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The Bond Buyer
A Bit Of Debt Abstinence In Store After A Two-Year Binge
By Michael McDonald
March 3, 2003
After two years of record debt issuance, in which the government and government agencies sold a total of nearly $12 billion in tax-exempt bonds, Puerto Rico is anticipating a relatively light year of selling bonds into the U.S. market in 2003.
The projected drop comes as the Puerto Rico government continues to struggle with structural budget deficits, which last year led Standard & Poor's to downgrade the general obligation credit -- to A-minus from A --for the first time since it started rating the commonwealth in 1956.
"Clearly, from our perspective there had been a change," said Kenneth Gear, an analyst at Standard & Poor's. "It was a weaker situation than when we looked at it in previous years."
The downgrade in part grew out of the high level of Puerto Rico's market activity in the last couple of years. Since Gov. Sila M. Calderon took office at the beginning of 2001, the commonwealth has been restructuring debt in order to push out debt costs to later years and provide immediate budget relief.
At the same time, the economy has weakened, forcing the administration to run operating deficits, sell deficit bonds, and use one-time revenues to close gaps. Standard & Poor's put the A-minus credit rating under review for a downgrade in November after revelations that government agencies failed to make payments on securitized leases.
However, on the plus side, the fiscal situation has not been as dire as in some states, and revenues and spending this fiscal year have for the most part been in line with projections.
"Their budget remains under a tolerable degree of pressure," said Timothy Blake, senior vice president at Moody's Investors Service, which rates Puerto Rico Baa1. "Fortunately, they appear to not be suffering the same revenue downturn that the mainland states are suffering."
In early February, the Treasury and Office of Management and Budget disputed higher estimates made by leaders of the commonwealth's opposition party and said the fiscal 2003 shortfall was, as of the end of December, no more than $50 million.
While the Calderon administration tried to prime the pump during the recession, the impact has not been as great as expected, said Jose J. Villamil, chairman of Estudios Tecnicos Inc. in San Juan. His consulting group estimated the island's economy grew by a somnolent 0.3% last year and would only grow around 2% this year.
"Basically two things happened," Villamil said. "The U.S. economy hasn't done as well, and of course in Puerto Rico we were all expecting the government construction investments to move a little faster. It hasn't happened as early as we thought it would." He said unemployment is roughly stable at around 11%.
After selling $5.9 billion in tax-exempt bonds last year, the government has said it would sell $2.3 billion this year, including taxable bonds sold only to Puerto Rico residents. However, Carlos M. Pineiro, executive vice president for finance at the Government Development Bank for Puerto Rico, said he expects that "we are going to have some additions to that as we move forward."
Pineiro joined the GDB, the government's fiscal agent, last year from Banc One Capital Markets in Chicago. He said Puerto Rico would sell $500 million in GO-backed public improvement bonds this summer. Last year, the government sold $555.7 million for its annual consolidated capital financing, including $96.7 million in refunding bonds in the deal.
The Puerto Rico Industrial Development Co. is planning a deal that includes $200 million in new money. Another candidate for a tax-exempt deal is the Puerto Rico Municipal Finance Agency. As well there are housing and highway deal possibilities. "The highway deal is a great candidate for a refunding opportunity," Pineiro said.
Last year, the commonwealth's long-term tax-exempt bonds sales were higher than expected as a result of new refunding opportunities that came up and a near-record tobacco settlement deal that raised new money and restructured outstanding tobacco debt.
In all, the Puerto Rico government and its agencies sold 23 issues in the U.S. market totaling $6 billion in long-term tax-exempt debt, which represented a less than 1% increase over volume in 2002. Of the total, the government sold $647.5 million, a 74% decrease from the year prior, while government agencies sold $5.3 billion, a 57% increase.
Among the agency sales was $1.2 billion in tobacco settlement asset backed bonds, Series 2002, that the government sold through the Children's Trust Fund. In addition to raising money for a host of capital projects and retiring a $93 million line of credit, the sale advance refunded $380 million of a $397 million sale done through the trust fund three years ago, when tobacco settlement sales were in their infancy.
Salomon Smith Barney Inc. was the senior manager of the deal, which used 100% of the projected tobacco settlement value as collateral. Puerto Rico was among the U.S. territories that joined in the 1998 settlement of a suit brought by states against tobacco companies that has been valued at more than $200 billion.
In all, Salomon Smith Barney was the lead manager on five issues out of Puerto Rico last year totaling $2.3 billion. Lehman Brothers was second in the rankings, lead managing nine deals totaling $1.9 billion.
Earlier this year, the GDB chose a new underwriting syndicate for sales of Puerto Rico bonds in the U.S. The new senior manager group is: Goldman, Sachs & Co. and First Bank; Lehman Brothers and Santander Securities Corp.; Morgan Stanley and Popular Securities Inc.; Banc of America and Oriental Financial Group Inc.; Salomon Smith Barney; UBS PaineWebber Inc., J.P. Morgan & Co. and R&G Financial Corp.; and Merrill Lynch & Co. and BBVA SA.
In order to do business in the commonwealth, most of the Wall Street companies are paired with Puerto Rico-based companies.
The GDB was the only financial adviser in the rankings, advising on four issues totaling $976.8 million. Sidley Austin Brown & Wood was the leading bond counsel, counseling on five issues totaling $2.3 billion, while Squire Sanders & Dempsey did so on 10 issues totaling $1.9 billion.
While the Children's Trust Fund was the largest single issuer last year, the Puerto Rico Public Buildings Authority issued the most bonds in the U.S. market, selling six issues totaling $1.3 billion.