Puerto Rico sells $3.5B in bonds, sees high demand

SAN JUAN, Puerto Rico (AP) — Puerto Rico sold $3.5 billion in general obligation bonds on Tuesday in the largest issue of its kind for the U.S. territory, which is struggling to pay off $70 billion in public debt.

The bonds were being sold at a minimum price of $100,000, luring mostly hedge fund investors in a sale handled by Barclays, Morgan Stanley and RBC Capital Markets. The bond issue had been initially set for $3 billion but was increased to $3.5 billion due to demand.

Orders were received from 270 different accounts and surpassed $16 billion, according to Puerto Rico's Government Development Bank, which oversees the island's debt transactions.

"It's something people did not think was achievable just a week ago," said David Tawil, co-founder and portfolio manager of New York-based Maglan Capital. "They were able to go ahead and up the size of the issuance. That gives them more room, more liquidity."

He said in a phone interview that an 8.7 percent yield also caught the attention of the private wealth community, which helped boost sales.

"The market is starved for yield," he said.

Puerto Rico's credit rating was recently downgraded to junk status, and the bond sale was being closely watched by U.S. investors who feared last year that the U.S. territory would default as it braced for its eighth year in recession.

The sale will likely give Puerto Rico less than two years' time to strengthen its economy, said Triet Nguyen, founder of Axios Advisors LLC, an Illinois-based independent municipal research and investment advisory company.

"It's just a short-term solution," he said in a phone interview. "It does help because the commonwealth will not be forced to default or restructure for a little while yet. It buys them some time."

Puerto Rico's Government Development Bank said Tuesday that the government will receive some $3.2 billion in net proceeds and that $900 million of that will be used to refinance debt, among other things. The bank said it would receive a $1.9 billion liquidity infusion.

The bond issue marks the first time in two years that the island has sold general obligation bonds, which are backed by Puerto Rico's constitution. Also appeasing investors was a bill that Gov. Alejandro Garcia Padilla signed last week that allows them to sue in New York courts.

A 250-page statement that the Government Development Bank released last week warned that there were significant risks to buying the bonds, including that it might not be able to pay the debt service.

In addition, it warned that recent downgrades to the island's credit rating could raise its cost of borrowing and affect the bank's liquidity.

"Although (the bank) has previously assisted the Commonwealth in satisfying its obligations...there is no assurance that it will be able to continue to provide such assistance in the future," it said. "If the Commonwealth's financial condition does not improve, it may need to implement emergency measures that may include a restructuring, moratorium or other actions affecting creditors' rights."

Puerto Rico's governor has taken several measures to help keep the island's economy afloat, including raising taxes and making changes to crumbling public pension systems. He also has pledged a balanced budget for fiscal year 2015.

Todd Hagerman, a New York-based analyst with Sterne Agee, said in an email to The Associated Press that there have been incremental signs of improvement in Puerto Rico's economy, and that the deal was upsized because of exceptionally strong demand from both traditional and non-traditional debt investors.

"The size of the issue ensured investor concerns were thoroughly addressed to diminish fears surrounding the government's fiscal challenges," he said.

Puerto Rico's bonds are popular with U.S. investors because they are exempt from federal, state and local taxes, and its debt is held by roughly 70 percent of U.S. municipal mutual funds, according to Morningstar.