The Puerto Rico Sales Tax Financing Corp. on Wednesday will sell $3.5 billion - or perhaps more - of subordinate sales-tax bonds against an investor landscape that has changed since the agency made its debut in the market with a sale of senior bonds in 2007.

The deal comes as Gov. Luis Fortuño today is set to sign into law a public-private partnership bill that will provide a framework for private-sector investment in public works projects throughout Puerto Rico. The governor filed the initiative earlier this year. It is one component of the administration's plan to restore fiscal stability to the island's finances.

The Government Development Bank for Puerto Rico, the commonwealth's fiscal agent, will offer a two-day retail order period for the sales tax bonds. Officials anticipate a larger appetite from individual investors than two years ago when the senior bonds priced, according to Fernando Batlle, the GDB's executive vice president for financing and treasury.

"Back then, the retail market was not as active as it is today," Batlle said. "In Puerto Rico, yes, that part of the deal that was sold in Puerto Rico always had active retail participation, which we will have again for this deal. But in the U.S., the market has changed over the last year and retail has become a more important player in this market."

The GDB will hold an investor conference call on the subordinate deal at 2 p.m. today, Batlle said.

Citi is book-runner on the transaction that some market participants believe may reach $4 billion in size or even larger, depending on market conditions. Barclays Capital is co-senior manager. Hawkins Delafield & Wood LLP is bond counsel.

Standard & Poor's and Fitch Ratings respectively assigned their A-plus and A ratings to the deal. Moody's Investors Service rates the subordinate bonds A2.

Series 2009A include current interest bonds with serial maturities from 2014 to 2020 and term bonds in 2024, 2039, 2042 and 2044, according to the preliminary official statement. The deal will also contain capital appreciation bonds with serial maturities ranging from 2021 to 2036 and convertible capital appreciation bonds that mature from 2017 through 2022, with an additional maturity in 2040. The GDB has yet to select when the convertible CABs will switch to current interest bonds.

Puerto Rico's sales tax bonds are called COFINA bonds, an acronym based on the Spanish name for the corporation, with the $5.2 billion of outstanding senior debt designated as COFINAI and the subordinate bonds called COFINAII.

Lawmakers implemented the sales tax in November 2006 to generate more revenue for the government, which has been operating on structurally imbalanced budgets. In July 2007, the corporation sold $2.66 billion of sales tax bonds in the U.S. market, the first-ever sales tax issue for the island.

The credit carries higher credit ratings than the commonwealth itself, which Moody's and Standard & Poor's rate Baa3 and BBB-minus, respectively, just above junk status. The double-A rated financing corporation allows the government to access the market with a higher-rated credit.

Batlle said the GDB does not anticipate issuing general obligation debt in fiscal 2010.

The sales tax credit recently entered the double-A rating category after Moody's last month boosted the senior debt to Aa3 from A1 and Standard & Poor's raised its rating to AA-minus from A-plus.

With a nearly15% unemployment rate and a $3.2 billion deficit, Puerto Rico's economy has its challenges. Lawmakers earlier this year approved fiscal reform legislation to reduce the government's payroll and increased the financing corporation's sales tax dedication to 2.75 cents from one cent.

Along with the anticipated strong retail demand, officials expect to see traditional institutional buyers grabbing the long end of the deal. While investment firms like Eaton Vance and Oppenheimer hold the COFINAI bonds, insurance companies such as Continental Casualty and Metropolitan Life absorbed a large portion of that deal.

Batlle believes the insurance companies may not be as active in the upcoming subordinate deal, but he said the GDB expects enough appetite from traditional institutional investors.

"We are anticipating similar types of investors," Batlle said. "We've been talking to a lot of the bond funds and they all are expressing interest in the transaction and they like the structure and it's a solid structure. On the insurance company side, some of [them] are going through problems so some of them might not be players, but so far we've received very strong indications of interest from the institutional investor base."

Investors said Puerto Rico's sales tax history and projected revenue growth are key factors in analyzing the credit. The fact that the COFINAI bonds have first claim to sales tax revenue is also a consideration.

"It's got to be priced to make sense given that it's a subordinate lien, but we're certainly going to look at it," said Bob MacIntosh, vice president and co-director of Eaton Vance's municipal bond group.

Buyers said the shorter maturity schedule is also a plus for the deal. While the senior COFINAI bonds go out to 2057, the longest maturity on the subordinate bonds is set for 2044, according to the POS.

While Puerto Rico's sales tax collections have dipped, the revenue stream has not declined as dramatically as other jurisdictions, according to rating analysts at Standard & Poor's and Moody's.

The island generated $715 million of sales tax revenue from July through April, $40 million less than the $755 million collected during the same period in fiscal 2008, according to the Department of Treasury.

Of the island's seven-cent sales tax, the corporation receives a 2.5-cent dedication that officials anticipate will bring in $550 million in fiscal 2010, which begins July 1. The GDB projects that $550 million to grow annually by 4%, with a maximum amount of $1.85 billion to be reached in 2041, according to the POS.

That 4% calculation would generate a combined senior and subordinate debt service coverage ranging from 2.12 times in 2010 to 3.98 times in 2057, according to the POS. A lower 1.51% growth rate would generate lower combined debt service coverage in the later years, with coverage ranging from 2.12 times in 2010, dropping to 1 times in 2041 - the lowest year - and finishing in 2057 with 1.27 times.

Some buyers said the 4% growth rate prediction may be optimistic, but say lower levels would still offer acceptable coverage.

"I think it's probably on the high side," said Tom Spalding, senior investment officer at Nuveen Investments. "We ran our stress tests at lower growth levels and still coverage is adequate."

He pointed to the reduction of government employees and spending cuts as positive factors in evaluating the subordinate deal overall.

"Some of the other fiscal measures that are taking place in the commonwealth give us a little more optimism than we've had in Puerto Rico for awhile," Spalding said.

Proceeds of the subordinate deal will help finance operating expenses in the fiscal 2009 and 2010 budgets, as well as support the commonwealth's $500 million local stimulus package. The corporation has already borrowed $600 million from the GDB and $500 million in a private loan from First Bank to help support the commonwealth's cash flows. Batlle said bond proceeds could repay a portion of those debts or the entire $1.1 billion.

"Proceeds will be used to either partially pay that down, fully pay it down, or we have the flexibility to pay it down further down the road," he said.

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