San Juan becomes the first of what PRMF envisions will be multiple such GO bond issues by other cities, secured by the CAE
The City of San Juan today closed the landmark and much-reported $122 million general-obligation (GO) bond issue, becoming the first Puerto Rico municipality in a decade and the first since PROMESA to raise public-works capital in the U.S. municipal bond market.
Last time it and every other municipality accessed the muni market, they did so through the now shuttered Government Development Bank of Puerto Rico, backed by the credit of the pre-bankruptcy central government. This time, San Juan did it directly, on the strength of its own credit, secured by the most solid repayment mechanism on the island, in a process where a new private-capital fund, PRMF, and its affiliates participated from the start and which has emerged largely to fill the void left by the GDB’s exit.
The $122 million transaction drew extraordinary investor interest, with 53 institutional firms submitting orders totaling about $2.2 billion, nearly eighteen times the amount of bonds available.
The overwhelming demand allowed the municipality to negotiate lower yields during pricing, ultimately securing a total financing cost of about 4.99 percent, including issuance expenses.
Mayor Miguel A. Romero Lugo said the result exceeded expectations and signaled a decisive restoration of market confidence in San Juan’s financial management.
“San Juan writes a new page in its financial history,” Romero Lugo said in the press release announcing the closing. “Not only did we enter the market directly for the first time, but we did so with a response that far surpassed our expectations. This extraordinary reception represents a strong expression of confidence in San Juan’s credit and in our ability to meet our obligations responsibly.”
Years in the making
Romero Lugo emphasized that the bond issue is the culmination of a sustained effort to stabilize the city’s finances. “During years we worked to recover San Juan’s financial stability, strengthen our finances, and restore credibility to the municipal administration,” he said. “Today that work translates into concrete results and better conditions for our city.”
During the order period, 53 investment firms submitted bids to acquire San Juan’s bonds. For every dollar of bonds available, investors submitted roughly $18 in orders, reflecting broad institutional participation and strong market appetite for the city’s credit and the repayment mechanism used in the transaction.
The strong investor demand is also the result of a unique and proven repayment mechanism that PRMF Fund LLC seeks to deploy to help additional government instrumentalities also access muni-market capital.
Behind the structure is a combination of the Basic Tax and the Additional Special Tax (CAE by its Spanish acronym), a statutory revenue mechanism that backs municipal GO debt.
The CAE, as previously reported by Caribbean Business, is the backbone of Puerto Rico’s municipal finance system. It is an unlimited ad valorem tax levied on real and personal property, collected by the CRIM (Municipal Revenues Collection Center), and deposited directly into each municipality’s Redemption Fund at Banco Popular.
The structure, repayment mechanism and high demand enabled the underwriting team to negotiate lower yields during pricing, reducing the cost of funds to 4.99 percent, well below initial expectations.
The results also positioned San Juan’s bonds favorably relative to other Puerto Rico credits currently trading in the secondary market, including general-obligation bonds, COFINA, and the Puerto Rico Aqueduct and Sewer Authority. The city’s yields even compared competitively with certain New York City general-obligation bonds, despite New York’s higher credit ratings.
Where the money will go
The funds raised will support San Juan’s Capital Improvements Program, financing long-term infrastructure projects in health, education, recreation, sports, and municipal facilities. Planned investments include upgrades to operating rooms and emergency departments at the Municipal Hospital, improvements to diagnostic and treatment centers, educational initiatives, and urban infrastructure projects such as the reconstruction of sidewalks along Ponce de León Avenue.
The transaction was preceded by two days of pre-marketing, during which RBC Capital Markets, the transaction’s underwriter, presented San Juan’s financial profile to institutional investors. Romero Lugo and his team participated directly in pricing negotiations and bond allocation, providing the municipality with real-time insight into investor sentiment and enabling it to influence final terms.
The mayor said the transaction strengthens San Juan’s position for future financing needs. “This result leaves us better positioned to manage our future financing needs responsibly and continue driving investments that directly benefit our people,” he said.
As Caribbean Business reported, San Juan’s return to the market is rooted in five consecutive years of budget surpluses, improved liquidity, and stronger fund balances, conditions credit rating agencies cited when awarding the city an investment-grade rating.
Romero Lugo said that consistency, not a single good year, convinced rating agencies that San Juan had restored the credibility lost before the enactment of PROMESA, the Puerto Rico Oversight, Management and Economic Stability Act, and the creation of the Financial Oversight and Management Board to oversee the U.S. territory’s bankruptcy proceedings.
With the bond issue now closed, San Juan shifts from planning to execution. The capital city will begin deploying funds to infrastructure projects that Romero Lugo says will shape San Juan’s development for years to come.
