(Adds details of GDB's liquidity position in paragraph 5)
SAN JUAN, Jan 28 (Reuters) - Puerto Rico is negotiating with at least two bond insurers to insure around $500 million of a planned $2 billion bond issue, which would extend the appeal of the sale beyond the hedge funds currently buying the U.S. commonwealth's debt, according to two sources close to the process.
The island's Government Development Bank (GDB) is in talks with MBIA's National Public Finance Guarantee Corp and Assured Guaranty, the sources said. The insurers already have substantial exposure to Puerto Rico's debt and may be trying to protect their exposure in other areas by helping Puerto Rico raise more money, the sources said.
The insured part of the deal would have a coupon of 5 percent, according to the sources. Assured Guaranty did not respond to a request for comment. MBIA declined to comment.
"The insurance companies don't want to do it but they are being leveraged into doing so because of their exposure to Puerto Rico Electric Power Authority (PREPA)," said a Washington, DC-based lobbyist who has worked for the Puerto Rico government and investment groups.
Puerto Rico badly needs the bond sale to stabilize its finances. The GDB's liquidity fell to $1.09 billion at the end of last year, a sharp drop from the $1.6 billion reported in November. The GDB, the financing arm of the commonwealth, did not immediately comment.
GDB President Melba Acosta-Febo said in November that the bank had held discussions with four bond insurers about insuring part of the deal but did not specify the amount. Acosta-Febo did not name the insurance companies but said they had commented on legislation needed for the deal.
The GDB said earlier that it discussed the legislation with Assured Guaranty, Ambac Financial Group Inc, National Public Finance Guarantee Corp and FGIC Corp.
"Obviously, they don't want to be involved, but they have to because one firm has about $1.4 billion exposure to PREPA, while the other has about $1 billion in exposure to PREPA. They also have exposure to the Highways & Transportation Authority," added a New York-based financial executive close to the process.
While Puerto Rico planned to raise up to $2.9 billion in March, it may be able to raise only $2 billion because a petroleum tax increase backing the deal was not indexed for inflation and will be able to provide coverage for only about $2 billion, government officials and lawmakers have said. (Reporting by Reuters in San Juan; Writing by Edward Krudy in New York; Editing by Chris Reese, Diane Craft and Dan Grebler)