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(Adds Moody's quote, details of transaction)
By Edward Krudy
NEW YORK, Oct 10 (Reuters) - Puerto Rico paid a steep priceto complete a $1.2 bln short-term financing deal on Friday asbonds of the indebted commonwealth slipped to a three-month lowand recent data showed the economy and tax revenues remain weak.
Puerto Rico paid an interest rate of nearly 8 percent toborrow from a syndicate of banks until next June, thecommonwealth's Government Development Bank (GDB) said on Friday,a hefty premium compared with top-rated municipal borrowers, whopay about 0.13 percent to borrow for a year.
Traditional muni investors are largely steering clear ofPuerto Rico with its debt load of over $70 billion. TheCommonwealth passed a law in June that enables it publiccorporations to restructure around $20 billion in debt, furtherspooking bondholders.
The exodus of traditional muni funds has left Puerto Rico'sfinancing needs in the hands of banks and hedge funds. Friday'snote deal was the first time the island had borrowed money sinceMarch when it issued $3.5 billion in general obligation bonds, adeal bought mainly by hedge funds.
"Clearly the commonwealth only has access to a very limitedaudience and that's why they have had to pay such high rates,"said Triet Nguyen, an analyst at NewOak.
Hedge funds did not take any of the note sale on Friday, aperson close to the transaction said. However, the banks couldsell on the notes at a later date, according to another personinvolved in the sale. The people were not authorized to talk topublicly about the deal.
Puerto Rico's benchmark general obligation bonds fell to thelowest since July on Friday. The bond, which carry an 8 percentcoupon and mature in 2035, traded at an averageprice of 87.833 cents on the dollar and a yield of 9.336percent, according to Municipal Market Data (MMD).
The notes sold on Friday have a general obligationguarantee, a sign of the more onerous borrowing conditions thatPuerto Rico faces. Although they are treated equally with otherGO debt they have a time seniority because of their short-termnature.
"The commonwealth still has market access but it is comingwith increasingly onerous terms and at higher borrowing costs,"said Edward Hampton, an analyst at ratings agency Moody's.
The deal "underscores the continued vulnerability on theliquidity front and the long running economic stagnation thathas exacerbated its budgetary challenges," he said.
The notes were Tax Revenue Anticipation Notes (TRANS),usually a standard cash management tool used to provide fundsahead of expected tax revenues.
Puerto Rico also had to waive sovereign immunity and agreeto New York jurisdiction in the event of any legal disputesinvolving the notes.
The weakness in Puerto Rico's bonds on Friday followed somedisappointing tax revenue and economic data in recent weeks.
Puerto Rico's tax collections fell unexpectedly in Septemberand the first quarter take, of $1.77 billion, was $36 millionbelow expectations, it said on Thursday.
The commonwealth also warned that it may cut its income taxforecast for the coming months.
The missed revenue forecast came after data showing ongoingweakness in the economy. Puerto Rico's economic activity hasslumped to its lowest level in two decades, according to anindex released by the GDB at the end of September.
The GDB said $700 million of the notes are structured as aterm note and carry an annual interest rate of 7.75 percent,while $200 mln of notes are structured as a revolving line andcarry an annual interest rate of one-month Libor plus 7.55percent. The GDB funded an additional $300 million in notes.
The lead underwriter on the transaction was J.P. Morgan.Morgan Stanley, Bank of America, Barclays, Banco Popular dePuerto Rico and Amalgamated Bank also took part.
J.P. Morgan and Morgan Stanley each took $250 million of thenotes, Bank of America took $200 million, Banco Popular took$100 million, Barclays took $75 million, and Amalgamated Banktook $25 million, according to someone close to the transactionwho was not able to talk about it publicly. (Reporting by Edward Krudy; Editing by Chizu Nomiyama andMarguerita Choy)
