Puerto Rico, rated one step above junk, is set to issue debt in the next month, the first borrowing from the U.S. territory since August, officials said today.
The island of 3.6 million people has sufficient cash through June, David Chafey, chairman of the Government Development Bank, said in an interview on CNBC. The commonwealth may issue bonds in February, he said.
While Puerto Rico debt has rallied this month, the securities are trading at speculative-grade yields. Chafey declined to say the yield level at which Puerto Rico can afford to borrow. The interest rates on commonwealth debt may attract buyers, he said.
“If that’s what it takes to bring in investors, that’s fine,” Chafey said in the interview.
Moody’s Investors Service on Dec. 11 threatened to cut Puerto Rico to speculative grade within 90 days if it’s unable to access capital markets. The commonwealth and its agencies have $70 billion of debt. About 70 percent of U.S. municipal mutual funds own the securities, which are tax-exempt nationwide, according to Morningstar Inc.
Puerto Rico plans to sell as investors are adding the most money since September to the riskiest part of the $3.7 trillion municipal market, Lipper US Fund Flows data show.
Commonwealth securities have earned about 3.3 percent this year through Jan. 23, beating all 27 U.S. states in Standard & Poor’s total-return index and surpassing the 2 percent gain for the broader municipal market.
The federal government hasn’t offered additional funds, and Puerto Rico hasn’t requested such aid, Treasurer Melba Acosta said in the interview. Puerto Rico’s economy is contracting, and its jobless rate of 14.7 percent in November exceeded the level in all U.S. states.
“The federal government has offered technical assistance, and that’s what we’re getting,” Acosta said.
Rising interest rates last quarter halted issuance of as much as $1.2 billion of sales-tax debt. The last borrowing from a Puerto Rico issuer was a $673 million Puerto Rico Electric Power Authority revenue-bond sale in August, data compiled by Bloomberg show.
Puerto Rico sales-tax bonds maturing in August 2042 and graded four steps below top-rated munis by S&P traded today with an average yield of 8.06 percent, about 4.16 percentage points above benchmark munis, Bloomberg data show. The yield gap was 4.4 percentage points at the end of 2013.
Morgan Stanley has approached hedge funds and buyers of distressed debt to assess interest in a possible taxable Puerto Rico bond sale, according to three people with knowledge of the matter who requested anonymity because the conversations are private.
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