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Market Close: PREPA Bonds Yields Surge on Restructuring Proposal

by Maria Bonello
JUN 25, 2014 5:32pm ET

Puerto Rico Electric Power Authority bond yields soared in the secondary market Wednesday
after Governor Alejandro Garcia Padilla proposed legislation that would enable some public
corporations to restructure debt.

“The Recovery Act is created to provide a clear legislative framework that allows public
corporations to address their financial difficulties without compromising any essential services
provided by these corporations,” said David Chafey, chairman of Government Development
Bank for Puerto Rico.

“Yields are up pretty dramatically” on PREPA bonds, a trader from New York said.

The most actively traded PREPA CUSIP, 5s of 2017, traded 18 times, with prices ranging
between 61 and 70 cents on the dollar, according to data analysis provided by Municipal Bond
Information Services. The issuer’s yields in the secondary reached a high of 23.9% Wednesday,
on a separate CUSIP of PREPA 5s of 2017.

“The PREPA debt is down quite a bit, but mostly the short term maturities,” Triet Nguyen,
managing partner at Axios Advisors said. “The long term debt didn’t go down as much as they
were already trading in the 60-range. Some type of restructuring was anticipated.”
Analysts anticipate more of a reaction on PREPA bonds as more details are released about the
potential negotiations between the bond holders and the authorities.

Chafey noted that the prospective legislature excludes the Commonwealth’s debt.
Traders said that the 35-year Puerto Rico general obligation bond slipped Tuesday to 84 centson-
the-dollar and recovered to 85.5 on Wednesday. There was one trade at a high of 87.
“Given the news, I think the market is interpreting it as being supportive of the GOs,” Nguyen
said. “That’s why the GOs are up on the day, after hitting a new low yesterday.

The municipal market had a stronger tone on Wednesday following the release of first quarter
gross domestic product data that showed a 2.9% contraction, the steepest drop since the first
quarter of 2009.

“The GDP number came in at a number that was weaker than expected,” the New York trader
said. “A lot of people expected the number to be redone at a lower level. It puts growth into
perspective; it’s 3 percent weaker.”

Munis strengthened Wednesday, as yields on bonds maturing in two to three years fell as much
as two basis points, while yields maturing in four to five years slipped between one and three
basis points, according to Municipal Market Data’s scale. Yields on bonds maturing in six to 24-
years dropped between two and four basis points, and those maturing beyond 2040lost between
three and five basis points. The front end of the curve was steady.

According to the Municipal Market Advisor’s MMA 5% triple-A scale, the 30-year yield and the
10-year benchmark fell by three basis points each to 3.47% and 2.27%, respectively. The twoyear
note fell two basis points to 0.31%.

“The Treasury market is reacting and muni estimates on the MMD yield scale show that prices
have gone up and yields have gone down,” the trader said. “The tone of the market is just a bit
stronger. This paints a picture that the hole we dug ourselves in is going to take a while to get
out of.”

Treasuries were mixed Wednesday, with the 30-year yield and the 10-year benchmark yield
dropping five basis points each to 3.38% and 2.56%, respectively. The two-year note rose three
basis points to 0.49%.

The $1.1 billion Washington state general obligation deal sold in the competitive market
Wednesday. Citigroup Global Markets won the bid for $420.2 million of GOs. Yields ranged
from 0.11% with a 2% coupon in 2015 to 2.81% with a 5% coupon in 2026.

Bank of America won the bid for about $419 million of GOs. Yields ranged from 0.20% with a
5% coupon in 2015 to 2.88% with a 4% coupon in 2025.

Bank of America won the bid for $207 million of GOs. Yields ranged from 2.63% with a 5%
coupon in 2025 to 3.51% with a 5% coupon in 2039.

JP Morgan Securities won the bid for $86 million of GOs. Yields ranged from 0.15% with
a0.15% coupon in 2015 to 3.12% with a 3.12% coupon in 2025.

All of the bonds are callable at par in 2024. The deal received a Aa1 rating from Moody’s
Investors Service, and AA-plus from Standard & Poor’s and Fitch Ratings.

JPMorgan won the bid for $300.5 million of Jacksonville Electric Authority water and sewer
revenue bonds. Yields ranged from 0.18% with a 2% coupon in 2015 to 4.03% with a 4%
coupon in 2040. The bonds are callable at par in 2024 with several exceptions. The deal is rated
Aa2 by Moody’s and AA by both S&P and Fitch.

Piper Jaffray priced $475 million of Idaho tax anticipation notes on Wednesday. The short-term
deal has a 0.11% yield with a 2% coupon. The deal received a MIG 1 rating from Moody’s, SP-
1-plus rating from S&P and a F1-plus rating from Fitch.

Citigroup Global Markets priced $185.2 million of Michigan Finance Authority revenue bonds.
Yields ranged from 0.40% with a3% coupon in 2015 to 4.60% with a 5% coupon in 2044. The
bonds are callable at par in 2024.The bonds mature serially from 2015 to 2034, with term bonds
in 2039 and 2044. The deal is not yet rated.

RBC Capital Markets won the bid for $200 million of New York City Municipal Water Finance
Authority water and sewer system second general resolution revenue bonds. Yields ranged from
3.82% with a 5% coupon in 2044 to 4.029% with a 4% coupon in 2044. The deal was rated Aa2
by Moody’s, and AA-plus by both S&P and Fitch.

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