Many clients have asked about the timing of a new deal from Puerto Rico. PR officials and underwriters have been very quiet which may indicate that they are contemplating a GO deal as opposed to a COFINA deal as previously publicized.

Here is what we know:

1) PR finance officials met with rating agencies on Monday and Tuesday of this week (1/27 and 1/28). PR cannot issue debt with the threat of an immediate downgrade after issuance.

a) If a Cofina 3rd lien is issued and the GO is subsequently downgraded how will the rating of Cofina be affected. This will need to be clarified.

b) If a GO is issued, then the rating agencies will have to either downgrade before the new issue or wait until the Fall. Downgrading soon after a new issue is not acceptable.

2) HB 1591 was signed into law on 1/24 and goes into effect on 2/1. This law directs 6% (instead of 5.5%) of the sales taxes to Cofina. The additional revenues will be used to support a 3rd lien. The new revenue projections will likely support approximately 1 billion new debt. We believe this is enough to keep the rating agencies happy, but the rope will be short.

3) On 1/24, SP put the GO and GDB debt on creditwatch negative and said they would resolve this in "several weeks". If they mean what they say, then they have given PR until 2/21 to come to market. If this is the case, then we will likely have details of the new issue no later than the week of 2/10.

4) There does appear to be significant non traditional muni interest in a GO deal. These investors would likely want a bigger deal to insure that PR has enough capital to carry out their economic initiatives and get the economy back on track. These investors would want some certainty that the ratings would remain stable at least until the Fall. Frankly, the yields of the GO debt are similar to C rated paper so I am not sure these buyer are rating sensitive.

Given the above, we are not certain if the new issue will be Cofina or GO. Our guess is that if there is significant hedge fund interest to support a larger GO deal then this is what the rating agencies would prefer and the additional liquidity would allow them to postpone any rating actions until the Fall. If not, then a smaller Cofina deal will come to market and the GO will remain under close rating agency scrutiny. There is a possibility that the rating agencies could act now, before a new deal is issued. If this is the case, I am not sure PR will choose to come to market.