Puerto Rico said it plans to sell $3 billion of general obligation bonds on Tuesday, in the government's first GO bond sale in two years.
The bonds have term maturity in 2035 but will mature according to the sinking fund schedule from 2022 to 2035, according to a source close to the sale. The bonds will be callable at par. The call date wasn't announced.
The bond will be the first GO bond sale by the commonwealth since it sold a bond in March 2012. The Puerto Rico Electric Power Authority sold a bond in August 2013.
The commonwealth's GO ratings have been lowered since the last GO sale to Ba2 at Moody's Investors Service, BB at Fitch Ratings and BB-plus at Standard & Poor's. The Moody's rating is provisional, because when Moody's put it out on Feb. 28 the government had not yet approved legislation concerning where disputes would be heard. Nor had the government announced details about the bond.
Puerto Rico has kept out of the bond market at least partly because of the escalating yields that investors were demanding for its bonds on the secondary market and would presumably demand for any new issues.
Minimum purchase size for the bond will be $100,000 with denominations of any multiple of $5,000 above this to be available, the government said in a preliminary official statement posted
The 2014 series A bond will be tax-exempt and fixed interest. Barclays, Morgan Stanley, RBC Capital Markets are the senior managers, with Barclays the book-running senior manager.
The POS devotes 14 pages to the "significant risks" associated with the bonds.
"A purchase of the bonds is suitable only for purchasers that can bear the risks of price declines, limited liquidity and the possible failure to pay debt service described in this official statement," it says.
The POS also says "the constitution of Puerto Rico provides that public debt of the commonwealth, which includes the bonds, constitutes a first claim on available commonwealth resources."
In a section on possible problems meeting its short-term obligations, the POS states, "If the commonwealth does not have sufficient access to the capital markets or alternative sources of financing to satisfy its liquidity needs, it may not be able to honor all of its obligations as they come due.
"If the commonwealth is unable to obtain sufficient funds from this and other future debt offerings, it may not have sufficient liquidity to meet its obligations as they come due," the POS states. "If the commonwealth's financial conditions does not improve, it may need to implement emergency measures that may include a restructuring, moratorium or other actions affecting creditors' rights."
On Jan. 15 Puerto Rico Treasury Secretary Melba Acosta Febo and GDB Interim President José Pagan issued a statement saying, "Puerto Rico will take every step necessary to continue honoring its obligations."
Puerto Rico Gov. Alejandro García Padilla has promised to introduce a balanced budget in fiscal 2015. Without growth in revenues in fiscal year 2015 or curbs to substantial cost escalators, the government would have to reduce expenses by $1.5 billion to balance the budget, the POS states. "Some of these measures could face opposition from affected constituencies, will be politically difficult to propose, adopt and implement, and will adversely affect the commonwealth's economy, putting further strain on the commonwealth's tax revenues and economic development," the document adds.
The bonds have no collateral and cannot be accelerated upon a default, the POS states.
Under no circumstances would holders of the GO bonds be able to attach commonwealth public property, it states.
Although the bond resolution states that New York laws apply to the bonds and disputes could be held in New York state and federal courts in New York City, these courts may decline to hear the suit, according to the POS.
"It is unclear how a court would apply New York law in the context of the bonds and to what extent a judgment from a New York court may be enforced in Puerto Rico," according to the POS.
Proceeds from the bonds will be used for: repaying GDB lines of credit to the commonwealth and Public Building Authority; repaying COFINA issued bond anticipation notes; refinancing GO bonds; paying termination amounts in interest rate agreements; providing for payment of a portion of interest on the bonds; and paying expenses related to issuance.
As of Thursday afternoon the bond's structure, amounts and dates were subject to change.
