Ahead of what seems to be a “do-or-die” trip to the stateside bond market through which it is seeking to sell at least $3 billion in Commonwealth General Obligation bonds, the government has taken steps to warn would-be investors that purchasing into the deal “involves significant risks.”
In a 250-page official statement released late last week, the Government Development Bank went on to list those risks, leading with the claim that the “Commonwealth may be unable to honor its obligation to pay debt service on the bonds.”
“The Commonwealth and its instrumentalities face a number of fiscal and economic challenges that, either individually or in the aggregate, could adversely affect the Commonwealth’s ability to pay debt service on the Bonds when due,” the GDB said.
“While the Bonds enjoy certain protections afforded by the Constitution of Puerto Rico, under certain circumstances some of the risk factors identified in this Official Statement, either individually or in combination with other risks described herein or other factors not described herein, may result in the Commonwealth being unable to honor its obligation to pay the principal of and interest on the Bonds in full or in a timely manner,” the agency further noted.
The GDB explained that recent downgrades by the three credit ratings agencies, Standard & Poor’s, Moody’s Investor Service and Fitch Ratings — which slashed Puerto Rico’s credit to junk status — “could raise the Commonwealth’s cost of borrowing, which could affect the Commonwealth’s ability to borrow in the future and may have other adverse effects on the Commonwealth’s financial condition.”
While the GDB is officially going to market seeking $3 billion, it is highly likely that it will pursue the full $3.5 billion approved last week by the Legislature and Gov. Alejandro García Padilla.
“If the Commonwealth is unable to obtain sufficient funds from this and other future debt offerings, it may not have sufficient liquidity to meet its obligations as they come due,” the GDB said.
The government expects to use the proceeds of the GO bond issue to repay amounts due to the GDB under certain lines of credit extended to the Commonwealth and Puerto Rico Public Buildings Authority, refund certain of its outstanding general obligation variable rate demand bonds, pay, certain termination payments due under interest rate exchange agreements, repay certain outstanding obligations on behalf of, and issued by, Puerto Rico Sales Tax Financing Corporation (“COFINA” by its Spanish acronym), provide for the payment of interest on a portion of the bonds, and pay the costs of issuing the bonds.
In the lengthy report, the GDB also acknowledges that the cash-strapped Commonwealth has been facing a number of fiscal and economic challenges in recent years due, among other factors, to continued budget deficits, a prolonged economic recession, high unemployment, population decline and high levels of debt and pension obligations.
“If the Commonwealth’s financial condition does not improve, it may lack sufficient resources to fund all necessary governmental programs and services as well as meet debt service obligations. In such event, it may be forced to take emergency measures. Although no specific contingency plans have been adopted to address any such situation, GDB, as fiscal agent to the Commonwealth, together with its financial and legal advisors, is evaluating alternative courses of action,” the GDB said in the statement.
The GDB has hired Millco Advisors LP, a Washington, D.C.-based affiliate of Millstein & Co LP, to guide the government through the transaction and in coming weeks. According to the Comptroller’s Office, the government will pay Millco $500,000 for about seven weeks of work, from Feb. 5 to Mar. 31.
Barclays, Morgan Stanley and RBC Capital Markets have been selected as joint lead managers for the upcoming GO bond issuance, with Barclays acting as lead book-running manager for the transaction expected to take place tomorrow.