(Adds GDB declining to comment)
By Edward Krudy
NEW YORK, May 15 (Reuters) - Puerto Rico bonds rallied in high volume on Friday, pushing yields lower after lawmakers agreed to a series of tax measures late on Thursday that could help stabilize the island’s finances and pave the way for a new financing deal.
Yields fell on the island’s general obligation bonds (GOs), as well as on bonds backed by sales tax revenues, after lawmakers said they would increase the sales tax to 11.5 percent from the current 7 percent in a package of tax measures.
The agreement, which needs to be ratified by the legislature, would raise tax revenues by $1.2 billion, officials said, and could help Puerto Rico avoid a government shutdown while allowing it to raise as much as $2.95 billion in financing.
“It’s good for the GOs and also I think it’s good for the sales tax revenue bonds even more so because you are going to be generating so much more sales tax proceeds,” said Howard Sitzer, a municipal debt analyst at CreditSights.
The agreement provides clarity after plans for a 16 percent value added tax (VAT) were defeated in April. Puerto Rico’s top finance officials had warned the government may have to shut down at the end of the fiscal year due to a revenue shortfall.
Puerto Rico’s government said it still needs to make $500 million in cuts. A spokesman at the Government Development Bank (GDB), Puerto Rico’s financing arm, declined comment on what the agreement meant for the island’s finances.
Hedge funds have said they could provide funding to Puerto Rico in return for increased tax revenue, better financial disclosure and a five-year financial plan.
A spokesman for a group of hedge funds that holds $4.5 billion of Puerto Rico’s government debt did not comment.
Yields on Puerto Rico’s GO bonds maturing in 2035 fell to an average of 9.176 percent from 10.504 percent the previous day. The average price rose to 79.972 cents on the dollar from 79.185 cents a day earlier.
Sitzer said if Puerto Rico’s government gets a bond deal the price of the GO bonds could rally to the high 80s or low 90s.
Trading volume was $135 million, the highest since March 24, according to data from Municipal Market Data (MMD).
Sales tax bonds, or COFINA bonds, rallied in higher than usual volume. The average yield on a COFINA bond maturing in 2040 fell to 8.263 percent from 8.689 percent. (Additional reporting by Megan Davies; Editing by Phil Berlowitz and Alan Crosby)