By Matt Wirz and Aaron Kuriloff 

Puerto Rico is expected to sell up to $1.2 billion of short-term notes this week to large banks that have agreed hold the debt until it matures in June, forestalling the heavy selling that followed a $3.5 billion March bond issue purchased largely by hedge funds.

Lenders including J.P. Morgan Chase & Co., Bank of America Corp. and Morgan Stanley have said they won't sell the debt, which is often sold by purchasing banks to bond funds and other buyers, according to people familiar with Puerto Rico's financing plans. The short-term note sale is expected to be arranged by J.P. Morgan, the people said.

The unusual requirement tied to the proposed sale of tax- and revenue-anticipation notes reflects the financially strapped territory's efforts to broaden its funding base and to avoid the market unrest that followed the March deal, some of the people familiar with the plans said. Banks don't usually agree to such lockups because regulators have increased capital charges for holding debt rated below investment grade, a bid to discourage lenders from holding risky assets.

The debt matures in June and will pay 7.75% annual interest, according to a notice posted on the website of Electronic Municipal Market Access, known as EMMA. The relatively high interest rates reflect investor fears that the island's economy won't turn a corner before the government runs out of cash.

The sale would mark the first time Puerto Rico has raised money in public markets since passing a June law that allowed agencies such as the island's power, water and highway authorities to restructure their debts. Those three have almost $20 billion outstanding, according to Barclays PLC. The law doesn't apply to Puerto Rico's general-obligation or sales-tax debt.

Spokespeople for J.P. Morgan and Bank of America declined to comment. Morgan Stanley didn't immediately return requests for comment.

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