Hedge funds seeking to participate in Puerto Rico’s planned bond offering are asking that the commonwealth raise enough money to meet its needs for two years, two people with knowledge of the preliminary talks said.
They’re also requesting that the commonwealth, which was downgraded to junk this month by the three largest credit raters, give up its sovereign immunity, allowing bondholders to sue in New York court rather than face its judicial system, said the people, who asked not to be identified because discussions with the underwriters are private.
While Puerto Rico may balk at the conditions, the requests underscore how perceptions of the Caribbean island’s risk have climbed as its economy has contracted by 14% since 2006. The island’s jobless rate, at 15.4% in December, is more than double the national average.
Puerto Rico plans to sell $2 billion of general-obligation debt by mid-March to balance budgets, though lawmakers are working on a bill that would give it as much as $3.5 billion of borrowing capacity.
The sale comes after Standard & Poor’s lowered Puerto Rico to BB+, one step below investment grade, on Feb. 4, citing its limited ability to access capital markets. Moody’s Investors Service and Fitch Ratings followed with downgrades.
The discussions are considered informal as offering documents have yet to be released, the people said. Barclays Plc, Morgan Stanley and RBC Capital Markets are underwriting the sale, according to the Government Development Bank, which manages bond sales for the commonwealth.
Marc Hazelton, a Barclays spokesman, Lauren Bellmare of Morgan Stanley and Sanam Heidary at RBC declined to comment on the requests from the funds. GDB officials also declined to comment, Alix Anfang, a spokeswoman for the bank in New York, said in an e-mail.
The GDB is hosting a webcast on Feb. 18 to discuss the offering. Investors want more information on how much cash and easy-to-sell investments the island has at its disposal. At a Bloomberg Link conference in New York in November, David Chafey, chairman of the GDB, said the bank had a pool of more than $2 billion of high-grade securities to draw on.
Puerto Rico’s finances have an influence beyond the island’s shores. About 70% of U.S. mutual funds that focus on municipal bonds hold the securities, which are tax- exempt nationwide, according to Morningstar Inc.
Hedge funds and other alternative investors have been buying commonwealth debt since at least September, when yields soared on the securities on concern that it may struggle to repay its obligations.
Puerto Rico general obligations maturing in July 2041 traded Friday with an average yield of about 8.1%, or about 4.2 percentage points above benchmark munis, according to data compiled by Bloomberg. While the yield is the lowest since November, it’s up from about 5.1% a year ago.
Debt sold by the commonwealth and its agencies have earned 2.5% this year through Friday, compared with 2.4% for the entire $3.7 trillion municipal market, according to S&P data. The securities are rallying after losing about 20% last year, the worst annual performance since at least 1999.
The commonwealth and its agencies have $70 billion of debt, as of June 30. This month’s downgrades triggered $940 million of accelerated payments on debt and swap fees, with almost half due within 30 days, unless officials alter the terms, according to S&P.
The general-obligation sale would be the first borrowing from the commonwealth since the Puerto Rico Electric Power Authority sold debt in August, Bloomberg data show.