Bloomberg News

Puerto Rico Borrowing Costs Rise on Rating Concern: Muni Credit

June 11, 2012

Investors who snapped up four times as much Puerto Rico debt this year as in 2011 are imposing higher borrowing costs on the U.S. commonwealth (STOPR1:US) even as its debt outperforms all but one state.

The Puerto Rico Public Buildings Authority last week sold lease-backed bonds the day after Standard & Poor’s said it may cut the island’s general-obligation rating, now two steps above junk. The agency sold 30-year tax-exempts rated BBB, the same as the commonwealth’s, to yield 5.38 percent. The spread above AAA was 2.17 percentage points, rising from 2.1 points in August and 1.5 points in a 2009 issue, data compiled by Bloomberg show.

Puerto Rico bonds appeal to investors in part because they are tax-free in all states. The island and its agencies have sold about $6.5 billion of securities this year, four times the pace of 2011, data compiled by Bloomberg show. Puerto Rico’s $58 billion of gross tax-supported debt exceeds the load of 48 states, according to Moody’s Investors Service.

“People are getting just up to their ears in Puerto Rico debt,” said Tom Spalding, who helps manage $10 billion of municipals in Chicago at Nuveen Investments Inc. The bigger yield penalty on the authority, whose debt Nuveen holds, “had to do with the change in outlook” on the commonwealth, he said.

Negative View

S&P cited the commonwealth’s “challenging” economic and fiscal environment in changing its outlook to negative from stable. The rating, lower than any U.S. state’s, may be cut if the economy deteriorates, a projected deficit swells or “decisive” action on pensions is delayed past next fiscal year, S&P said.

The commonwealth’s 14.8 percent jobless rate in April was above that of all 50 states. As of June 30, 2011, it had 6.8 percent of assets to cover promised retirement benefits, the worst-funded system in the U.S., data compiled by Bloomberg show. Illinois’s ratio of 45 percent is the weakest among states.

Belle Haven Investments Inc. has reduced Puerto Rico debt to less than one percent of its $1.1 billion of munis in the past year, said Matt Dalton, a portfolio manager at the firm.

For the company to add more, there would need to be “some kind of improvement for the revenues for the island versus the expenses, and it looks like it’s going to take some time before that starts to move in the right direction,” Dalton said from White Plains, New York.

Revenue Quest

The commonwealth’s finances are hampered in part by an underground economy that may be as large as 30 percent of activity on the island, curtailing tax collections, according to a Wells Fargo Securities LLC report last month.

With municipal interest rates hovering close to four-decade lows, the extra yield on the island’s debt has been a draw. Its bonds have earned 12.8 percent in the past 12 months, trailing only Wyoming’s 13.9 percent gain, Barclays data show. The $3.7 trillion municipal market has earned 9.6 percent.

The bigger yield spread helped demand for last week’s sale. The $589 million offer received $1.7 billion of bids, said Jose Otero, vice president of financing for the Government Development Bank for Puerto Rico, the commonwealth’s borrowing agent.

The bank lowered the yield during the sale for the portion due in 2042 to 5.375 percent from 5.5 percent, Otero said. That segment totaled about $548 million.

Competing Issuers

The yield penalty also grew in part because Puerto Rico was competing with other issuers, Otero said. States and localities sold about $9.5 billion of long-term munis last week, the year’s third-busiest period, data compiled by Bloomberg show.

“All things considered, we’re extremely happy with the transaction and the fact that we were able to not only do the deal, but reprice the term bonds down,” Otero said.

Among U.S. states, only California and New York had more gross tax-supported debt last year, with $103 billion and $63 billion, respectively, Moody’s data show.

Puerto Rico’s debt burden has grown partly because it has borrowed to help balance budgets since at least 2006. In addition to its general obligations, it has about $15 billion of sales-tax bonds as of March 31, some of which went to fill spending gaps.

Following are pending sales:

THE BLACK BELT ENERGY GAS DISRICT, ALABAMA, which supplies natural gas to the Clarke-Mobile Counties Gas District, is set to borrow $773.8 million of revenue bonds as soon as this week. Proceeds will prepay natural-gas deliveries for 30 years, according to bond documents. Goldman Sachs Group Inc. is the underwriter. Moody’s Investors Service rates the sale A1, fifth- highest. (Added June 11)

SAN DIEGO plans to sell about $103 million of tax- and revenue-anticipation notes as soon as this month, according to bond documents. The debt will mature in one year. Moody’s Investors Service gives the notes its highest short-term rating. (Updated June 11)

To contact the reporter on this story: Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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