New bonds in the time of the inverted yield curve

March 7, 2014

Just a few more data points on the upcoming $3 billion Puerto Rico general obligation sale expected to price on Tuesday, March 11. Note the yield curve remains inverted and likely will offer some very high yields to investors lucky enough to win bonds maturing in 2022 through 2025 (red box marks the maturities listed in the tentative sinking fund schedule below).

Here is the most recent preliminary official statement (March 6, 2014).

Here is the tentative sinking fund schedule:

The dollar amounts of the use of proceeds has not been detailed yet, but here are the broad uses (page 23):

An important part of the use of proceeds is repaying some of the deal underwriters for various short term financings and swap termination payments to Morgan Stanley, Goldman Sachs and Bank of America Merrill Lynch (page 23-24):

Market chatter is suggesting that the underwriter spread, which includes underwriting expenses, management fees for the lead underwriter and the monies paid to the dealers to sell the bond, is a rather high $10 or more per bond. We won’t know the specific amount of the underwriter spread until the final Official Statement is filed. In contrast, on Puerto Rico’s March 2012 general obligation bond deals, the underwriter spread was $6.35 and $5.61 per bond (CUSIP: 4514LD87 & 74514LZZ3).

Just for fun, here is a radio interview I did with Enrique Kike Cruz last week on popular Puerto Rico talk radio station Notiuno.


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Glass-Steagall was a reaction to the abusive underwriting practices of the 1920s. In the 20s, banks would lend money to Latin countries and then get repaid by selling bonds which then defaulted. The idea was that selling bonds to the public for the purpose of obtaining loan repayment from the issuer was a conflict of interest. It looks like the PR underwriters have a strong motivation to sell this issue in oder to get their loans repaid. There ought to be a law.

Posted by nixonfan | Report as abusive

After filing this post Barron’s reported

“The new deal, which is expected to consist of a single bond with a 21-year maturity and an expected average life of nearly 17 years, will likely carry a yield at or near 9%” ml

Posted by Cate_Long | Report as abusive

“The bonds mature in 2035 and were issued at an 8 percent coupon and an 8.727 percent yield, which was at lower end of expectations for the junk-rated debt. The bonds were being sold at a minimum price of $100,000, luring mostly hedge fund investors.

The 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.”

Well, how about that, Cate? People were falling all over themselves to buy the PR “junk” (in quotes, because the S&P clowns should be completely ignored when it comes to rating anything, as they stated in their own defense against the federal lawsuit).

Posted by CraigL | Report as abusive