Reprinted from Caribbean Net News
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Puerto Rico leads tax-exempt borrowers with 9-month note sale

Friday, October 20, 2006

by: Jeremy R. Cooke and Adam L. Cataldo

NEW YORK, USA (Bloomberg): Puerto Rico led borrowers in the US municipal debt market on Wednesday as it sold notes maturing in nine months to fund operations and augment cash flow.

The US commonwealth, which replaced its excise tax with a higher-percentage sales tax after a budget impasse shut down the government earlier this year, issued $875 million of top-rated tax-and-revenue-anticipation notes through Merrill Lynch & Co.

Short-term borrowing costs have gone up since Puerto Rico last issued such debt. In December 2005, the island's Government Development Bank sold notes due in July at a 3.23 percent yield.

"We have seen short-term credits like California and New Jersey trading this week" at around 3.5 percent, said Jorge Irizarry, executive vice president for finance at the bank, which oversees debt sales by the commonwealth and its agencies.

"We expect that those would be comparable to where we could trade." Today's notes were priced to yield 3.5 percent -- in line with Irizarry's expectations yesterday and 0.03 percentage point, or 3 basis points, less than today's Municipal Market Advisors index of what high-grade issuers pay to borrow for one year. The commonwealth's $1.05 billion note deal in December yielded 3 basis points more than the one-year index that day.

Yields on debt maturing in 2008 or later were unchanged today, with the index for top-rated 30-year debt at 4.25 percent.

Puerto Rico typically generates demand from investors across the nation, because interest earned on its debt is exempt from federal, state, and local taxes. Its notes carry the highest short-term ratings from Moody's Investors Service and Standard & Poor's, thanks to the backing of a letter of credit from six banks.

Each institution will secure a different portion of Wednesday's note deal, with Bank of Nova Scotia leading banks and backing 35 percent of the offering. Seven banks led by Scotiabank shared responsibility for backing last year's Puerto Rico note deal.

Buying credit enhancement cuts borrowing costs for the commonwealth, whose general obligation credit carries the lowest and second-lowest investment grade from Moody's and S&P, respectively. Both credit-rating companies maintain a negative outlook on the island's credit.

For two weeks in May, the commonwealth government shut down nonessential services because of a squabble over the budget.

Puerto Rico lawmakers later passed spending and tax measures aimed at improving the government's finances, and the new sales tax of 7 percent is projected to increase revenue.

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