Home This Week Government Puerto Rico expected to return to Wall Street to raise $2 billion
Issued : Tuesday, March 18, 2014 12:00 AM
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Puerto Rico expected to return to Wall Street to raise $2 billion

By : JOHN MARINO
Edition: March 20, 2014 | Volume: 42 | No: 10

Success of GO deal should expedite timing of Cofina, Cofim deals

With investors suddenly hungry for its high-yield bonds, the government of Puerto Rico is expected to return to Wall Street soon to raise an additional $2 billion, with at least a portion of the money being used for public works or economic-development initiatives.

The government is planning a $1.5 billion deal through its Sales Tax Financing Corp. (Cofina by its Spanish acronym) and a $500 million deal through its new Municipal Financing Corp. (Cofim by its Spanish acronym) financing vehicle, according to CARIBBEAN BUSINESS sources.

Government Development Bank (GDB) interim President José Pagán had told CB last month that Cofina and Cofim deals could be on the horizon late this year or in early 2015, but sources now say that the timetable has moved up because of the successful $3.5 billion general-obligation (GO) deal undertaken last week.

The GO issue was upsized from $3 billion to $3.5 billion due to unprecedented demand; total orders, received from 270 different accounts, surpassed $16 billion, which represents more than four-and-a- half times the bonds available for sale.

The bonds all mature in 2035 and were issued at an 8% coupon and an 8.727% yield, less than the 10%-or-higher yield that Wall Street sources and investment experts had been predicting in the weeks leading up to the deal.

"There was a collective sigh of relief in the municipal-bond market," said Robert Donahue, managing director at Municipal Market Advisors. "There was concern last month whether Puerto Rico would be able to access enough capital to bridge itself to something.

"Now the question is what do they bridge themselves to, another economic crisis or an economic recovery," he added.

One seasoned financial-industry professional said the deal outcome was "much, much better than expected. Kudos to the administration and Barclays for managing expectations," he said.

However, the finance veteran stopped short of calling the deal a complete success, noting that while it will mostly be used to refinance existing debt, it will still add more than $500 million to the government's overall debt load.

"There is really almost no new money to invest in infrastructure from the deal, but you have at least $700 million in capitalized interest, cost of issuance expenses and the discount of which the government will never see a penny, but will have to pay interest and principal for the next two decades," the source added.

The deal will enable the repayment of all outstanding variable-rate debt of the commonwealth (other than $126 million in outstanding Consumer Price Index bonds), which greatly simplifies the Puerto Rico government's capital structure and reduces market and credit risk. The bonds also have a six-year call option at par, which will permit the commonwealth to refinance the bonds in 2020 without premiums, as market conditions allow.

Remaining net proceeds will be used to refinance certain obligations of the commonwealth and its instrumentalities, with the GDB receiving a liquidity infusion of about $1.9 billion. GDB lines of credit repaid from bond proceeds were primarily used to finance general-fund deficits during the current and previous fiscal years.

Many market observers said a wave of negative press late last year had driven yields to "irrational highs," and that last week's deal brought Puerto Rico bonds back to their true yields, which are still high given their triple-tax-exempt nature.

Backed by the 6% state portion of the 7% sales & use tax (IVU by its Spanish acronym), Cofina is Puerto Rico's top-rated credit. The new Cofim will be a mirror image of Cofina, but backed by the 1% municipal portion of the IVU and aimed at municipal public-works projects. The GDB is in the process of getting a legal opinion regarding the Cofim financial structures, CB sources said.

The government still has a $900 million margin in its ability to borrow through GO bonds and this is expected to increase to $1.7 billion at the end of the fiscal year if revenue targets are met, government officials said. Most observers believe that a GO issue will wait until mid-2015, which is when the money for last week's deal is expected to be exhausted.

"Cash is king—in the past, present and future," another financial industry professional said. "If I were in their position, I would issue Cofina and Cofim as soon as possible."

Last week's deal was driven by a new class of hedge-fund investors who seek greater returns and for which they are willing to take greater risks. Worries about Puerto Rico's economy are still a big concern for traditional municipal-bond investors.

The deal will buy Puerto Rico about 18 months to balance its budget and make its public corporations self-sufficient, but doing so will be no easy task, requiring about $1.5 billion in annual spending cuts (CB, Feb. 27).

Donahue, who called the risk discussion of last week's bond deal "scary," said Puerto Rico could wind up back in another fiscal crisis if it doesn't make big changes.

"There is concern that debt levels could be stifling for Puerto Rico," he said. "They are hoping that traditional municipal-bond investors come back when the storm clears and the dust settles.I'm just not sure that is going to happen."

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