Demand Stronger Than Expected for Puerto Rico Debt

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Boats in San Juan Bay Marina. Puerto Rico faces a stubbornly high unemployment and shrinking population.Credit Dennis Rivera for The New York Times

Updated, 6:46 p.m. | Faced with strong demand from hedge funds and wealthy individuals, Puerto Rico sold 17 percent more debt on Tuesday than it had 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, 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 in the face of 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.

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Some analysts had 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 buyers.

“The strong demand as well as the sheer number and diverse cross-section of investors who participated in today’s offering are a testament to the progress Puerto Rico has made in addressing its fiscal situation and enhancing credibility with investors,” James Henn, managing director in Barclays’ municipal products division, 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 declining 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 restructuring firm Millstein & Company, to help it sort through its obligations and cash flow needs.

The proceeds from the $3.5 billion bond deal should ease the need for a restructuring of the island’s debts, but it does not eliminate the possibility that it will happen in the future, investors say.

The biggest demand for Puerto Rico’s debt on Tuesday 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.

In addition to Puerto Rico’s high yields — 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 intended to soothe fears that investors would be at a disadvantage arguing their case in 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.