Puerto Rico came to market with $3.5 billion of general obligation debt Tuesday, tapping the municipal bond market with GOs for the first time in two years. The sale was upsized by $500 million from an originally planned $3 billion sale.
Yield on the single term bond with final maturity in 2035 was 8.727%, according to a pricing document obtained by The Bond Buyer.
The yield on the bond, which comes with an 8% coupon, is more than 500 basis points higher than AAA-rated general obligation municipal bonds.
"Investor feedback regarding the various financial measures that Puerto Rico has taken over the past 12 months has been extremely positive," Ken Friedrich, managing director of municipal sales, trading & syndication at RBC Capital Markets, a co-leader on the deal, said in an e-mail. "The reception on the deal reflects the market's confidence that the situation in the Commonwealth is improving."
Puerto Rico's general obligation bonds have rallied 110 basis points since the beginning of the year, according to Thomson Reuters' Municipal Market Data, even after the three major credit rating agencies downgraded the bonds to junk on concern over the commonwealth's ability to raise capital.
Alan Schankel, managing director on Janney Capital Market's fixed income strategy team, predicted there would be demand for the new debt, provided yields exceeded those levels. Preliminary pricing information on Monday indicated underwriters would seek yields in the 8.625% to 8.875% range.
"The key for Puerto Rico is getting this deal done, whether at 9% or 11%" Schankel said in an interview before the bond sale. "It's important to borrow in the range of $2.5 billion or more. If Puerto Rico is only able to borrow less than $2.5 billion, a downgrade is very possible."
Puerto Rico outlined the debt sale during a webinar on Feb. 18, saying it planned to market $2.8 billion in tax-exempt general obligation bonds in March. At the time José Pagan, the interim president of the Government Development Bank of Puerto Rico, projected that the bond sale could exceed $3 billion. On March 4 the government approved a sale of as much as $3.5 billion.
Yields soared higher than 10% last summer on concerns over the territory's debt load and persistent recession.
Officials said revenue from the sale would be used for as much as $600 million of general obligation debt service in fiscal 2013, $575 million in fiscal year 2014 debt service, and $175 million in Public Building Authority debt service in fiscal 2013. The sale is also expected to be used to redeem $333 million in sales tax bond anticipation notes, up to $540 million in GO floating rate bonds and to terminate related swaps.
Proceeds will go toward $245 million in current year's deficit financing, and $360 million in new money fiscal year 2012 and 2014 GOs.
The underwriters are Barclays Capital, RBC Capital Markets, and Morgan Stanley.
This is the first Puerto Rico government bond issuance since the commonwealth sold $2.3 billion of its public improvement refunding bonds in March 2012. The commonwealth experienced such great demand that it was able to increase the sale to $2.3 billion from $1.5 billion, cutting yields by two or three basis points.
Yields on the deal ranged from 4.00% with 4% and 5% coupons in 2020 to 5.32% with a 5% coupon in 2041. The bonds are callable at par in 2022, with the exception of bonds maturing in 2026 which will be callable in 2018.
Barclays Capital served as underwriter for the 2012 deal. The bonds were rated Baa1 by Moody's Investors Service, BBB by Standard & Poor's and BBB-plus by Fitch Ratings at the time.
Puerto Rico also issued a concurrent $415 million offering to local investors at the time. The issuance was led by UBS FS Puerto Rico. Greenberg Traurig acted as bond counsel for both offerings.
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