Puerto Rico Ready to GO

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Puerto Rico this week will issue $85 million of general obligation refunding bonds that will restructure debt to help lower debt-service costs in the current fiscal year.

The deal comes as the commonwealth is gearing up to address more than $1 billion in letters of credit and standby bond purchase agreements that will terminate this year and next.

Barclays Capital will begin retail pricing on Tuesday, followed by institutional pricing on Wednesday. Greenberg Traurig LLP is bond counsel.

The Series 2011A public improvement GO refunding bonds will reduce the commonwealth’s debt-service payment this year by about $85 million by pushing out those costs into future years.

Officials are also watching the market to issue another $350 million of public improvement GO refunding bonds originally set to price in late November. The Government Development Bank for Puerto Rico, the commonwealth’s fiscal agent, postponed that refinancing due to unfavorable market conditions. Morgan Stanley is the book-runner on that transaction.

That deal would include $250 million to restructure outstanding bonds and lower fiscal 2011 debt-service costs. Another $100 million would refinance variable-rate debt into fixed-rate mode to help address liquidity facilities that will be expiring this year. The government may opt to terminate derivatives attached to those floating-rate bonds as well.

Puerto Rico will have $473.9 million of liquidity facilities that will expire in 2011, including $273.9 million supporting GO debt and $200 million enhancing Puerto Rico Highways and Transportation Authority bonds, according to the preliminary official statement for the Series 2011A bonds. Another $591.9 million of liquidity facilities attached to GO debt will terminate in 2012.

Puerto Rico has nearly $9.2 billion of outstanding GO debt, as of Sept. 30, 2010, according to the POS. It’s total general fund related debt is $20.68 billion. Fitch Ratings assigns a BBB-plus to the credit. The outlook is stable. Standard & Poor’s rates the commonwealth BBB-minus with a positive outlook. Moody’s Investors Service rates it A3 with a ­negative outlook.

The government will seek to address the upcoming terminations by replacing or renewing those liquidity facilities or by refinancing some variable-rate bonds into fixed-rate mode. Fernando Batlle, executive vice president of financing and treasury at the GDB, said that while some liquidity facility replacements are too expensive for Puerto Rico, the commonwealth does have “ample access” to different credit enhancements.

“You have a little bit of everything. You have some proposals that are not the most favorable, but overall I think there are proposals that are attractive,” Batlle said. “Are they as attractive as they were three years ago or four years ago? I think the answer is no, but there’s been a dramatic change in the market.”

For the past two years, the GDB has been monitoring the commonwealth’s debt and derivatives portfolio to find a balance between the benefits of variable-rate debt, which often provides lower interest rates than fixed-rate bonds, and the risks of swaps and rollover of liquidity facilities that come with floating-rate bonds.

Puerto Rico and its public corporations have a combined $7.12 billion of notional swaps outstanding, with a negative mark-to-market value of $706.7 million, as of Dec. 31. That’s down from about $9 billion of swaps it had outstanding two years ago, Batlle said. Derivatives attached to GO debt total $3.23 billion in notional amount, with a negative mark-to-market value of $281.5 million, as of Dec. 31.

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