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Puerto Rico after financing

Puerto Rico brought its long awaited bond offering to market last Tuesday for $3.5 billion, the full amount that was authorized by the Legislative Assembly. Underwriters had talked about the deal as $3 billion, but it seemed obvious given the liquidity needs of the Government Development Bank that it would be upsized it to the full legislatively authorized limit. The bond was structured to mature in 2035 with a 2020 par call.

The deal was priced with an original issue discount of $93 and an initial offering yield of 8.727 percent. This yield was approximately 95 basis points more than secondary market trading for Puerto Rico 2035 general obligation maturity, but in line with with secondary market yield for the bond’s single call par maturity of 2020, according to Thomson Reuters Municipal Market Data.

Puerto Rico’s yield curve has been inverted for several months and the deal seems to have been priced to its par call in 2020, which was trading with a higher yield than 2035 maturities. Reuters reports:

Bigger than an initially planned $3 billion, the sale was oversubscribed, attracting orders worth more than $16 billion from 270 different accounts, according to the island’s Treasury. It drew scores of hedge funds and other non-traditional buyers eyeing fat yields and possible trading gains.

The new bonds were freed to trade late on Tuesday, and they immediately began to rise in price. Yields hovered around 8.4 percent and 8.5 percent, with the lowest reaching 8.352 percent, according to Municipal Securities Rulemaking Board data.

New bonds in the time of the inverted yield curve

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):

Puerto Rico’s perfect storm

 

Two critical documents related to Puerto Rico’s upcoming $3.5 billion general obligation bond offering have been released: A draft of the preliminary official statement (POS) for the general obligation bond underwriting and a special liquidity update from the Government Development Bank (GDB).

Both documents contain new financial information and a laundry list of risks for potential bondholders. Citi has published a special focus report on the upcoming GO bond offering. Raise the starting gun; the race will begin soon.

Puerto Rico Senate approves $3.5 billion general obligation issuance

The Puerto Rico Senate followed the House and approved the authorization of $3.5 billion of new general obligation bonds. Included in the approved legislation is language that allows bond anticipation notes to be issued. The legislation allows for the new debt to:

1. Pay or refinance debt and other obligations of the Commonwealth of Puerto Rico,

2. Repay or refinance debt and other obligations of any public corporation with the purpose of covering or fund a portion of the deficit of the Commonwealth of Puerto Rico, 3. Repay or refinance obligations incurred by the Commonwealth of Puerto Rico on ancillary contracts to bonds Commonwealth of Puerto Rico issued, refinanced or paid,

Puerto Rico’s bond rally and economic contraction

Reuters and others have reported on the recent rally in Puerto Rico bonds.

The S&P Municipal Bond Puerto Rico Index is up 4.94 percent so far this year, with most of that increase happening in February. That same index fell more than 20 percent in 2013, when net outflows in Puerto Rico-oriented funds totaled $20.2 billion, or 28 percent of $83.4 billion in assets under management, according to Lipper data.

The primary spur for the February rally in Puerto Rico bonds was the investor call held by the Government Development Bank on February 18. The GDB had held its previous investor call on October 15, 2013 and it hadn’t issued any financial information in the  four months between calls. Investors were starved for information aside from the monthly Economic Activity Index data issued by the GDB.

Looking back over my previous writing, another big movement in Puerto Rico bond prices caught my attention. This was the violent 40 percent spread widening of Puerto Rico general obligation bonds that happened between August 28 and September 3 last year:

Puerto Rico partly opens the kimono

Puerto Rico held a long-awaited investor call on Tuesday. In a highly scripted performance, participants delivered statements that accompanied the presentation slide deck. The call lasted one hour and 20 minutes and no questions from attendees were answered. Written questions submitted two weeks prior were addressed. Important issues of government liquidity and the proposed 2015 budget were briefly detailed.

Puerto Rico Governor Alejandro Garcia Padilla, in a pre-recorded talk, opened the call with an update on the commonwealth’s fiscal and economic progress over the last 13 months. He said that he was proud to have acted rapidly to address problems that were created years and possibly decades ago. He said that politics have been put aside.

Government solvency and the Government Development Bank’s (GDB) liquidity are the key focus for investors. Incomplete data made it hard to assess whether sufficient cash flows exist to service short-term liquidity needs and repay additional debt service for a proposed $3 billion dollar general obligation debt offering.

Puerto Rico’s funny labor data

 

The Federal Reserve Bank of New York made a big splash by pre-announcing that the Bureau of Labor Statistics would revise the employment data for Puerto Rico upwards. Here are the revisions that the NY Fed says that the BLS will make:

Oddly the BLS website shows different employment figures for Puerto Rico than what the NY Fed references. The BLS shows Puerto Rico employment as 1.04 million in June 2012 (an unemployment rate of 14.1 percent) versus approximately 1.01 million in June 2013 (an unemployment rate of 13.2  percent). The decrease in the BLS unemployment rate is due to a large shrinkage in the labor force of 40,322 year over year.

Puerto Rico’s debt limit

One of the most interesting points that Puerto Rico Governor Alejandro Garcia Padilla made in a speech on Monday after the credit rating downgrades by Standard & Poor’s and Moody’s (Fitch has since also downgraded Puerto Rico to speculative grade) is related to the restructuring of Puerto Rico’s tax code. He said:

In less than a year, propose a new tax structure allowing the best balance between all sectors of the country and promote economic development. These studies include the revaluation of the SUT to explore if it is the best alternative for all, taking into account the debt issued against that source.

SUT is the “sales use tax” that is the repayment source for $15.5 billion of Cofina debt. This debt is generally considered highly secure because of the legislative pledge of SUT revenues.

A plan for Puerto Rico

Puerto Rico’s governor, Alejandro García Padilla, announced a six point plan to restructure the government in light of the credit rating downgrades by Standard & Poor’s and Moody’s.

He opened his speech that was delivered live on Monday:

In these difficult times, I want to speak personally to each citizen, whether in the living room or the balcony of their homes. I want talk about the budget of Puerto Rico, the current situation and how we face it together. It is time to pay bills that others left without paying.

The governor went on to outline six steps the government will take:

1. We will reduce the budget $170 million in current fiscal year. Much of the reduction will be in contracts with agencies. To be clear, we will succeed without employee dismissals.

Puerto Rico’s liquidity

If you dig a little deeper than what is generally reported on the S&P downgrade of Puerto Rico, a few facts seem to diverge from the conventional story line. The most important relates to the “liquidity” of the Puerto Rico’s government and its fiscal agent the Government Development Bank (GDB).

Puerto Rico officials have made repeated statements about the commonwealth’s liquidity and market access, saying that it has adequate funds to make all repayments required through June 30. They repeated these statements on February 4 in a press release:

‘We are confident that we have the liquidity on hand to satisfy all liquidity needs until the end of the fiscal year, including any cash needs resulting from today’s decision. In addition, the GDB and the Commonwealth of Puerto Rico have been in discussions with parties that have expressed an interest in arranging additional liquidity for the Commonwealth, and the Commonwealth continues to explore such options, including obtaining additional funding, as necessary.’

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