The Puerto Rico Government Development Bank (GDB) has indicated that it could sell up to $2 billion of bonds this year to refinance loans it made to the Puerto Rico Highway and Transportation Authority (PRHTA). These loans on the GDB balance sheet comprise about 24 percent of the GDB’s assets. The PRHTA is a money-losing operation with $4.7 billion of its own debt outstanding. If the GDB is successful in moving these loans off its balance sheet, then the PRHTA could be carrying up to $6.7 billion in debt on a very shaky revenue base.
If you think that you might be interested in participating in a PRHTA bond offering, you really should first talk to Alan Schankel, Managing Director of the Fixed Income Strategy team at Janney Montgomery. He has written an excellent report that looks at the Highway and Transportation Authority. Here are some key takeaways from his report [my comments in brackets]:
The toll and tax revenue streams securing Highway and Transportation Authority bonds have been pressured by the island’s stagnant economy. [Note that year over year revenues are down]
A gross receipts pledge and monthly deposit mechanism represent a strong security framework from bondholders’ perspective, but operating expenses and losses must also be considered in evaluating creditworthiness. [Operating expenses far outstrip revenues after debt service]
GDB has extended more than $2 billion of short term loans to the authority. The plan is to issue bonds to finance repayment. [In other words, moving the bad loans off their books]
Significant revenue increases are needed if the authority is to remain solvent and retain investment grade ratings. [It looks as if revenues would need to increase at least 50 percent to cover operating losses and service additional debt]
A series of management stumbles, not typically seen with a $5 billion bond issuer, heighten concerns. [Go on…]
It remains to be seen if the political will exists in Puerto Rico to take measures needed to dig PRHTA out of the fiscal hole in which it finds itself. [The political beast rules muniland]
In the breakdown from the PRHTA (page 15), you can see how all revenue streams have fallen over the last five years:
Toll revenue fell from 2011 to 2012 since Puerto Rico sold off two of its toll roads to Goldman Sachs and Albertis in 2011. And there was a kerfuffle in early May over the fear that the PRHTA might miss its July 1 bond payment, which the GDB president batted down.
Generally when bond markets lend more to operating entities with declining revenues and growing debt burdens, buyers want higher yields. Puerto Rico general obligation bonds due 2023 are now trading at 5.23 percent. It’s likely that investors would want higher rates since highway debt will have lower seniority. Although the yields will be very high, if you have an appetite for these bonds, call Alan Schankel first. I’m sure that he can walk you through their strengths and weaknesses.