Puerto Rico will sell $10.2 million of general obligation bonds and remarket another $88.1 million of GOs on Wednesday or Thursday to help ward off higher interest charges and accelerated principal payments set to kick in next month on public improvement debt that became bank bonds in April.
The commonwealth will begin paying 5.25% interest on $96.8 million of daily-rate Series 2007A-4 GO public improvement bonds beginning Oct. 3 and will face higher principal payments on Oct. 13 unless it addresses the debt before then.
Since becoming bank bonds on April 14, the government has been paying a rate of 4.25% on the bonds.
At that time, the Government Development Bank for Puerto Rico, the island's fiscal agent, tried to remarket the debt, but market conditions forced officials to wait, according to Fernando Batlle, the GDB's executive vice president of financing and treasury.
"If you track this market on a weekly basis, you see that inflows into the big bond funds has been positive for a while now," Batlle said.
"So obviously there's a lot more funds chasing opportunities, and supply, as we all know, is down. And supply is down for several reasons, including that there's been supply going into the Build America Bond market. So overall I think general conditions are more favorable now then they were at the beginning of the year."
On April 14, Dexia purchased the Series 2007A-4 bonds after the debt's standby purchase agreement expired. Puerto Rico was unable to replace that liquidity facility, forcing the debt to become bank bonds.
It will refinance $10.2 million of the variable-rate debt into fixed-rate mode, with a portion of those proceeds financing the termination of the swap agreement attached to the Series 2007A-4 bonds. The bonds will not be insured.
For the remarketing, $88.1 million of the variable-rate debt maturing in 2031 will convert into fixed-rate mode with Financial Security Assurance Inc. continuing to provide insurance on the bonds.
"They're going to convert part of the issue to fixed rate and maintain the insurance on that portion," said Moody's Investors Service analyst Edith Behr.
"But because the insurer didn't want to expand its exposure, the balance is being refunded with non-insured, fixed-rate bonds and the commonwealth will terminate the swap at the same time."
Morgan Stanley is the book-runner on the $10.2 million refunding piece and Greenberg Traurig LLP is bond counsel. Morgan Stanley and JPMorgan are the co-remarketing agents on the $88.1 million conversion and Greenberg is bond counsel.
Moody's and Standard & Poor's rates Puerto Rico's $10.8 billion of outstanding GO debt Baa3 and BBB-minus, respectively, both with a stable outlook.
Addressing mandatory tender bonds will be on the horizon as the government has both floating- and fixed-rate debt that Puerto Rico or its tender agent will need to purchase if a termination event occurs on a letter of credit or standby purchase agreement.
"VRDO bonds subject to mandatory tender upon expiration of the applicable credit/liquidity facilities and for which there is a related interest-rate exchange agreement amount to approximately $100 million for fiscal year 2010, $472.9 million for fiscal year 2011 and $769.7 million for fiscal year 2012," according to the POS.
"We are actually talking to several liquidity providers as we speak and looking at different alternatives," Batlle said. "So we'll deal with that when we get there. At this stage we know they're mandatory tenders or LOC-backed bonds that have to be dealt with at that point in time."
In addition, Puerto Rico, as of Dec. 31, 2008, has $279.2 million of fixed-rate GOs that are subject to mandatory tender, payable from the remarketing of the bonds, on July 1, 2012, with the interest rate to be either fixed or variable. There is a forward-starting, floating-rate swap associated with $69.2 million of the debt.
Along with liquidity provider issues, Batlle's team continues to work on restructuring a portion of Puerto Rico's debt to extend maturities and ease near-term debt service payments.
He said that while officials do not plan to issue new-money for capital projects soon, the GDB is still hoping that the island can take advantage of the Build America Bond program before it expires at the end of next year.
"I guess that our ability to issue BABs is measured by the opportunities that we have in terms of the use of funds, and right now we don't anticipate anything for the commonwealth that we can use them for," Batlle said.
