the deal.

“Part of the transaction has a number that’s related to refunding opportunities,” Batlle said. “So we like the market and we have a full calendar ahead of us in terms of transactions, so we want to go out there as soon as possible.”

The refinancing transaction will include $250 million for a restructuring that will lower debt-service costs in the near term and another $100 million that will refinance variable-rate debt into fixed-rate as the bank liquidity facilities will expire on the floating-rate debt. The sale will help finance the termination of swaps attached to the variable-rate bonds. Batlle declined to give an approximate swap-termination cost.

Officials are also looking to tap into the taxable Build America Bond program before its set expiration on Dec. 31. The Puerto Rico Electric Power Authority may issue taxable BABs before the end of 2010.

“We’re running the numbers, seeing how much we can raise, and making sure we qualify the [capital improvement plan] for the BAB program,” Batlle said. “We’re working through all that as we speak.”

The potential PREPA deal would be the only BAB deal for the commonwealth for the remainder of 2010, and the BAB program will expire unless Congress extends it.

With BABs, issuers gain a 35% subsidy on interest costs from the federal government.

Other upcoming debt sales include a Puerto Rico Public Buildings Authority debt restructuring for up to $140 million and $750 million of taxable qualified school construction bonds that officials will sell in the local market. The PBA refinancing and the QSCBs are set to price in early 2011, Batlle said.

In changing  its outlook for PRASA, Moody’s cited the authority’s dependence on the central government and its leakage problems.

About 63% of PRASA’s water service does not generate revenue because of leaks and-or faulty metering, up from 62% in 2008, according to Moody’s. It rates PRASA’s senior-lien bonds Baa1.

“The negative outlook reflects PRASA’s continued reliance on GDB and the commonwealth for financial support, as well as the operational challenges the authority faces to reduce the significant amount of water lost through the system,” a Moody’s report said.

PRASA has more than $3.6 billion of outstanding debt. Standard & Poor’s and Fitch Ratings rate the senior-lien credit BBB-minus and BBB, respectively, both with a stable outlook.

The GDB’s investor conference call detailed the commonwealth’s tax-reform initiatives.

Puerto Rico’s Legislature Monday evening passed two tax measures that reduce 2010 individual and corporate taxes. The Fortuño administration will file tax cuts for future years and tax reform initiatives in the coming weeks, said GDB president Carlos Garcia.

The GDB estimates tax benefits to individuals and businesses will cost a combined $3.02 billion in 2010, 2011, and 2012. Officials anticipate that a temporary excise tax that lawmakers passed last month and the elimination of subsidies and certain tax credits will bring in $3.3 billion of revenue during that time to offset tax reform costs and actually make the program a net-positive.

Standard & Poor’s analyst Horacio Aldrete said that while the rating agency will monitor the results of the tax reform plan, the commonwealth has worked towards structurally balanced budgets. The Fortuño administration reduced Puerto Rico’s deficit to $1 billion in fiscal 2011 from $3 billion in fiscal 2009, mainly through spending reductions, reducing the government payroll by 17%, and increasing certain taxes.

“I think from a policy standpoint, they are doing what they can to balance their budgets and address what has proven to be an extremely challenging economic environment,” Aldrete said in a telephone interview. “So from a budget management standpoint, we believe the credit is headed in the right direction. The challenges are very significant, but they’re proactively tackling the issues that they have in front of them.”

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