Wall Street Waits While Statehood Debate Handcuffs Puerto Rico Decision Makers
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By Maryellen Tighe and Ellie Ismailidou
Puerto Rico has become much more than a vacation destination for anyone who invests their money on Wall Street, plans for retirement using pension funds, or even pays taxes. As the commonwealth continues to suffocate under the weight of nearly $70 billion in outstanding debt, a debate about whether Puerto Rico will become the 51st state has become less about the number of stars on the United States flag and more about the staggering losses facing those exposed to the territory.
While government officials grapple with strategies for addressing Puerto Rico’s massive debt load, they are left paralyzed by the inaction that stems from the fear that a step toward addressing the financial crisis would tip the balance either toward or away from becoming a state.
Flag of Puerto Rico (Photo credit: Wikipedia)
For evidence of the conundrum you can look no further than the decision-making related to accepting tax breaks from the continental US to boost revenue. One of the earliest sparks for Puerto Rico’s financial demise was lit in 1996, when President Bill Clinton repealed the legislation that gave tax incentives for US companies to locate facilities in Puerto Rico.
But because those tax breaks are perceived as a hurdle to statehood, Puerto Rico Resident Commissioner Pedro Pierluisi – a non-voting member of Congress and a member of the pro-statehood New Progressive Party – would not advocate for the return of the aid, even if they could help balance the budget.
A related wrinkle comes into play as the market debates the benefits of a federal bailout. Yes, a bailout would be expensive for US taxpayers; but Puerto Rico’s default could be far more disruptive than Detroit’s record bankruptcy, experts tell Debtwire.
Lastly, indecisiveness on the issue impacts what could be the most efficient mechanism to remedy the financial woes. With Puerto Rico being a territory and not a municipality, it cannot even file for bankruptcyaccording to federal law. This means that any type of debt restructuring would unfold in an uncontrolled way a la Greece or Argentina.
The statehood stalemate could have a devastating effect on Wall Street if it also results on a standstill over how to balance the budget and also keep up with debt obligations.
Puerto Rico and its various public agencies have issued $70 billion of debt in the tax-exempt municipal bond market, which has been picked up by state-specific bond funds across America. Today around 70 percent of US mutual funds own Puerto Rico securities, according to Morningstar. These funds were looking to increase their yield with the commonwealth’s bonds, which are exempt from state, local and federal taxes. As Puerto Rico entered a severe financial crisis and its bonds were eventually downgraded to “junk” status, prices tanked and investors have lost as much as 35% of their holdings.
With the territory stuck in limbo, the fact of Puerto Rico’s public corporations stepped into focus last week when the governor surprised the market by presenting a last-minute bill that would provide an avenue for restructuring to public agencies and utilities but not to the commonwealth itself.
Maryellen is a senior reporter covering Puerto Rico, Michigan, and the utilities sector for Debtwire Municipals. Ellie is a reporter following Puerto Rico, California, and public pensions. Maryellen and Ellie can be reached atMaryellen.tighe@debtwire.com and ellie.ismailidou@debtwire.com, respectively.
This post is brought to you by Debtwire, a Mergermarket company, the leading provider of real-time intelligence, analysis and data on distressed debt, leveraged finance and asset-backed markets. The team at Debtwire is comprised of financial journalists and credit analysts with considerable experience covering trading, law and investment banking. Our reach is global, with separate products covering North America, Europe, CEEMEA, Asia-Pacific, Latin America, ABS and Municipals. For more information regarding Debtwire visit www.debtwire.com.
Puerto Rico’s Government Development Bank sold at least $620 million of notes maturing in June 2015, in the island’s first borrowing since lawmakers passed a debt-restructuring law.
The offering from the junk-rated commonwealth included about $560 million of tax-exempt securities priced to yield 7.75 percent, where benchmark issuers pay about 0.14 percent to borrow for one year, data compiled by Bloomberg show.
The commonwealth in June approved a law that allows certain public agencies to ask bondholders to take a loss. The three largest credit-rating companies cut the island to speculative grade in February as its leaders struggled to revive the island’s economy and generate enough revenue to pay its debt.
The GDB, which handles the territory’s capital-markets transactions, also sold $61 million of floating-rate notes, Bloomberg data show.
Jessica Francisco, a spokeswoman at New York-based JPMorgan Chase & Co., which managed the fixed-rate portion of the sale, declined to comment, as did Mark Lane, a spokesman in New York for Barclays Capital Inc., which handled the floating-rate part.
To contact the reporter on this story: Michelle Kaske in New York at mkaske@bloomberg.net
To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.netMark Tannenbaum, Pete Young
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Wed Oct 8, 2014 10:24am EDT
(Corrects TRANS note amount in paragraph 3 to $1.2 billion from $1.2 million)
NEW YORK Oct 7 (Reuters) - Puerto Rico enacted legislation on Tuesday providing additional guarantees to investors who purchase Tax Revenue Anticipation Notes (TRANS) issued by the U.S. commonwealth.
Governor Alejandro Garcia Padilla, who signed the legislation, said the guarantees were to win more favorable terms for the commonwealth's government.
The legislation, approved by the Senate Monday night and the House last week, would allow the Treasury Department to sell up to $1.2 billion in TRANS notes.
A syndicate of U.S. and local banks are expected to buy $900 million of TRANS notes and Puerto Rico's Government Development Bank would provide the additional $300 million, Senate FinanceCommittee Chairman Jose Nadal Power said.
That syndicate is lead by JPMorgan Chase & Co, and includes local banks Popular Inc and First Bank, according to financial industry executives in San Juan.
The legislation is seen as providing additional protection for investors by allowing them to sue under New York law. Investors are wary of lending to Puerto Rico because it has been hit by a series of creditdowngrades and has made moves to restructure some of its public corporation debt.
The legislation also enables the Treasury secretary to "cede its immunity, sovereign or otherwise, with respect to judicial procedures." (Reporting by Edward Krudy; Editing by Lisa Shumaker)
Updated Oct. 7, 2014 6:12 p.m. ET
The financial district in San Juan, Puerto Rico. The financially strapped territory aims to broaden its funding base and to avoid the market unrest that followed a bond issue in March. Associated Press
Puerto Rico is expected to sell up to $1.2 billion of short-term notes this week to large banks that have agreed to hold the debt until it matures in June, forestalling the heavy selling that followed a bond sale in March.
Lenders including J.P. Morgan Chase JPM -0.95% JPMorgan Chase & Co. U.S.: NYSE $58.52 -0.56-0.95% Oct. 10, 2014 4:00 pm Volume (Delayed 15m) : 16.48M AFTER HOURS $58.50 -0.02 -0.03%Oct. 10, 2014 7:55 pm Volume (Delayed 15m) : 209,910 P/E Ratio 15.01 Market Cap $222.22 BillionDividend Yield 2.73% Rev. per Employee $404,867 60595810a12p2p4p6p8p 10/11/14 Crystal Ball10/10/14 J.P. Morgan CEO: Cybersecurity... 10/10/14 Puerto Rico Sells $900 Million... More quote details and news » JPM in 
Your Value Your Change Short position & Co., Bank of America Corp. BAC-0.66% Bank of America Corp. U.S.: NYSE $16.48 -0.11 -0.66% Oct. 10, 2014 4:03 pm Volume (Delayed 15m) : 128.00M AFTER HOURS $16.49 +0.01 +0.06% Oct. 10, 2014 7:59 pm Volume (Delayed 15m) : 1.56M P/E Ratio 25.35 Market Cap $174.46 Billion Dividend Yield 1.21% Rev. per Employee $395,876 16.8016.6016.4016.2010a12p2p4p6p8p 10/10/14 J.P. Morgan CEO: Cybersecurity... 10/10/14 Puerto Rico Sells $900 Million... 10/10/14 Bank Execs Try to Push Beyond ...More quote details and news » BAC in Your Value Your Change Short position and Morgan StanleyMS -1.08% Morgan Stanley U.S.: NYSE $32.94 -0.36 -1.08% Oct. 10, 2014 4:02 pm Volume (Delayed 15m) : 10.95M AFTER HOURS $32.94 0.00 % Oct. 10, 2014 6:19 pm Volume (Delayed 15m) :230,665 P/E Ratio 15.18 Market Cap $65.38 Billion Dividend Yield 1.21% Rev. per Employee $778,05934.0033.5033.0032.5010a11a12p1p2p3p4p5p6p 10/10/14 Tesla Aims to Leapfrog Rivals 10/10/14Puerto Rico Sells $900 Million... 10/10/14 Morgan Stanley Says No Assuran... More quote details and news » MS in Your Value Your Change Short position have said they won’t sell the debt, which is often sold by purchasing banks to bond funds and other buyers, according to people familiar with Puerto Rico’s financing plans. The sale of short-term notes, rated below investment grade, is expected to be arranged by J.P. Morgan, the people said. The $3.5 billion of bonds in March were purchased largely by hedge funds.
Your Value Your Change Short position & Co., Bank of America Corp. BAC-0.66% Bank of America Corp. U.S.: NYSE $16.48 -0.11 -0.66% Oct. 10, 2014 4:03 pm Volume (Delayed 15m) : 128.00M AFTER HOURS $16.49 +0.01 +0.06% Oct. 10, 2014 7:59 pm Volume (Delayed 15m) : 1.56M P/E Ratio 25.35 Market Cap $174.46 Billion Dividend Yield 1.21% Rev. per Employee $395,876 16.8016.6016.4016.2010a12p2p4p6p8p 10/10/14 J.P. Morgan CEO: Cybersecurity... 10/10/14 Puerto Rico Sells $900 Million... 10/10/14 Bank Execs Try to Push Beyond ...More quote details and news » BAC in Your Value Your Change Short position and Morgan StanleyMS -1.08% Morgan Stanley U.S.: NYSE $32.94 -0.36 -1.08% Oct. 10, 2014 4:02 pm Volume (Delayed 15m) : 10.95M AFTER HOURS $32.94 0.00 % Oct. 10, 2014 6:19 pm Volume (Delayed 15m) :230,665 P/E Ratio 15.18 Market Cap $65.38 Billion Dividend Yield 1.21% Rev. per Employee $778,05934.0033.5033.0032.5010a11a12p1p2p3p4p5p6p 10/10/14 Tesla Aims to Leapfrog Rivals 10/10/14Puerto Rico Sells $900 Million... 10/10/14 Morgan Stanley Says No Assuran... More quote details and news » MS in Your Value Your Change Short position have said they won’t sell the debt, which is often sold by purchasing banks to bond funds and other buyers, according to people familiar with Puerto Rico’s financing plans. The sale of short-term notes, rated below investment grade, is expected to be arranged by J.P. Morgan, the people said. The $3.5 billion of bonds in March were purchased largely by hedge funds.
The unusual requirement tied to the proposed sale of tax- and revenue-anticipation notes reflects the financially strapped territory’s efforts to broaden its funding base and to avoid the market unrest that followed the March deal, some of the people said. Banks don’t usually agree to such lockups because regulators have increased capital charges for holding debt rated below investment grade, a bid to discourage lenders from holding risky assets.
The debt matures in June and will pay 7.75% annual interest, according to a notice posted on the website of Electronic Municipal Market Access, known as EMMA. The relatively high interest rate reflects investor fears that the island’s economy won’t turn a corner before the government runs out of cash.
Puerto Rico, under Gov. Alejandro Garcia Padilla, wants to broaden its funding base and avoid the market unrest that followed a March deal. Reuters
The sale would mark the first time Puerto Rico has raised money in public markets since passing a law in June that allowed agencies such as the island’s power, water and highway authorities to restructure their debts. Those three agencies have almost $20 billion in outstanding debt, according to BarclaysBARC.LN -0.91% Barclays PLC U.K.: London GBp223.90 -2.05 -0.91% Oct. 10, 2014 4:35 pm Volume (Delayed 15m) : 40.32M P/E Ratio 32.45 Market Cap GBp37.18 Billion Dividend Yield 1.79% Rev. per Employee GBp212,636 2282262242229a10a11a12p1p2p3p4p 10/10/14 Tesla Aims to Leapfrog Rivals10/10/14 RBC Ordered to Pay $75.8 Milli... 10/10/14 Nike CIO Rakes in the Honors More quote details and news » BARC.LN in Your Value Your Change Short position PLC. The law doesn’t apply to Puerto Rico’s general obligation or sales tax debt.
Your Value Your Change Short position PLC. The law doesn’t apply to Puerto Rico’s general obligation or sales tax debt.
Representatives for J.P. Morgan, Morgan Stanley and Bank of America declined to comment.
Puerto Rico has about $73 billion in total debt, which is widely held by mutual funds, hedge funds and individuals, and the island needs market access to cover expenses, including more than $1.2 billion in debt service due this year.
By selling new bonds, Puerto Rico buys itself time to try to restart the economy, plug its budget deficit and to restructure the Puerto Rico Electric Power Authority, which owes about $9 billion.
The previous sale was billed as crucial to give the new administration of Gov. Alejandro Garcia Padilla breathing room. The sale came after major credit-rating firms downgraded Puerto Rico to junk status.
By issuing debt only to banks, Puerto Rico is broadening its pool of investors, as it plans to sell longer-term bonds in coming months and may need hedge funds and mutual funds to buy that debt, said Robert Donahue, managing director at research firm Municipal Market Advisors. The commonwealth also may have wanted to keep the bonds from trading immediately to avoid the risk that falling prices might undermine investor confidence, he said.
Hedge funds like Och-Ziff Capital Management OZM -1.04% Och-Ziff Capital Management LLC U.S.: NYSE $10.50 -0.11 -1.04% Oct. 10, 2014 4:03 pm Volume (Delayed 15m) : 2.13M AFTER HOURS$10.50 0.00 % Oct. 10, 2014 4:05 pm Volume (Delayed 15m) : 5,064 P/E Ratio 6.51 Market Cap $5.03 Billion Dividend Yield 6.48% Rev. per Employee $4,007,52010.7510.5010.2510.0010a11a12p1p2p3p4p 10/07/14 Puerto Rico to Sell $1.2 Billi... 09/28/14 Fed Questions Bank Maneuver to... 09/18/14 Regulators Probe Goldman's Int... More quote details and news » OZM in Your Value Your Change Short position LLC, Fir Tree Partners and Perry Capital LLC bought most of Puerto Rico’s bonds in March. Some still own the debt, but many sold out within weeks. The bond traded 2,539 times in its first month after issue, declining in value by about 8% in that period, according to data from EMMA.
Your Value Your Change Short position LLC, Fir Tree Partners and Perry Capital LLC bought most of Puerto Rico’s bonds in March. Some still own the debt, but many sold out within weeks. The bond traded 2,539 times in its first month after issue, declining in value by about 8% in that period, according to data from EMMA.
In comparison, a California bond sale in March traded 717 times in its first month, according to EMMA.
Banks buying the new notes, which include Barclays and Banco Popular, are willing to put the risky debt on their balance sheets because it pays an unusually high rate for short-term debt. A bond backing bankrupt Detroit’s development authority that matures in July traded in recent days at a yield of about 4.25%, according to EMMA.
Agreeing to buy debt now could also win the banks business underwriting billions of dollars in future bond sales Puerto Rico hopes to sell to fund managers in the next 12 months, analysts said.
A representative of Barclays declined to comment. Representatives for Banco Popular didn’t immediately return requests for comment.
Write to Matt Wirz at matthieu.wirz@wsj.com
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NEW YORK Fri Oct 10, 2014 1:46pm EDT
NEW YORK Oct 10 (Reuters) - Prices of Puerto Rico's benchmark general obligation bonds fell to their lowest average level since July on Friday as the U.S. commonwealth carried out a private placement of up to $1.2 billion in short-term notes.
The bonds, which carry an 8 percent coupon and mature in 2035, traded at an average price of 87.833 cents on the dollar and a yield on 9.336 percent, according to Municipal Market Data (MMD).
As part of the short-term Tax Revenue Anticipation Notes (TRANS) sale Puerto Rico's Government Development Bank issued nearly $350 million in short-term financing on Thursday, according to a filing on the Electronic Municipal Market Access (EMMA) website.
A source with knowledge of the transaction, who could not talk publicly about the ongoing deal, said the bulk of the sale would likely be completed on Friday.
The TRANS notes sold on Thursday carried an interest rate of 7.7 percent to 7.75 percent and mature in June 2015. That compares to top-rated municipal borrowers who pay 0.13 percent a year for loans, according to MMD.
Puerto Rico's debt carries below investment grade, or junk, ratings.
Puerto Rico's tax collections fell unexpectedly in September and the first quarter take, of $1.77 billion, was $36 million below expectations, it said on Thursday. The commonwealth also warned that it may cut its income tax forecast for the coming months. (Reporting by Edward Krudy; Editing by Richard Chang)
Fri Oct 10, 2014 5:48pm EDT
(Adds Moody's quote, details of transaction)
By Edward Krudy
NEW YORK Oct 10 (Reuters) - Puerto Rico paid a steep price to complete a $1.2 bln short-term financing deal on Friday as bonds of the indebted commonwealth slipped to a three-month low and recent data showed the economy and tax revenues remain weak.
Puerto Rico paid an interest rate of nearly 8 percent to borrow from a syndicate of banks until next June, the commonwealth's Government Development Bank (GDB) said on Friday, a hefty premium compared with top-rated municipal borrowers, who pay about 0.13 percent to borrow for a year.
Traditional muni investors are largely steering clear of Puerto Rico with its debt load of over $70 billion. The Commonwealth passed a law in June that enables it public corporations to restructure around $20 billion in debt, further spooking bondholders.
The exodus of traditional muni funds has left Puerto Rico's financing needs in the hands of banks and hedge funds. Friday's note deal was the first time the island had borrowed money since March when it issued $3.5 billion in general obligation bonds, a deal bought mainly by hedge funds.
"Clearly the commonwealth only has access to a very limited audience and that's why they have had to pay such high rates," said Triet Nguyen, an analyst at NewOak.
Hedge funds did not take any of the note sale on Friday, a person close to the transaction said. However, the banks could sell on the notes at a later date, according to another person involved in the sale. The people were not authorized to talk to publicly about the deal.
Puerto Rico's benchmark general obligation bonds fell to the lowest since July on Friday. The bond, which carry an 8 percent coupon and mature in 2035, traded at an average price of 87.833 cents on the dollar and a yield of 9.336 percent, according to Municipal Market Data (MMD).
The notes sold on Friday have a general obligation guarantee, a sign of the more onerous borrowing conditions that Puerto Rico faces. Although they are treated equally with other GO debt they have a time seniority because of their short-term nature.
"The commonwealth still has market access but it is coming with increasingly onerous terms and at higher borrowing costs," said Edward Hampton, an analyst at ratings agency Moody's.
The deal "underscores the continued vulnerability on the liquidity front and the long running economic stagnation that has exacerbated its budgetary challenges," he said.
The notes were Tax Revenue Anticipation Notes (TRANS), usually a standard cash management tool used to provide funds ahead of expected tax revenues.
Puerto Rico also had to waive sovereign immunity and agree to New York jurisdiction in the event of any legal disputes involving the notes.
The weakness in Puerto Rico's bonds on Friday followed some disappointing tax revenue and economic data in recent weeks.
Puerto Rico's tax collections fell unexpectedly in September and the first quarter take, of $1.77 billion, was $36 million below expectations, it said on Thursday.
The commonwealth also warned that it may cut its income tax forecast for the coming months.
The missed revenue forecast came after data showing ongoing weakness in the economy. Puerto Rico's economic activity has slumped to its lowest level in two decades, according to an index released by the GDB at the end of September.
The GDB said $700 million of the notes are structured as a term note and carry an annual interest rate of 7.75 percent, while $200 mln of notes are structured as a revolving line and carry an annual interest rate of one-month Libor plus 7.55 percent. The GDB funded an additional $300 million in notes.
The lead underwriter on the transaction was J.P. Morgan. Morgan Stanley, Bank of America, Barclays, Banco Popular de Puerto Rico and Amalgamated Bank also took part.
J.P. Morgan and Morgan Stanley each took $250 million of the notes, Bank of America took $200 million, Banco Popular took $100 million, Barclays took $75 million, and Amalgamated Bank took $25 million, according to someone close to the transaction who was not able to talk about it publicly. (Reporting by Edward Krudy; Editing by Chizu Nomiyama and Marguerita Choy)
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Fri Oct 10, 2014 7:42pm EDT
(Adds Puerto Rico's statement that it will appeal and percentage jump of Doral's stock price.)
SAN JUAN, Puerto Rico Oct 10 (Reuters) - A Puerto Rico judge ruled in favor of Doral late on Friday in its $229 million tax dispute with the Puerto Rico Treasury Department, which said it would appeal.
"The court finds that the State failed to prove that relevant facts were falsified," Puerto Rico Superior Court Judge Laureana Perez said in her 48-page ruling.
Following the ruling, Doral's shares jumped more than 30 percent in after-hours trading to $7.25 from $5.29.
Puerto Rico's Treasury Secretary said it would pursue "all legal options available" to appeal the ruling, noting that it "sets a dangerous precedent."
Last May, the Treasury Department voided a 2012 agreement that set a $229 million tax refund for Doral resulting from a restatement of inflated earnings during a six-year period from 1998 to 2004. Doral asked for the payment after U.S. regulators said earlier this year it could no longer include the money as cash on its balance sheet.
Treasury Secretary Melba Acosta said the agency voided the deal because it was never recognized in government accounting books and because the statute of limitations had run out on the refund. Officials also cited discrepancies in Doral financial documents and said the agreement was reached through fraud.
In response to the ruling, Doral's Chief Legal Counsel Matthew McGill of Gibson, Dunn & Crutcher, said in a statement that it was "a great day not just for Doral but also for the rule of law in Puerto Rico. Doral stands ready to work with Hacienda to put this litigation behind us all and to move forward serving the people of Puerto Rico."
Puerto Rico's Treasury Department said the refund payment of over $200 million would need to be repaid in five installments over a five year period and would "remain contested by the Commonwealth of Puerto Rico until appeal processes within the judiciary system are resolved."
The department also noted that the applicable law allows for longer payment plans for payment of judgments. (Reporting by Reuters in San Juan; Editing by Chris Reese and Ken Wills)
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Doral Financial Corp. (DRL), the holding company for Puerto Rico’s second-largest lender, rose as much as 50 percent in after-hours trading following a San Juan judge’s ruling that it’s entitled to a $229.9 million tax refund.
The Puerto Rico Department of Treasury will be required to refund the full amount over five years under the ruling yesterday by Superior Court Judge Laureana Perez Perez.
Doral hasn’t posted an annual profit since 2005 and has been under pressure to collect the tax refund that the firm said was due under a 2012 agreement.
The bank sued the Treasury when settlement talks over the refund broke down this summer. San Juan-based Doral claimed the government reneged on a promise to return the overcharge.
The tax dispute arose amid a slowdown in Puerto Rico’s economy, which has struggled to expand since 2006, and financial difficulties for both for the island’s government and the San Juan-based lender. Puerto Rico’s credit rankings were dropped to speculative grade in February by the three largest credit-rating companies as concerns rose over whether the U.S. commonwealth and its agencies will be able to repay their combined $73 billion in debt.
Perez said she couldn’t consider the condition of the economy in deciding the case. The Treasury didn’t prove Doral had misrepresented or falsified facts related to an agreement in the tax dispute, according to the judge.
Appeal Vowed
Puerto Rico Treasury Secretary Melba Acosta Febo vowed to appeal the decision.
“We respectfully disagree with the court’s ruling in this matter, which is inconsistent with the Internal Revenue Code, applicable laws and regulations,” she said in a statement.
Doral fell 24 percent on Oct. 1 when it disclosed in a regulatory filing that the Federal Deposit Insurance Corp. had downgraded it to “significantly undercapitalized.” The bank must “immediately” increase capital to the minimums required in a 2012 consent order or submit a contingency plan for the sale, merger or liquidation of the bank, according to that filing.
“The court carefully listened to all the evidence and has ruled definitively that Doral’s tax agreement is valid and effective,” the company’s chief legal counsel, Matthew McGill, said yesterday in a statement. “It’s a great day not just for Doral but also for the rule of law in Puerto Rico.”
The refund stems from the company’s overstatement of earnings from 1998 to 2005, an attorney for Doral said in June.
Earnings Restated
Doral announced in September 2005 that it would restate earnings before taxes as of the end of 2004. The following year, it agreed to pay a $25 million fine to settle an investigation by the U.S. Securities and Exchange Commission into whether it had overstated earnings from 2000 to 2004. The company didn’t admit or deny regulators’ allegations in the settlement, the SEC said at the time.
The excess tax payment on the overstated earnings was memorialized in an agreement that Doral alleges the treasury department wrongfully voided. In its lawsuit, Doral said that the agency’s actions were “unlawful and beyond its authority.”
The Puerto Rican government maintained that it didn’t owe the money. In May, the Federal Reserve Bank of New York told Doral to write off the refund as a loss on its balance sheet after Puerto Rico’s Treasury ruled that the company wasn’t entitled to payment.
The case is Doral Financial Corp. v. Commonwealth of Puerto Rico, KAC2014-0533, Civil Court of First Instance, San Juan Superior Division.
To contact the reporter on this story: Phil Milford in Wilmington, Delaware at pmilford@bloomberg.net; Alexander Lopez in Civil Court of First Instance in San Juan
To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net Andrew Dunn
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Updated Oct. 10, 2014 5:23 p.m. ET
Puerto Rico sold $900 million of short-term notes bearing interest rates of as much as 7.75%, its first debt offering since the passage of a law paving the way for a possible restructuring of some of its agencies’ obligations.
Among the lenders were J.P. Morgan Chase JPM -0.95% JPMorgan Chase & Co. U.S.: NYSE $58.52-0.56 -0.95% Oct. 10, 2014 4:00 pm Volume (Delayed 15m) : 16.48M AFTER HOURS $58.50 -0.02-0.03% Oct. 10, 2014 7:55 pm Volume (Delayed 15m) : 209,910 P/E Ratio 15.01 Market Cap $222.22 Billion Dividend Yield 2.73% Rev. per Employee $404,867 60595810a12p2p4p6p8p 10/11/14 Crystal Ball 10/10/14 J.P. Morgan CEO: Cybersecurity... 10/10/14 Puerto Rico Sells $900 Million... More quote details and news » JPM in Your Value Your Change Short position & Co., Bank of America Corp. BAC-0.66% Bank of America Corp. U.S.: NYSE $16.48 -0.11 -0.66% Oct. 10, 2014 4:03 pm Volume (Delayed 15m) : 128.00M AFTER HOURS $16.49 +0.01 +0.06% Oct. 10, 2014 7:59 pm Volume (Delayed 15m) : 1.56M P/E Ratio 25.35 Market Cap $174.46 Billion Dividend Yield 1.21% Rev. per Employee $395,876 16.8016.6016.4016.2010a12p2p4p6p8p 10/10/14 J.P. Morgan CEO: Cybersecurity... 10/10/14 Puerto Rico Sells $900 Million... 10/10/14 Bank Execs Try to Push Beyond ...More quote details and news » BAC in Your Value Your Change Short position and Morgan Stanley,MS -1.08% Morgan Stanley U.S.: NYSE $32.94 -0.36 -1.08% Oct. 10, 2014 4:02 pm Volume (Delayed 15m) : 10.95M AFTER HOURS $32.94 0.00 % Oct. 10, 2014 6:19 pm Volume (Delayed 15m) :230,665 P/E Ratio 15.18 Market Cap $65.38 Billion Dividend Yield 1.21% Rev. per Employee $778,05934.0033.5033.0032.5010a11a12p1p2p3p4p5p6p 10/10/14 Tesla Aims to Leapfrog Rivals 10/10/14Puerto Rico Sells $900 Million... 10/10/14 Morgan Stanley Says No Assuran... More quote details and news » MS in Your Value Your Change Short position according to a news release issued by the U.S. commonwealth.
Your Value Your Change Short position & Co., Bank of America Corp. BAC-0.66% Bank of America Corp. U.S.: NYSE $16.48 -0.11 -0.66% Oct. 10, 2014 4:03 pm Volume (Delayed 15m) : 128.00M AFTER HOURS $16.49 +0.01 +0.06% Oct. 10, 2014 7:59 pm Volume (Delayed 15m) : 1.56M P/E Ratio 25.35 Market Cap $174.46 Billion Dividend Yield 1.21% Rev. per Employee $395,876 16.8016.6016.4016.2010a12p2p4p6p8p 10/10/14 J.P. Morgan CEO: Cybersecurity... 10/10/14 Puerto Rico Sells $900 Million... 10/10/14 Bank Execs Try to Push Beyond ...More quote details and news » BAC in Your Value Your Change Short position and Morgan Stanley,MS -1.08% Morgan Stanley U.S.: NYSE $32.94 -0.36 -1.08% Oct. 10, 2014 4:02 pm Volume (Delayed 15m) : 10.95M AFTER HOURS $32.94 0.00 % Oct. 10, 2014 6:19 pm Volume (Delayed 15m) :230,665 P/E Ratio 15.18 Market Cap $65.38 Billion Dividend Yield 1.21% Rev. per Employee $778,05934.0033.5033.0032.5010a11a12p1p2p3p4p5p6p 10/10/14 Tesla Aims to Leapfrog Rivals 10/10/14Puerto Rico Sells $900 Million... 10/10/14 Morgan Stanley Says No Assuran... More quote details and news » MS in Your Value Your Change Short position according to a news release issued by the U.S. commonwealth.
The relatively high interest rate reflects concerns that Puerto Rico could run out of cash as its economy struggles. A widely watched index measuring economic activity in August fell to its lowest level in 20 years. In comparison, a bond backing bankrupt Detroit’s development authority, which matures in July, traded in recent days at a yield of about 4.25%. Treasury bills maturing in June 2015 yield about 0.05%.
“This transaction will support the Commonwealth’s ongoing liquidity as we continue to focus on guiding Puerto Rico on a path to fiscal health and stability,” Puerto Rico Treasury Secretary Melba Acosta said in the release.
The deal “means Puerto Rico will live another day,” said Robert Donahue, managing director at the research firm Municipal Market Advisors. The sale “should allow the government to breathe easy until the end of the fiscal year. The banks will continue to have to monitor the cash burn at the central government level to ensure they can get repaid by next June.”
Puerto Rico collects the bulk of its tax receipts in the fourth quarter of its fiscal year, which ends on June 30, Mr. Donahue said. The commonwealth often taps banks for debt financing that is backed by this anticipated tax revenue.
But its financial woes have complicated and raised the costs of what in past years has been a routine annual transaction. For example, these latest notes are subject to New York law, a new protection for the banks, said Shawn O’Leary, senior research analyst at Nuveen Investment Management LLC. The high interest rate on the Puerto Rico notes shows “how thin the market for Puerto Rico paper is at this point,” he said.
The sale marks the first time Puerto Rico has borrowed since passing a law in June that allowed some agencies such as the island’s power, water and highway authorities to restructure their debts. Those three agencies have almost $20 billion in debt outstanding, according to analysts at Barclays.BARC.LN -0.91% Barclays PLC U.K.: London GBp223.90 -2.05 -0.91% Oct. 10, 2014 4:35 pm Volume (Delayed 15m) : 40.32M P/E Ratio 32.45 Market Cap GBp37.18 Billion Dividend Yield 1.79% Rev. per Employee GBp212,636 2282262242229a10a11a12p1p2p3p4p 10/10/14 Tesla Aims to Leapfrog Rivals10/10/14 RBC Ordered to Pay $75.8 Milli... 10/10/14 Nike CIO Rakes in the Honors More quote details and news » BARC.LN in Your Value Your Change Short position The law doesn’t apply to Puerto Rico’s general-obligation or sales-tax bonds.
Your Value Your Change Short position The law doesn’t apply to Puerto Rico’s general-obligation or sales-tax bonds.
The notes sold Friday are guaranteed by the commonwealth and come due in June, with $700 million carrying an annualized interest rate of 7.75% and another $200 million structured as a revolving line of credit and bearing an interest rate of 7.55% over the London interbank offered rate, or Libor.
The island’s Government Development Bank will use the $900 million to buy the same amount of tax- and revenue- anticipation notes from the commonwealth. The bank also will buy another $300 million in notes, as it has in prior years, bringing the total size of the deal to $1.2 billion, according to the release.
In total, Puerto Rico has about $73 billion of debt, which is widely held by mutual funds, hedge funds and individuals. The island needs to tap credit markets again to cover expenses, including more than $1.2 billion in debt service due this year, Mr. Donahue said.
By selling new bonds, Puerto Rico buys itself time to restart the economy, plug its budget deficit and restructure the Puerto Rico Electric Power Authority, which owes about $9 billion.
In March, Puerto Rico tapped public credit markets, borrowing $3.5 billion at an interest rate of 8%. That sale, which was seen as crucial to the new administration of Gov. Alejandro Garcia Padilla, came after major credit-rating firms downgraded Puerto Rico to junk status.
Write to Aaron Kuriloff at AARON.KURILOFF@wsj.com
