SAN JUAN, Puerto Rico Fri Oct 17, 2014 8:07pm EDT
SAN JUAN, Puerto Rico Oct 17 (Reuters) - Puerto Rico is working on a bond sale of up to $2.5 billion to boost liquidity at the Government Development Bank (GDB), the financing arm of the struggling U.S. commonwealth, according to sources with knowledge of the deal said on Friday.
Junk-rated Puerto Rico, saddled with a debt load of more than $70 billion, wants to transfer a loan of around $2 billion the GDB made to the highway authority PRHTA to the island's infrastructure authority PRIFA. PRIFA would then securitize the debt, backed by dedicated revenues, and sell it to investors, including hedge funds, the sources said.
"The deal is very possible, but hedge funds would definitely have a big role," said one source, a former government official and finance industry veteran. "There are many funds willing, able and wanting to buy Puerto Rico bonds."
The sources were finance industry insiders in San Juan who had been briefed on the matter but were not authorized to talk about it publicly.
The PRHTA deal would also include refinancing $400 million in bond-anticipation notes sold to RBC and may include $200 million in variable notes the GDB brought from PRHTA. That would bring the total financing requirement to $2.5 billion, the sources said.
A New York-based spokesman for the GDB declined to comment.
Puerto Rico paid a steep price to complete a $1.2 billion short-term financing deal last week. It paid an interest rate of almost 8 percent to borrow from a syndicate of banks until next June. In March it sold $3.5 billion of debt in a single 2035 maturity with an 8 percent coupon and a yield of 8.727 percent.
Officials are trying to ring fence the government and the GDB by cutting off public corporations that have depended on them for funds. Refinancing PRHTA's debt with the GDB would be another step in that direction.
The island's power authority PREPA has hired restructuring expert Lisa Donahue to overhaul its operations in a move that could involve a write-down to around $9 billion in debt.
PRIFA is believed to have better access to markets than PRHTA. Unlike the highway authority, PRIFA is not subject to a restructuring law the commonwealth passed earlier this year that allows public corporations to restructure their debt.
Legislation enabling PRHTA's debt, along with supporting revenues, to be transferred to PRIFA was filed back in June but no action was taken on it despite positive reports by the House and Senate finance committees.
"The bill is still alive" Senate Finance Committee Chairman Jose Nadal Power said on Friday. "The GDB and the governor's office are still discussing alternatives. We are basically waiting for them to give us the green light in order to proceed."
The bill is expected to be re-filed to make some changes in the structure of the revenues and to include a general obligation-like bond guarantees, according to the sources.
The legislation raised eyebrows among investors and analysts when it was first filed because by clearing its debt with the GDB, PRHTA would be able to restructure nearly $5 billion of outstanding debt with bondholders without impairing the GDB.
Nadal Power, however, said eliminating the debt with the GDB and increasing crude oil and petroleum taxes again are being considered by lawmakers to make the PRHTA a stronger entity without the need to restructure its debt.
A spokeswoman said on Friday that GDB would hold a conference "shortly" but no exact date has been set. It will be the first teleconference after a fiscal team shakeup this week when Treasury Secretary Melba Acosta was nominated as GDB president. (Reporting by Reuters in San Juan, writing by Edward Krudy; Editing by Alan Crosby)
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