Munis Weaker; Several Sales Delayed or Reduced

The municipal market was weaker yesterday, and close to two dozen issues were either postponed or decreased in size due to continuing market volatility.

Market participants yesterday were dealing with the news that the Federal Reserve had decided to save insurer American International Group Inc., and that Barclays Capital has signed a definitive agreement to acquire substantially all of the North American businesses and operating assets of Lehman Brothers.

Traders said tax-exempt yields yesterday were higher by about five basis points.

"Everyone's just focused on really short paper, and pre-refunded bonds. Anything super safe," a trader in Los Angeles said. "It doesn't seem like anyone wants to move"

Given the dramatic amount of turmoil in the market this week, traders are not surprised to see deals being pulled.

"I've barely seen a deal this week," a trader in New York said. "This would be just about the absolute worst time to bring one."

In the new-issue market yesterday, Goldman, Sachs & Co. priced about $100 million of special tax obligation refunding loan bonds for Connecticut, chopping down what was to be a $479 million sale. The deal was cut by almost $300 million due to market conditions.

"We're going to continue to monitor the market, and because it was a refunding, it was flexible in size in any event, but we're going to continue to monitor the market about maybe refunding some of the other bonds we had hoped to do in the future," an official from the state treasurer's office said.

"We had good retail orders and we wanted to fill them, we didn't want to turn them back," the official said.

The bonds mature from 2012 through 2018, with term bonds in 2021 and 2022. Yields range from 2.54% with a 3% coupon in 2012 to 4.26% with a 4.125% coupon in 2022. The bonds, which are callable at par in 2018, are rated A1 by Moody's Investors Service, AA by Standard & Poor's, and AA-minus by Fitch Ratings.

Also, the Los Angeles Convention Center Authority delayed a $250 million fixed-rate lease-revenue bond refunding from the market yesterday, fearing a lack of buyers. The bonds are being issued to refinance variable rate demand obligations that are insured by Ambac Assurance Corp. and to terminate an outstanding swap on the debt. The VRDOs have been remarketing with rates in the 6% to 7% range, almost twice what the city was paying before Ambac lost its triple-A credit ratings.

Natalie Brill, debt manager for the nation's second largest city, said LA will watch the market over the next few days to see if the surge in rates is a new equilibrium or a temporary disruption.

"We're going to wait," she said. "We are going to see if we can sell [today]. We don't think so because the stock market is down."

Brill is juggling a lot of competing market crises as she tries to bring her deal - a remedy for an earlier crisis - to market. Merrill Lynch & Co., sold in a fire sale to Bank of America over the weekend, is the city's underwriter. She's determined that doesn't matter. The swap termination fees on her existing debt are rising with short rates rose in the reference index. AIG, taken over by the Federal Reserve earlier in the week, is one of the biggest holders of her outstanding debt and could flood the market with her paper if it decided to liquidate the position. She also already sent out a 30-day redemption notice on its outstanding VRDOs, though she can withdraw that up to five days before the redemption.

"We'll do the deal when we see the market is able to handle it."

That could be today, but she wasn't making any promises. Her only prediction: "We'll refund this debt before the end of the year."

In addition to those, numerous other upcoming transactions were either postponed or moved to the day-to-day calendar yesterday due to market turmoil.

The New York City Transitional Finance Authority announced that it will delay its planned $700 million new money building aid revenue bond deal, originally scheduled for next week. The bonds will now be delayed "for one to two weeks, subject to market conditions," according to a press release. Merrill Lynch will price the bonds.

The Boston Water & Sewer Commission rescheduled a $115.1 million bond sale, which was scheduled for competitive bids today. The deal is now slated for Oct. 7.

Illinois' Community College District No. 525 completed a preliminary pricing on a $30 million deal yesterday, priced by Raymond James & Co., before pulling the sale from the market. It has been moved to the day-to-day calendar.

Long Beach, Calif., removed a $49 million tax and revenue anticipation note sale from the Sept. 23 competitive calendar, and moved it to day-to-day.

Also, at least 16 other issues have been moved to the day-to-day calendar, most prominently a $250 million Los Angeles Convention Center Authority deal, a $191 million Indiana Finance Authority transaction, and a $185 million deal for Pasco County, Fla.

Other deals include $190 million for Chicago over two issues, $188 million for the Las Vegas Redevelopment Agency over two issues, and $143 million for the University of Colorado Board of Regents.

Also, The Bond Buyer's one-year note index is up 32 basis points yesterday, to 1.93%. This is the highest level for the index since May 7.

The Treasury market, however, showed more flight-to-quality gains yesterday. The yield on the benchmark 10-year Treasury note, which opened at 3.44%, was recently quoted at 3.38%. The yield on the two-year note was quoted recently at 1.62% after opening at 1.80%. The yield on the 30-year Treasury was quoted recently at 4.07% after opening at 4.09%.

Additionally, the Treasury Department yesterday sold $40 billion 35-day cash management bills, due Oct. 23, at a 0.300% high tender rate. The bid to cover ratio was 2.45. Tenders totaled $98,002,170,000 and the Treasury accepted $40,000,050,000, including $18,870,000 non-competitive.

In economic data released yesterday, housing starts for August came in at 895,000, after a revised 954,000 the previous month. Economists polled by IFR Markets had predicted 950,000 housing starts.

Building permits for August came in at 854,000, after 937,000 the previous month. Economists polled by IFR had predicted 920,000 building permits.


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