The Puerto Rico government is paving the way for a general obligation bond sale next month through which it seeks to raise as much as $3.5 billion to improve the Government Development Bank’s liquidity, high-ranking administration officials said Tuesday.
Following a call with investors, the GDB Interim President José Pagán said mostly non-traditional investors would pick up the financing, making it a speculative transaction.
“These investors enter into these types of transactions when they offer extraordinary yields. To be able to attract those buyers, the interest rate has to be above 9 percent,” he said, acknowledging it will be a costly deal for the Puerto Rican government, whose credit ratings was downgraded to junks status less than two weeks ago by Standard & Poor’s, Moody’s and Fitch Ratings.
“This transaction will solve our liquidity problem in the short-and mid-term, but it’s at a high cost, which is why it’s important that it is used as a tool to straighten out the island’s finances,” he said. “We’re only recommending this transaction if there is a commitment to balance the budget for the General Fund, public corporations, agencies and municipalities.”
During the call with investors, the administration’s economic team provided an update of Puerto Rico’s fiscal situation, including the overhauls to the Pension Systems, revenues and expenses, and legislation in the pipeline.
Treasury Secretary Melba Acosta said the goal is to repay debt on the short-term that was used to balance the 2014 budget, as well as financing that could accelerate or come due as a result of the downgrades.
With the proceeds from the GO bond sale, the Commonwealth intends to refinance about $1.1 billion in short-term liabilities. Another $2 billion would be pumped into the GDB to bring down the $9 billion in outstanding loans it has extended to other government agencies and municipalities over the years.
Acosta explained that the $1.1 billion in debt is associated with a $330 million deficit and a debt restructuring of $775 million included in the Fiscal 2013 budget that was supposed to be floated through debt, but never happened because the government held back from going to market.
“We’re now completing those transactions. The prior administration probably didn’t go to market for fear of a downgrade and worked off GDB credit lines,” she said. “They didn’t go to market and now the GDB is debt-ridden and short in liquidity.”Treasury Secretary Melba Acosta
The planned transaction has reportedly drawn interest from New York-based investors who Pagán said have conditioned their participation to the sale being subject to New York laws.
“They want to have a familiar forum to turn to in case they had to collect. They don’t want to enter the Puerto Rico judicial system,” he said. “They can price for risk if they know the venue.”
As for how long the financing injection is expected to last, Pagán said the plan is to raise enough cash to be able to avoid further GO bond issues for at least a year.
“We were waiting for market conditions to improve and they have. There’s a lot of momentum going for this transaction,” Pagán said, of what will be the government’s first trip to the market since 2012.
Meanwhile, he said the government could go to market again in about six months through the newly created Municipal Finance Corp., known as COFIM. This public corporation under the GDB umbrella can issue debt to pay or refinance municipal debt — which currently stands at $590 million — backed by municipal sales and use tax collections.
Finally, Acosta said the government will meet the May 1 deadline for submitting its Comprehensive Financial Annual Report, which was released four months late last year.