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Primary Faces a Slow Week

The primary market will again be severely diminished this week as several new issues remain in limbo against a backdrop of continued weakness in municipals and intense anxiety in the overall financial markets as a result of last week's government takeover of Washington Mutual and the pending resolution by Congress of the $700 million financial industry rescue plan.

Just $1.034 billion of new issuance is anticipated for sale this week, compared with a revised $1.42 billion last week, according to Thomson Reuters. Of the $831.5 million in negotiated deals expected, a $300 million New York Transitional Finance Authority building aid revenue sale could be one of the largest deals to surface pending market conditions and the outcome in Washington.

This week the competitive market expects to see just $203.2 million, versus $123.0 million last week.

Although the New York TFA deal does not appear on the negotiated calendar published by Dalcomp, a New York trader at a large firm told The Bond Buyer on Friday that underwriters at Merrill Lynch & Co. released a preliminary retail scale on Friday that was meant to take indications of interest and showed the long end of the deal at a 5.65% yield.

He said the deal would serve as a benchmark for others coming at such a tumultuous period in the market, and its success would provide some stability toward returning to a more normal primary market.

"It seems right now everyone is unsure of everything," the trader said. "When you price new issues, that helps everything, but right now without those deals, everything is all over the place - it's so sloppy. I've been through some tough situations and this is the toughest as I have seen it."

Between Sept. 7 and Sept. 13, there were 231 long-term issues priced totaling $9.11 billion - the largest one-week volume this month - versus last week, when issuance dropped to 69 long-term issues totaling $1.54 billion, according to Thomson.

Last year, during the week between Sept. 23 and Sept. 28, the market saw 226 issues totaling $10.5 billion.

So far, volume totals $19.69 billion among 593 issues for September 2008 as of Friday, versus last September when the market welcomed 941 long-term deals totaling $32.81 billion - the largest September volume since 1999.

The New York trader said despite the current dearth of new-issue supply, there is retail money sitting on the sidelines that should be willing to chase the first round of large deals priced in the recovering market.

"There's money out there and the widening spreads present opportunities," he said. He said with absolute yields levels above the psychologically "magic" 5% for generic triple-A general obligation bonds, there should be interest in the New York TFA deal and others creeping back to market.

Meantime, Howard Mackey, president of the broker-deal business unit of Rice Financial Products, said that with the quarter coming to a close tomorrow, it is a "safe bet to say nothing much will happen before then," but he thinks the determining factor in that is more the impending bailout plan rather than the quarter end.

"I think until that is solidified and gets disseminated to the public, hopefully with conditions that are very acceptable and show that we have underpinned the safety of our financial system, nothing is going to happen," he said. "And my thought is that we will get a successful conclusion and a program put in place, probably over the weekend, and that shortly thereafter, we'll start to get some normalcy. And if we don't get it the first couple of days of the week, by the following week, we should start to see issuance creep back into the market."

Last Tuesday, underwriters at Merrill were able to price $253 million of Los Angeles Convention and Exhibition Center Authority lease revenue and refunding bonds that were postponed the previous two weeks.

The bonds, which are rated A1 by Moody's Investors Service and AA-minus by Standard & Poor's and Fitch Ratings, were priced to yield 4.36% in 2016 and 5.30% in 2022.

Kurt Kauffman, debt manager for the Ohio Office of Budget and Management, said he found it encouraging that the Los Angeles deal got priced in the midst of the current market turmoil, and hopes that it would start a trend of new issues slowly resurfacing.

Last Thursday, financial markets suffered another blow when Washington Mutual Inc. was closed by the U.S. government in what is being called the largest failure of a U.S. bank linked to the housing bust and credit crisis. The assets were sold to JPMorgan Chase & Co. for $1.9 billion.

In the meantime, a $290 million GO sale from the Ohio Public Facilities Commission is one of the deals in the state being delayed by market disconnect, according to Kauffman.

He said he hoped that the commission will receive enough retail and institutional demand as the Los Angeles deal did when its deal finally enters the market.

"If we can get a sense that we have buyers for a majority of the transaction and what levels those buyers are interested at, we may move forward," Kauffman said, noting that the commission is also anxiously watching absolute yield levels and spreads to the general market in determining when to come to market.

The Ohio deal - which consists of $240 million of new money and $50 million of refunding bonds - was originally scheduled to price two weeks ago. Kauffman said the commission is not at a critical part of its funding process and that it could borrow intra-state if it needs funding for the road, bridge, and sewer projects being financed with the pending new bonds.

"We're hopeful before we reach that point that the market will be functioning again," he added. "We're trying to be patient and see if an opportunity presents itself at reasonable interest rates."

In other market activity, a $626 million Hawaii GO sale is the largest deal on the negotiated calendar with a day-to-day status for a second week in a row.

The deal, which is being senior-managed by Citi, is structured with bonds maturing from 2012 to 2028 and is rated Aa2 by Moody's and AA by Standard & Poor's.

Meanwhile, the Athens-Clark County, Ga., Unified Government is also sitting on its $220.8 million water and sewer revenue offering that was originally slated to price on Sept. 19.

Finance director John Culpepper said he is concerned about the market and is also anticipating getting the deal sold as soon as possible.

"For us, there was no immediate cash outlay, but the uncertainty for us is the interest rates. That's what weighs on us a bit more," Culpepper said. "We just simply would like to return to a more normal municipal market."

The deal is being senior-managed by Citi and matures from 2009 to 2039, and is rated Aa3 by Moody's, AA-minus by Standard & Poor's, and AA by Fitch.

Michael Scarchilli contributed to this story.

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