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.
Eli Combs, president and co-founder of Greenwich, Conn., hedge fund Meehan Combs LP, already has a position in Puerto Rico's debt, and he is interested in participating in the new offering.
"We think the new offering will be done successfully, and that this will make it very clear that there will be no reason for Puerto Rico to have to forcibly restructure in the next one-and-a-half to two years at minimum, if ever," Combs said.
He also said that he believes other hedge funds are thinking along the same lines.
"Anecdotally, there seems to be significant interest" among distressed debt-focused hedge funds, Combs added, explaining that "there are very few distressed opportunities right now that distressed investors can play in size, and this is one of them."
Some potential investors have suggested the possibility of new bonds that would be subject to New York courts rather than Puerto Rico's courts, but Combs isn't getting hung up on that idea, as he doesn't think the extra credit protection would be significant.
Alan Schankel, managing director of municipal bond strategy at Janney Capital Markets, said he expects that "there will be a large amount of variation within the deal" in terms of debt structures in order to attract a diverse investor group.
The Government Development Bank's Pagan said the upcoming raise should cover Puerto Rico's financing needs for "the next year or two," and noted that the commonwealth doesn't intend to come to market again this fiscal year.
When fiscal 2015 begins on July 1, the commonwealth may use some of its other bond-issuing entities to raise new funds.
Janney's Schankel said he expects that Puerto Rico could raise
$1 billion, give or take, through Cofina, which issues sales tax-backed bonds, and Cofim, which is a new, untested bond agency backed by municipal funds.
The webcast painted Cofim as an attractive possibility for future financing, claiming, "Cofim senior-lien debt has the potential to become a highly rated credit."
Government officials are also intent on strengthening the Government Development Bank's credit profile and decreasing federal corporations' reliance on it.
The webcast emphasized the importance of pushing Puerto Rico's government-owned companies to fiscal self-sufficiency.
Fitch announced on Tuesday that it has downgraded two major Puerto Rican federal agencies, Puerto Rico Electric Power Authority, known as PREPA, and Puerto Rico Aqueduct and Sewer Authority, known as PRASA, to BB+ from BB-.