Buy Side

California's $1B Deal Tops Week

A $1 billion California general obligation offering leads the way in the primary new-issue market this week, as investors will digest $6.1 billion of bonds when a week of full sessions begins today following the Thanksgiving holiday. The estimate is higher than both the $5 billion of bonds and notes that came to market last week, which was dominated by a $3.8 billion North Texas Tollway Authority note sale, and also exceeds the $5.1 billion that was priced the week before. “The big deal [this] week is obviously the California deal. That’s going to dominate,” said Evan Rourke, portfolio manager at MD Sass. “Demand overall has been moderate. Individual investors have not been terribly active, and I think that’s probably due to the absolute level of yields.” “In the Treasury market, we have the 10-year note poised to break through a 4% [it went as low as 3.978% Wednesday and was quoted near the end of the session at 4.01%], and while munis are offering good relative value to Treasuries, the absolute level of yields is just keeping individuals out of it,” he added. “With institutionals, there’s a good bid for high grades, but away from that, I’d say the demand is soft.” Tom Spalding, senior portfolio manager at Nuveen Investments, said that the California deal will be a “bellwether issue” that should illuminate “what the true demand is out there.” “Demand is going to be not quite the flight to quality that we have seen in Treasuries, but it’s going to be an alternative investment for certainly retail, and property and casualty companies continue to have money, so I think the real buyers will be back in,” Spalding said. “The other part of the equation is that dealers don’t want to stock bonds at this stage of the calendar, this late in the year.” In the week’s largest scheduled transaction, UBS Securities LLC will price $1 billion of various-purpose GOs for California Thursday. The credit is rated A1 by Moody’s Investors Service and A-plus by Standard & Poor’s and Fitch Ratings. However, this follows Standard & Poor’s revising its outlook on the state’s credit rating to stable from positive Tuesday. The agency cited downturns in projected tax receipts and the state’s track record of failing to take corrective mid-year action when budget numbers prove soft. The bonds will be used to finance environmental protection projects, parks projects, construction of school and university facilities, housing projects, and children’s hospital projects. Orrick, Herrington & Sutcliffe LLP and Gibbs & Oliphant LLP are co-bond counsel. Public Resources Advisory Group is financial adviser. Tom Dresslar, spokesman for state Treasurer Bill Lockyer, said that no one can predict how the market will respond to the bonds this week, but that the state will “make sure our underwriters get the best possible price for taxpayers.” “We switched from competitive to negotiated to take advantage of the retail demand in the current market,” he said. Dresslar also said that the state will make a decision on the extent to which it insures any of the bonds on the pricing date. Just last week, Clark County, Nev., School District, rated AA by both Standard & Poor’s and Fitch, came to market with a $650 million GO sale, which it brought uninsured, in keeping with a growing trend over the past few weeks, where investors are looking more at underlying ratings. “General generic insured bonds are definitely lagging, so you’re really seeing a much more widened spread between the top credits and the lower credits,” Rourke said. “There’s a much more nuanced approach to credit here than we’ve had in years, where people are not just looking at the insurer, they’re looking at the underlying rating.” Rourke said the Clark County district deal is one that in the past would typically have come with insurance. “Normally for issues like this, the issuer would put insurance on the bonds, because it didn’t cost much, and they felt the value of the triple-A credit was worth it,” he said. “This week, that deal came and there was the sentiment that, 'Don’t put the insurance on it, it doesn’t matter.’ And the market is definitely in flux because of that, because everyone is trying to determine what that right spread is. I think the market is still trying to make that transition.” California last came to market with $2.5 billion of various-purpose GOs last month, priced by Goldman, Sachs & Co. in two series. Bonds from the larger, $1.5 billion new-money series, came to market mostly uninsured. Those bonds mature from 2008 through 2010 and from 2022 through 2027, with term bonds in 2032 and 2037. Yields range from 3.34% with a 3.3% coupon in 2009 to 4.75% with a 5% coupon in 2037. Bonds maturing in 2022 are insured by XL Capital Assurance Inc., and bonds maturing in 2023 are insured by Financial Guaranty Insurance Co., while all other bonds are uninsured. Also, bonds maturing in 2008 were not formally re-offered. Bonds from the $1 billion refunding series, however, featured a steady diet of insured paper. Bonds mature from 2009 through 2025, with yields ranging from 3.34% with a 3.3% coupon in 2009 to 4.52% with a 4.5% coupon in 2025. Portions of bonds maturing from 2014 through 2023 are insured by Assured Guaranty, Ambac Assurance Corp., FGIC, XL Capital, and MBIA Insurance Corp. All remaining bonds are uninsured, and bonds maturing in 2008 were not formally re-offered. Among uninsured 5% coupon paper in the deal, bonds maturing in 2012 were tightest to that day’s Municipal Market Data triple-A yield curve, with yields 21 basis points over the curve. Bonds maturing in 2032 and 2037 were widest to the scale, with yields 41 basis points over. Among insured 5% coupon paper in the deal, Assured Guaranty-insured bonds maturing in 2014 were tightest to that day’s MMD triple-A yield curve, with yields 17 basis points over the curve. MBIA-insured bonds maturing in 2020 and 2021 were widest to the scale, with yields 23 basis points over. The spread has since tightened by between four and 12 basis points among uninsured 5% coupon bonds, and by six basis points among insured 5% coupon paper in the $1.5 billion new money deal, according to Tuesday’s MMD triple-A yield curve. However, spreads in the $1 billion refunding have mostly widened, ranging from narrowing by two basis points to widening by 15 basis points among uninsured 5% coupon paper, and between narrowing by two basis points and widening by nine basis points among insured 5% coupon bonds. In other activity, the Los Angeles Unified School District will competitively sell $600 million of tax and revenue anticipation notes, which mature in December 2008. The notes are rated MIG-1 by Moody’s. Merrill Lynch & Co. will price $450 million of sales tax bonds this week for Washington’s Central Puget Regional Transit Authority. The underlying credit on the bonds, which will be insured by Financial Security Assurance Inc., is rated Aa3 by Moody’s.


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