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Puerto Rico Plans Issue of New Tax-Exempt Bonds

NEW YORK (The Deal) -- The Commonwealth of Puerto Rico plans to issue new tax-exempt general-obligation bonds next month in order boost its liquidity, compensate for its budget deficit, and refinance some short-term obligations.

Puerto Rico and its state-owned bond-issuing entity, the Government Development Bank, held a webcast on Tuesday to present new financial information to current and potential investors.

Although government officials didn't comment on the size of the planned raise, they noted that they have a $3.5 billion legal capacity for raising new general-obligation bonds and also outlined $2.86 billion in "potential financing components," or uses for the liquidity infusion.

Those initiatives include putting $245 million toward the fiscal 2014 deficit, redeeming up to $333 million in Cofina bond anticipation notes, and taking out up to $540 million in floating-rate GO bonds and terminating related swaps.

The commonwealth announced last week that Barclays plc, RBC Capital Markets Corp., and Morgan Stanley are the joint lead managers of the upcoming offering.

The Government Development Bank's interim president, Jose Pagan, addressed the possibility of debt acceleration triggered by ratings downgrades during the call.

When all three major ratings agencies - Moody's Investors Service, Standard & Poor's, and Fitch Ratings Inc. - cut the commonwealth's debt to junk-level ratings this month, they raised the specter of debt acceleration.

But Pagan said none of the commonwealth's financial counterparties has taken steps to accelerate debt thus far. Puerto Rico has already negotiated waivers with some parties and is working to reach similar agreements with other investors.

Puerto Rico's credit rating will prevent a substantial portion of mutual funds from participating in its new bond raise, since many mutual funds are only allowed to invest in investment-grade debt. Sources are counting on participation from high-yield investors and hedge funds to fill out the latest round of financing.

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