Esta página no está disponible en español.

The Bond Buyer

Puerto Rico Readies $1B Tobacco Sale

By Michael McDonald

September 11, 2002
Copyright © 2002 The Bond Buyer; Thomson Financial, Inc. All rights reserved. 

Puerto Rico is preparing to sell $1.1 billion in tobacco settlement-backed bonds before the end of this month to raise money for infrastructure investments and refinance $380 million in tobacco bonds sold by the commonwealth in 2000.

Salome Galib, spokeswoman for the Government Development Bank for Puerto Rico, the commonwealth's fiscal agent and financial adviser, said securitizing annual tobacco settlement payments will allow the government to pay for infrastructure projects that could not be done otherwise because of budget constraints.

Essentially, we need to have some infrastructure projects take off and we understand this is the right time to raise those funds, Galib said. The exact use of proceeds is still being determined.

Puerto Rico's Children's Trust Fund is the issuer of the bonds. The fund was set up after 46 states and six U.S. jurisdictions, including the commonwealth, reached a $200 billion settlement in 1998 with four tobacco manufacturers. This summer, the Puerto Rico legislature passed a law to loosen the restrictions on the use of the fund's money, allowing it to be used to back infrastructure projects.

From a need standpoint, the island has tremendous infrastructure needs, said Kenneth Gear, director at Standard & Poor's. As for refunding outstanding tobacco bonds, he said, If there are efficiencies that can be achieved through a refunding, then it makes sense for them to do that part of it.

The plans for the sale come as an increasing number of state and local governments have begun using the promise of tobacco payments as security to raise funds in a bond issue and use the proceeds to plug budget holes. As more tax-exempt tobacco bonds have been sold, the price of the debt has dropped and yields have gone up.

Puerto Rico has hired Salomon Smith Barney Inc. as lead manager for the upcoming tobacco sale, with Goldman, Sachs & Co. and UBS PaineWebber Inc. as co-managers. The commonwealth was not willing to reveal the plans for the maturity and structure of the sale.

Two years ago, it sold $397 million in Children's Trust Fund tobacco bonds, one of the first tobacco bond deals done. It was structured with serial bonds maturing between 2002 and 2014 and term bonds maturing in 2020 and 2026. The commonwealth paid a coupon of 4.625% on the 2002 maturity and 6% on the 2026 term bond.

Moody's Investors Service rated that deal Aa3 and Fitch Ratings rated it A-plus, while Standard & Poor's rated the maturities between 2002 and 2005 AA-minus, the maturities between 2006 and 2010 A-plus, and those between 2011 and 2026 A.

None of the agencies has rated the upcoming deal yet. Moody's rates the commonwealth's general obligation credit Baa1, while Standard & Poor's rates it a step higher at A-minus. It downgraded the credit to A-minus from A in May due to Puerto Rico's budget problems.

Fitch does not rate the GO credit.

In addition to the tobacco sale, the Puerto Rico Public Buildings Authority has also recently added a $346 million refunding -- split into a $62 million current refunding and a $284 million forward refunding -- to the tax-exempt bond calendar, expected to price next week. Lehman Brothers is lead manager.

Puerto Rico is also planning its annual tax and revenue anticipation note sale, backed by its GO credit, in the coming weeks. This year it is selling $800 million.

Also yesterday, the government announced the Government Development Bank's new seven-person executive committee, which includes Carlos M. Pineiro. Last week, The Bond Buyer reported that Pineiro was leaving Banc One Capital Markets in Chicago to join GDB, replacing finance director Jose Pagan.

The government named Hugo Diaz Molini executive vice president, treasurer, and director of investments, replacing Hector Mendez, who was promoted to head the GDB in July.

Self-Determination Legislation | Puerto Rico Herald Home
Newsstand | Puerto Rico | U.S. Government | Archives
Search | Mailing List | Contact Us | Feedback