Bates Research - 03-07-14

Puerto Rico Debt Issuance

Guest Post from our Affiliate Expert in Puerto Rico, Mario Iturrino

This week the Puerto Rico Legislature approved the proposed issuance of a $3.5 bln General Obligation Bond issue.  The Government Development Bank (GDB) issued a statement saying that the offering proceeds will be used principally to repay outstanding lines of credit with the GDB, strengthen its liquidity, and refinance other outstanding debt.

The bill also authorizes the Secretary of the Treasury to consent to New York as a choice of law and jurisdiction with respect to the bonds.

On Wednesday, a report issued by the GDB acknowledged that if the bond issue scheduled to go to market next week is not finalized, the Puerto Rico Government and its agencies would have to look for alternative sources of income, because the GDB will not have the necessary liquidity to guarantee any payments.  Among other things, the report states that the capital of the bank could be reduced by 30% before June, and by 60% before June 2015.

 The preliminary consensus among market participants seems to be that the yield of the issue could be below 9%, due to an early strong indication of demand and the fact that prices in the secondary market for Puerto Rico securities have been trending higher lately.  However, the issue (which is scheduled to be priced on Tuesday, March 11 and finalized five working days afterwards) could still be priced at a discount. 

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