Puerto Rico dodges debt bullet

Debt-laden Puerto Rico successfully issued $3.5 billion worth of bonds Tuesday in an effort to stave off default long enough for the US territory to right its finances.

But the fresh fundraising came at a high cost, with the bonds sold at a yield of 8.727 percent, reflecting market concerns the Caribbean island will still struggle to turn around its situation.

The Government Development Bank said it had increased the offering by $500 million due to strong demand, with bids from investors totaling $16 billion.

According to reports, hedge funds were prominent among buyers while traditional funds investing in such municipal bonds stayed away after Puerto Rico's credit grade was slashed last month to "junk" status by the major rating agencies.

The yield on the new issue was roughly double that of investment-grade municipal bonds.

The government will use the $3.2 billion in net proceeds from the bond issue mainly to refinance short-term debt, which will help it better manage its finances and simplify the structure of its debt.

The bond sale came after the government pledged further targeted spending cuts to pare its huge deficit, without undermining efforts to restore growth after the economy contracted for seven years straight.

During that period, Puerto Rico took advantage of strong demand for its tax-free bonds to raise funds to turn the economy around, but without success.

The bankruptcy declaration of another major municipal bond issuer, the city of Detroit, sent shivers through bond markets and support for Puerto Rico all but dried up.

The Government Development Bank said the fresh funds would meet the territory's near-term liquidity needs, allowing it to pursue the reforms needed for the longer term.

Alejandro Garcia Padilla, governor of the island, called the bond sale "a clear message of the investors' confidence" in his plans to turn around the economy, as well as efforts to boost transparency around the government's use of the funds it raises.

"We have shown with concrete actions that we are doing what it takes in order to solve the great challenges the country faces," he said in a statement.