What’s with Puerto Rico GDB bonds?

September 25, 2013


The bonds of Puerto Rico’s fiscal agent, the Government Development Bank, are inexplicably blowing up today. After a trader alerted me to the sell-off I haven’t been able to find any public information that would explain why.

The GDB bond in the graph above is Cusip 745177FN0 due 2019. It was issued in 2012 for $500 million. The bond is taxable and its yield is hovering around 13.2 percent on inter-dealer trades today (trades done between dealers are the sharpest prices in the market).

In contrast, Puerto Rico tax-exempt general obligation bonds of the same maturity are trading at around 6.74 percent, or 11.16 percent on a fully-taxable equivalent basis. Why did the GDB bond move out 2 percent on heavy trading?

The GDB, like any financial institution, has to be evaluated on its balance sheet. The bank solely relies on loans it makes to collect revenue and repay other loans. All the borrowers from the GDB are public corporations, government agencies or Puerto Rico municipalities. Net assets of the bank were $2.21 billion as of March 31, 2013. It carries a BBB- rating from Standard & Poor’s (page 59).

The top ten borrowers of the GDB are shown above. The GDB values its loans to public corporations and municipalities at par. At least one borrower, the Tourism Development Fund, has been writing down loans it had made for tourism construction and had an operating loss of $223 million for the fiscal year ending June 30, 2012 (page 7). For 2012, the Tourism Development Fund had a deficit of $66 million. It’s very difficult to be certain of the value of the GDB’s assets.

The general economy of Puerto Rico has been slowing. Many believe that increased taxes will further contract the economy, and tax collection has always been difficult in Puerto Rico. Something bigger is happening at the GDB though, if market signals are correct. Email me with information or tips.


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Cate, Excellent blog! Would like to know what’s with PR? Simple, the Government is killing the economy. It is a matter of time. Currently, we have been imposed over 45 different new taxes. Every single person, business and/or institution in the land was taxes. They have no money, they are compelled to raise taxes and yet they approved a budget $800 million larger than the previous year. Go figure!

Posted by AllanBrito | Report as abusive

Moody’s Sept 20, 2013 report:

“The commonwealth reported that general fund revenues are currently slightly ahead of initial
projections for July and August, the first two months of the fiscal year, though down slightly from
fiscal 2013 collections reflecting the transition period for some new revenue sources to take effect.

However, the commonwealth had planned $820 million of deficit financing and debt service restructuring for fiscal 2014, and that amount could increase if projections fall short. While net liquidity at the GDB was over $3 billion at the end of fiscal 2012, that amount has narrowed significantly due to continuing loans to the Commonwealth and other authorities and the inability to refinance certain lines in the long-term market.

The GDB reports that it has access to approximately
$2.8 billion in public deposits of the commonwealth’s agencies, public corporations and municipalities at private banking institutions which are in the process of being moved to GDB. If the GDB is unable to strengthen its liquidity position and the Commonwealth faces extended difficulties accessing the long-term market, the Commonwealth’s overall liquidity position could become severely strained.”

Posted by Cate_Long | Report as abusive

Citi has been aggressively trying to move this taxable PR paper for a few days. 5MM of the taxable GDBs in 2020 traded yesterday morning at +1261 (745177EN1). The COFINA announcement yesterday certainly isn’t helping matters, more SUT cash flow being statutorily pledged to creditors means less cash flow flexibility for the Commonwealth.

Posted by speak_softly | Report as abusive

What is SUT in SUT cash flow?

Posted by BBrite | Report as abusive

A Sales and Use Tax (SUT) regimen operates in Puerto Rico and has replaced, with few exceptions, the excise tax system that existed for many decades.


Posted by Cate_Long | Report as abusive


http://emma.msrb.org/SecurityView/Securi tyDetailsTrades.aspx?cusip=A58771782DC0E BBCE0F5F4D24510F9756

Posted by Cate_Long | Report as abusive