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Volatility to Affect New Issuance

Although the municipal market saw slight gains on Friday, the volatility that rocked Wall Street last week will continue to affect new-issue volume in the municipal market this week.

Several large negotiated deals were placed on standby in light of the massive flight to quality in the Treasury market and extreme market dislocation following the latest fallout from the forced sales of two banking behemoths.

Many municipalities are opting to put deals on the sidelines that would have otherwise been priced last week or this week due to the tumultuous environment that developed after the news of Lehman Brothers Inc.'s bankruptcy and subsequent agreement to sell substantially all of its North American businesses and operating assets to Barclays Capital, which coincided with Bank of America's planned purchase of Merrill Lynch & Co.

Those events were then topped off by the news that the Federal Reserve decided on an $85 million bailout of American International Group Inc. as well as the announcement of an overall market rescue plan by federal officials Friday.

Deals began being postponed - or significantly reduced in size - by mid-week and that scenario appears to be the case again this week, as many of the largest deals are without a specific sale date and instead are being considered for day-to-day pricing depending on market conditions.

Volume is expected to be an estimated $2.41 billion this week, compared with a revised $2.43 billion last week, according to Thomson Reuters. There is an estimated $890.4 million of competitive offerings expected, compared with a revised $305.1 million last week, and $1.52 billion in negotiated deals on tap this week, versus a revised $2.13 billion last week.

Underwriters say they are closely monitoring the market with the hopes of seeing enough stability, liquidity, and demand for new issues to be priced.

Some of that support came on Friday morning when the long end of the municipal market showed signs of improvement as yields fell 10 to 15 basis points on average on the heels of the announcement of the overall market rescue plan by Federal Reserve and Treasury officials.

"We believe these actions will go a long way toward restoring order in the markets and building investor confidence after a period of extraordinary turmoil that has affected money market mutual funds and other financial products," said Paul Schott Stevens, president and chief executive officer of the Investment Company Institute in a statement issued Friday.

Market participants agreed the Fed's plan could help pump some life back into the ailing market - and there was already slight evidence of that on Friday.

For instance, long 5% coupon bonds that were trading at two- to three-point discounts on Thursday quickly developed a bid on Friday, and were able to be sold nearly 10 basis points higher in price, noted Fred Yosca, managing director and manager of trading and underwriting at BNY Capital Markets in New York City.

"It's a small step in the right direction," he said. "At the end of the day [Thursday] there were some signs of life and when the bailout plan was announced that set the stage for the improvement this morning," Yosca said on Friday. "When the stock market turned around, that was also a psychological boost."

Others agreed.

"One of the things that the pricing action is telling you is that we are not in a vacuum, and there are buyers and that's what makes markets," said Jay Alpert, executive vice president and manager of the municipal bond department at M.R. Beal & Co. in New York. "If the market is going higher we could achieve some stabilization and clarity for a fractured system."

"I think the mere fact that the Fed has elected to verbalize the formation of a recovery plan in such wide-based terms addresses the root of the problem and will prop up the rest of the market," he said.

He said the closest the municipal market has come to facing a similar dislocation was back in the first quarter when tender-option bond programs were liquidating massive amounts of auction-rate securities after that market failed and collapsed.

"That was more confined to one segment of the market, and this [current crisis] has a domino effect around the world and is part of a much larger financial structure," he added.

Alpert compared the market's current state to a "bad financial virus that has been fatal," and said a large bellwether deal from a general market name could help spreads bounce back to more normal levels.

"You might see that happen on a day-by-day basis as we get a more firm footing," he said.

"If we failed at that, it would be more telling that the market has not yet evolved to a normal state since the evaluations on bonds have been extraordinarily rocked," he said.

Still, there was too much cloudiness in the market on Friday to forecast the timing of deals pending for pricing this week - even as the Fed's planned bailout spread good news at the end of one of the most dismal weeks in recent months.

"Every day is a new day. You don't know what's going to happen over the weekend, so we will re-evaluate everything Monday morning," said one New York underwriter at a major Wall Street firm.

He said his firm has no plans to reduce the size of any of its upcoming or pending deals, and that once the market returns to an orderly manner, demand should follow and deals should be able to be priced at their intended size without having to reduce capacity.

"If deals do have to be halved, then that would be the dawn of a new era, and then we're going to be at a standstill for a while," he said.

Last year at this time, volume totaled $8.33 billion for the week ending Sept. 22 and $32.81 billion for the month, while back in 2003, volume totaled $8.97 billion for the week ending Sept. 27 and $26.14 billion for the month. Going back to 1999, volume was slightly lower during the week ending Sept. 25 at $6.56 billion, and the monthly total was $19.60 billion, according to Thomson data.

Issuers, meanwhile, want to avoid selling deals into a rising rate environment marked by noticeable voids in underwriting syndicates left by Lehman and Merrill as they transition through their respective financial and business recovery phases, a New York trader said.

"A lot of new issues seem to be getting pulled," he said.

This week, the largest negotiated deal - a $626 million Hawaii general obligation offering that is being senior-managed by Citi - hasn't been pulled altogether, but its pricing for this week is up in the air. The deal is structured to mature from 2012 to 2028 and is rated Aa2 by Moody's Investors Service and AA by Standard & Poor's.

At least four other larger deals that were originally scheduled for pricing last week were postponed to this week, but are pending day-to-day pricing status, including the $583.7 million Royal Oak, Mich., Hospital Finance Authority sale on behalf of the William Beaumont Hospital. The deal, which is being senior-managed by Morgan Stanley, will finance improvements at the regional medical center's facilities in Royal Oak, Troy, and Sterling Heights, and refund a portion of the authority's outstanding bonds.

The hospital deal is rated A1 by Moody's, A by Standard & Poor's, and A-plus by Fitch Ratings.

A $280 million hospital issue from the General Authority of Southcentral Pennsylvania on behalf of the WellSpan Health Obligated Group was also delayed last week, but on standby this week.

At the same time, the Ohio Public Facilities Commission's $270 million GO sale is also on day-to-day status after being nixed last Wednesday. The deal is being senior-managed by Citi.

Last week, Citi also postponed a $225 million Athens-Clark County, Ga., Unified Government sale of $225 million of water and sewer revenue bonds originally scheduled for last Thursday. In the competitive market, meanwhile, a $500 million tax and revenue anticipation note sale from New Mexico is the largest deal on the calendar. On Friday, a spokeswoman for the state said it will assess the condition of the market today and will make a determination about the deal's pricing by the end of the day.

The notes mature in 2009 and are rated MIG-1 by Moody's and SP-1-plus by Standard & Poor's.

Meanwhile, in the long-term market, a two-pronged competitive GO sale from Wake County, N.C., is also on the sidelines awaiting pricing.

The deal consists of $354.5 million of GO public improvement bonds maturing from 2016 to 2026, and $69.8 million of GO refunding bonds that mature from 2010 to 2015. The bonds have natural triple-A ratings from all three major rating agencies.

Although the county hopes to be able to price the deal soon, debt manager Cheryl Spivey said on Friday that the bonds are part of the county's long-term capital improvement plan that will finance construction of schools and community college, library improvements, and open space acquisition, but doesn't expect the delay in pricing to have any effect on those projects getting done.

"We have sufficient cash reserves to fund a portion of these projects and at this time we do not think that any of the projects will be affected," Spivey said.

"We are on standby and we will monitor the market and sell when it's best to do that," she said. "We're hopeful that it's a very temporary market condition and we will be able to sell these bonds shortly."

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