What do you do with more than $50 billion of total debt and an $8.15 billion swap portfolio? Manage it.

That is the agenda of the Government Development Bank for Puerto Rico after the commonwealth's fiscal agent sold $5.3 billion of subordinate sales tax bonds in the U.S. and local markets in the past three weeks to help close the island's $2.5 billion fiscal 2010 deficit and support a $500 million local stimulus package.

Officials are now monitoring Puerto Rico's outstanding bonds in search of refinancing prospects for debt-service savings and to alleviate risk. Such refinancing is expected to help balance the $7.6 billion fiscal 2010 budget by reducing debt-service payments though debt restructuring.

Transactions may include refunding for present-value savings and extending principal and interest payments to lighten the government's debt-service costs in the near term, according to Fernando Batlle, GDB's executive vice president for financing and treasury. The commonwealth does not anticipate issuing a new-money general obligation deal in fiscal 2010.

"As we look at our portfolio of debt, there are certain opportunities to realize present-value savings and we're looking at everything we can to achieve that," Batlle said. "And there's also, [as] part of the fiscal year 2010 budget, a portion of this which is stretching out [debt service]. So, there's a little bit of both. Again, when you have the portfolio debt that the commonwealth has, you have to continuously evaluate potential opportunities."

Batlle declined to identify specific GOs or appropriation debt as refinancing candidates, the potential restructuring deal sizes, or Puerto Rico's total debt-service savings goal.

"We're working on all that as we speak," Batlle said.

Puerto Rico isn't alone in spreading out debt-service payments to lessen imminent principal and interest payments. Kansas restructured roughly $15 million in February to ease its fiscal 2009 budget. Meanwhile, New Jersey plans to refinance up to $350 million to cut its fiscal 2010 debt-service payment by nearly $145 million.

"They're definitely not the only place to do that," said Moody's Investors Service analyst Emily Raimes. "We're seeing that in a number of states, that one of the tools that they're using to get a little bit of budgetary relief is getting some debt service relief through some restructuring."

Meanwhile, legislators were set to hold conference meetings over the weekend to hammer out a fiscal 2010 budget after the Senate Thursday evening added amendments to the lower chamber's spending plan. Once approved, the budget would then head to Gov. Luis Fortuño for his consideration.

In that bill, GO and appropriation debt service, service payments to agencies such as the Puerto Rico Aqueduct and Sewer Authority and the Puerto Rico Electric Power Authority, and payments to the GDB for prior loans total $894 million. Legislators have been referring to that entire $894 million as "debt service." Of the $894 million, $520.6 million will go towards principal and interest payments on GO debt, according to Batlle. In fiscal 2009, the island allocated $393 million for GO debt service. In addition, the $894 million amount reflects future debt-service savings from potential bond refinancings that have yet to be realized, he said.

House members lowered the $894 million allocation from a $1.08 billion allotment that Fortuño designated in his fiscal 2010 budget proposal, according to Rep. Angel Perez, vice president of the House Treasury and Financial Affairs Committee.

Puerto Rico has more than $50 billion of total public debt among the central government and its various independent authorities, including roughly $9.79 billion of commonwealth-backed debt. In addition, the notional amount of all Puerto Rico derivatives is about $8.15 billion, with $3.5 billion of swaps attached to GO and commonwealth-appropriation debt. That $3.5 billion amount is down from a $4.1 billion exposure earlier this year.

Beyond the island's high debt levels, Puerto Rico has been operating with unsustainable budgets for several years and now faces a $3.2 billion structural imbalance that the Fortuño administration aims to close by fiscal 2013. Puerto Rico has had a history of borrowing from the GDB to help meet expenditures.

While the bank offers the central government needed liquidity, Standard & Poor's last week stated that a continued reliance on the GDB in the future could have negative consequences on the commonwealth's credit rating. Standard & Poor's and Moody's rate Puerto Rico's GO debt BBB-minus and Baa3, respectively, both with a stable outlook.

"In our view, GDB's stabilizing effect on the commonwealth's rating has its limitations," according to the Standard & Poor's release. "The rating may be pressured if Puerto Rico's reliance on GDB to fund the deficit increases materially or if the government does not continue to implement measures in the near term to reduce the structural deficit. In our view, the ability of the commonwealth to use GDB only as a temporary source of flexibility to implement meaningful measures to narrow the budget deficit and not as a long-term source of deficit financing may affect the commonwealth's credit stability. We expect, however, that the expanded authority of [the Puerto Rico Sales Tax Financing Authority] to provide interim deficit financing will gradually reduce the commonwealth's reliance on GDB."

In looking at the island's derivatives, Batlle said his team aims to keep Puerto Rico's swap risk at a realistic level. Earlier this month, the GDB terminated a sales tax swap that cost roughly $160 million and ended a $566 million GO derivative in late April, that generated $12 million in the commonwealth's favor, according to Standard & Poor's. The GDB could unwind other hedges depending upon market conditions.

"Obviously from our perspective this is something that has to be managed and this is something where we'd like to reduce our exposure ... and we just think that we have to manage this prudently," Batlle said. "We're not saying swaps are bad, we're just saying they have to be managed and so we've been reducing our exposure as the market allows it."

In addition to finding debt-service savings, the GDB continues to evaluate the commonwealth's debt to address its variable-rate exposure. The bank last week sold $375 million of Puerto Rico Public Buildings Authority refunding bonds to refinance Series 2004K floating-rate debt - a portion of which are put bonds - into fixed-rate mode. Of the deal, $50 million involved a remarketing of prior debt insured by Financial Security Assurance, Inc., according to the preliminary official statement.

Merrill Lynch & Co. was the book-runner and Ramirez & Co. was the co-senior manager on the deal. Nixon Peabody LLP was bond counsel.

The authority will pay approximately $20 million to end a floating-to-fixed Libor swap attached to a portion of the bonds.

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