Faced with very strong demand from hedge funds and wealthy individuals, Puerto Rico on Tuesday sold 17 percent more debt than it originally planned, a sign that the commonwealth still has ample access to the capital markets.
Puerto Rico sold $3.5 billion of debt at an 8.72 percent yield, a high rate that attracted investors willing to bet that the financially troubled commonwealth  has the means to pay back its debts. The commonwealth had originally planned to sell $3 billion on Tuesday, but its bankers found about five times as many buyers for the bonds as they could accommodate, according to a person briefed on the matter.
The sale, which comes amid fears that Puerto Rico will need to restructure its existing debt, is a coup for the island’s lead bankers on the deal: Barclays, Morgan Stanley and RBC Capital Markets.
Some analysts had earlier questioned whether Puerto Rico would be able to sell the bonds at all, given its precarious financial condition. Others predicted that Puerto Rico would have to pay rates of as much as 10 percent to attract bond buyers.
“The reception on the deal reflects the market’s confidence that the situation in the commonwealth is improving,†Ken Friedrich, a managing director in RBC’s municipal sales, trading and syndication, said in a statement.
The successful bond sale will help ease some of Puerto Rico’s near-term liquidity issues by helping to refinance debt and ease budgetary strains. But it does not solve the island’s long-term problems, such as a stubbornly high unemployment and shrinking population. The island still faces a municipal debt load of $70 billion, which is a relatively high burden for its residents.
Last week, Puerto Rico’s fiscal agent, the Government Development Bank, announced that it had hired Millco, an affiliate of the well-known restructuring firm Millstein & Company to help it sort through its obligations and cash flow needs.
The proceeds from the $3.5 bond deal should ease the need for a restructuring of the island’s debts, but it does not entirely eliminate the possibility that it would happen in the future, investors say.
Millstein & Co. was founded by James Millstein, a former Treasurer Department official who oversaw the overhaul of of the bailed-out insurance giant American International Group after the financial crisis.
Tuesday’s bond sale reflects a new development in the municipal debt market. The biggest demand for Puerto Rico’s debt came from hedge funds, a person briefed on the sale said. These investors have typically stayed away from the municipal market because the returns have not been high enough.
Amid near record low interest rates, hedge funds are starving for high-yielding, dollar-denominated debt investments.
In addition to Puerto Rico’s high yields â€" which are more than double that of a highly-rated municipal bond - the latest bonds also included some unusual enticements for investors, including a provision that would allow legal disputes to be settled in New York courts, rather than in Puerto Rico.
That provision was designed to soothe fears that investors would be at a disadvantage arguing their case a Puerto Rico court.
Still, the bonds carry considerable risks. As a United States territory, Puerto Rico cannot file for bankruptcy, which means any possible restructuring of its debt carries many unknowns. But investors are looking past those risks, citing the commonwealth’s recent progress at closing its budget deficit and its enhanced disclosure of financial information.
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