Dealmaker: Albert del Castillo
The Deal: Puerto Rico Public Finance Corp., a subsidiary of Puerto Rico’s Government Development Bank, closed on June 28 on the sale of more than $410 million worth of bonds.
The 2012 Series A bonds were issued to refund portions of five separate series of bonds issued at different times, the proceeds of which were loaned to various government entities.
The refinancing saved $6.6 million in interest payments, according to the government bank.
Details: As bond counsel, del Castillo helped to take the deal from kick-off to closing in two months.
“I liken the bond counsel to the quarterback of the legal team, trying to keep things on track from the legal standpoint,” he said.
Del Castillo’s firm, Squire Sanders, has been bond counsel to Puerto Rico since 1998. After investment bankers, financial advisers and the issuer’s financial team structure the bond issue, the bond counsel approves the legality of the proposed financing structure and determines what documentation is required. For tax-exempt issues based on the U.S. tax code, bond counsel also provides a tax opinion.
For this bond financing, a tax opinion was not needed from Squire Sanders because the tax benefits accrued only to their intended buyers, Puerto Rico residents. The bonds were marketed only to them.
“Puerto Rico has its own tax code and bonds issued as tax-exempt obligations under the Puerto Rico tax code have their own appeal to Puerto Rican residents,” del Castillo said.
Prior to the sale, Moody’s rated the bonds Baa2 and Standard & Poor’s rated them BBB-. On June 6, S&P revised its outlook on Puerto Rico’s general obligation and appropriation debt issue from stable to negative, citing “a challenging economic and fiscal environment, which has the potential to delay structurally balanced budgets beyond fiscal 2013.
“In our view, structural balance by the end of fiscal 2013 remains critical to reducing the growth in the commonwealth’s tax-supported debt, which has increased nearly 44 percent over the past three years primarily as a result of deficit financing,” according to a statement from S&P quoted by Bonds Online.
The ratings were one factor that affected the interest-rate scale, del Castillo said. “The issuer goes into the marketplace with the realization that its credit ratings will affect the interest rates on its bonds.”
All of the bonds were issued at par. Interest rates ranged from 3.1 percent for the earliest maturity in 2015, to 5.35 percent for the last maturity in 2031.
The financing structure was complicated because the five series of bonds being refunded were issued under three different trust indentures, so del Castillo and his team had to look to three different operative documents for the defeasance and refunding requirements and set up three separate escrow arrangements.
Still, he said, “we did this one relatively quickly.”
Under the escrow arrangements, the proceeds of the refunding bonds are deposited with an escrow agent. As the refunded bonds come due (or reach the “call date”) the escrowed proceeds are applied to pay and refund the refunded bonds.
According to a statement by Government Development Bank president Juan Carlos Batlle, during the three-hour sales period, GDB received retail orders of about $422 million and institutional orders of about $122 million, for a total of almost $544 million, or 33 percent above available bonds.
Batlle said the transaction’s average interest cost was 4.75 percent; a similar deal in late 2008 would have cost more than 6.5 percent. He said the results show “today Puerto Rico pays less for its debt than what it paid in 2008. The numbers speak for themselves.”
Background: Del Castillo is a partner and Florida practice coordinator in Squire Sanders’ Miami office. He specializes in public and infrastructure finance and works on bond issues in Florida and Puerto Rico. He worked on the deal with Pedro Hernandez, a public finance associate in the firm’s Miami office.
O’Neill & Borges of San Juan acted as underwriter’s counsel and special Puerto Rico tax counsel. The lead underwriter was UBS Financial Services Inc. of Puerto Rico.