Bloomberg reports that, according to Finance Director Martin V. Arroyo Feliciano, the Puerto Rico Electric Power Authority is selling $500 million in taxable Build America Bonds before the program expires to save $130.8 million over tax-exempt borrowing. See excerpts with a link to the original article below:
The agency rushed out the federally subsidized debt before the December 31 deadline to capture the program’s 35 percent savings on interest costs and avoid traditional tax-exempt borrowing. U.S. issuers brought forward planned sales to this month to capture the subsidy, making the last three months of 2010 the biggest sales quarter since Build Americas began in April 2009, according to data compiled by Bloomberg. The Government Development Bank for Puerto Rico decided on the offering earlier this month as it became less likely that the program would be extended, said Arroyo.
“We started rushing around getting information; I had to stop my treasurer from going on vacation,” he said in a telephone interview from San Juan. “But we got it made.” Today’s issue, backed by electricity charges, may yield 6.25 percent for 30-year bonds, he said. That’s a premium of about 180 basis points, or 1.80 percentage points, above comparable U.S. Treasuries. With the subsidy, the overall interest cost to the authority may be less than 5 percent, he said.
[. . .] The Build America rates compare with 5.72 percent yields on long-term corporate utility obligations ranked BBB to A, according to a Bank of America Merrill Lynch index. While the rating drives up the authority’s yields, the revenue stream is secure, said Bud Byrnes, chief executive officer at Encino, California-based RH Investment Corp. “They’ll trade as cheap as any credit out there and they’re not going to go out of business,” Byrnes said in a telephone interview. “Consequently, there will be a market.” Bonds of Puerto Rico, a self-governing commonwealth ceded to the U.S. in 1898 after the Spanish-American War, offer investors an exemption from any state tax, unlike most municipal debt.
[. . .] The authority had $10.1 billion in revenue bonds outstanding before the sale, making it second only to the California State Department of Water Resources, Bloomberg data show.
“This is the deal of the week,” said Tony Shields, a principal in the public-finance department at Williams Capital Group LP in New York. “There’s going to be tremendous interest.” The authority, a monopoly that provides electricity for 1.4 million consumers, is the largest public-power utility by number of customers and revenue, according to preliminary offering documents.
The proceeds will be used for Puerto Rico’s Via Verde project, a pipeline that will transport natural gas to several electricity-generating plants, the documents show. Funds also may be used to finance the authority’s capital improvement plan. The project, which will be completed by February 2012 according to bond documents, is part of a government push to develop alternative energy to lower fuel costs on the island. The use of natural gas will save customers $1 billion dollars, Arroyo said.
The authority last sold Build Americas in April, with 30- year securities priced to yield about 6.13 percent, about 149 basis points over benchmark Treasuries. The securities traded December 20 at an average yield of 6.43 percent, or 199 basis points above U.S. government debt.
[Many thanks to Teo Freytes for bringing this item to our attention.]