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Betting On A Bailout Bounce

The deep freeze that the primary market has endured the last two weeks may begin to thaw a bit this week, aided by the much-anticipated news on Friday that the House approved the $700 billion financial rescue plan. But some market participants said it was too early to expect new-issue business to bounce back quickly given that the nation's economic crisis is far from over.

Volume will remain significantly diminished from its usual pace, with total new issuance estimated at just $1.25 billion this week, compared with a revised $1 billion last week, according to Thomson Reuters. This week's negotiated volume is estimated at $888.6 million, slightly less than last week's revised $888.8 million, while competitive sales are estimated at $370.6 million, up from $117.7 million last week.

One New York underwriter said whatever deals are priced this week will test the market and set the tone for coming weeks. Retail demand should be strong given the current absolute yield levels above 5% on the long end of the market.

"There will be no onslaught of deals by any means," he said. "I think the market needs to be tested in a very orderly and methodical way through smaller deals as opposed to larger deals. The market needs a lot of confidence back and that's going to take some time. It needs three or four days of stability in the cash market before anyone brings any deals of size."

Paul Schott, chief executive officer of the Investment Company Institute, said in a statement on Friday that the timing of the rescue bill by the House was a key advantage.

"Swift enactment of this legislation is in the interest of all Americans and will promote confidence in the face of the unprecedented conditions in our markets and the consequent risks to our economy," Schott said.

Another underwriter said the two-week stall in new issuance is nearing an end. "I think things have bottomed out here, so [this week] you will see some more deals coming," he said.

Bill Mason, executive vice president at David Lerner & Associates Inc. in Syosset, N.Y., said the bailout itself will not be a cure-all for the shortage of new paper.

"There are still less players in the market than before, less people willing to commit capital than before, and more people concerned about risk than they were before," he said.

In the past two weeks volume has been virtually nonexistent as deals large and small were significantly reduced in size, postponed, placed on the day-to-day calendar - or just removed altogether.

Peter Delahunt, national institutional sales manager at Raymond James & Associates Inc. in New York City, said there was increased activity in the secondary market on Friday in anticipation of the passage of the bailout bill.

"It provides a little bit of calm to the fear that had become pervasive across all markets and it starts to calm people," he explained. "It certainly doesn't get us out of the woods, but it gives us a flashlight and some matches."

He was uncertain, however, that the activity was limited to the secondary.

"We'll have to wait and see if there is enough demand to chew through the large pending supply of new issues overhanging the market, and just how much price dislocation may be necessary for these deals to clear the market."

Edwin Harrison, director of financial services for Harris County, Tex., which includes Houston, said he does not expect the credit markets to begin thawing for at least a week. Harrison will make a presentation to the Harris County Commissioners tomorrow about how the bailout and related developments might affect the county's plans for issuing debt.

The county has twice changed its schedule for issuing $200 million of general obligation refunding bonds because of adverse market conditions. After issuing $100 million of fixed-rate bonds in September, the plan called for another $200 million of variable-rate debt swapped to a synthetic fixed rate. When liquidity tightened, the plan changed to $100 million of variable rate and $100 million of fixed. When conditions eroded further, the plan switched to $200 million of fixed rate, he said.

"We plan to issue that by the end of the month," Harrison said.

Houston needs access to the short-term debt market to cover the immediate costs of recovering from Hurricane Ike. Those costs will be reimbursed by the Federal Emergency Management Agency, but cash flow is the problem.

"We need about $200 million for recovery costs," said city Controller Annise Parker. "We expect to get most of that from FEMA."

The immediate cost of debris removal was estimated at $98 million. The city had a $20 million reserve fund and got a $95 million line of credit from JPMorgan Chase Bank, Parker said

The city has authorization to issue tax revenue anticipation notes to smooth cash flows, but Parker said she hopes the notes are not needed anytime soon because of difficulty pricing deals. "The market is there, if you're willing to pay a higher interest rate," she noted.

The market freeze has left the city holding $250 million of airport auction-rate securities and forced delays in issuing $450 million of general obligation bonds to take out commercial paper, she said.

James Bass, chief financial officer of the Texas Department of Transportation, said he hopes the bailout will have a positive impact on the department's variable-rate debt, that rose from a 1.8% interest rate at the beginning of September to 8% by Sept. 24. It has since reset at more moderate levels of between 5.5% to 7.25%, he said.

"If the bailout increases confidence, that will help," he said. "Will it bring us back down to 1.8%? I'm not so sure."

Noe Hinojosa, co-founder of Estrada Hinojosa & Co., said Friday that he was already getting indications that the market was loosening up. "We may see some deals next week," he said. "But patience is going to have to be more of a virtue than ever."

The Wisconsin Housing and Economic Development Authority is looking for the federal package to ease the tight liquidity that has hampered its ability to originate new loans. "I'm hopeful that this will loosen up the liquidity markets, it's just a question of how long," said Laura Morris, chief financial officer of the agency.

The authority is still accepting applications from first-time homebuyers interested in its single-family mortgage program, but has suspended actually locking in rates for new mortgages. The move stems from uncertainty over the agency's credit line which is expiring and may not be renewed. Morris declined to name the bank that provides the line

WHEDA typically uses the line to pre-fund a pool of loans ahead of a bond sale. The authority typically pre-funds a pool representing about one-third the size of the upcoming bond sale that will provide the long-term funding for the loan. The pre-funding mechanism provides more guidance for the agency as it is structuring the bond sale to accommodate the rate on the loans. The remaining two-thirds of the eventual bond sale is then used to fund future loans.

The authority's next single-family tax-exempt issue of about $150 million is slated for November. It remains unclear whether that deal will go forward as expected as housing agencies have put most deals on hold amid a drought of investors.

Florida has not sold any debt for three weeks because of the frozen bond market, but Ben Watkins, director of the state Division of Bond Finance, hopes that bond sales can resume in the near term.

"I am hopeful that this provides the catalyst for the credit markets to stabilize and begin functioning properly," Watkins said Friday. "The whole idea behind the bailout is to provide some thawing for the market. Right now it's frozen up and we need some stability and certainty going forward in order to allay fears so that people will start investing and start loaning money again. We're sailing in uncharted water so there's no way to know with certainty whether this is going to have the desired effect, but I hope it will for everyone."

Watkins said he thinks that over time investors will return to the fixed-rate bond market with "safety and security as their number one objective."

One of the larger deals expected to make an appearance this week is a $324.5 million Kentucky State Property & Building Commission revenue and refunding sale, which is targeted to price on Wednesday, after a two-day retail order period today and tomorrow by lead underwriter Morgan Stanley. The bonds are rated Aa3 by Moody's Investors Service, A-plus by Standard & Poor's, and AA-minus by Fitch Ratings.

Atlanta, meanwhile, is expected to sell $120 million of tax allocation bonds on Wednesday in a negotiated deal by Wachovia Bank NA. The news early Friday morning that Wachovia agreed to be acquired by San Francisco-based Wells Fargo & Co. in a $15.1 billion deal - the latest banks to merge amid ongoing turmoil in the U.S. banking industry - was not expected to interfere with the pricing of the deal, according to Wachovia underwriter.

Wachovia also said it was still planning to price a $112.1 million deal from the Maine Municipal Bond Bank tomorrow, after a two-day retail order period that began last Friday. The Series 2008 C bonds were structured to mature from 2009 to 2029 with a term bond in 2038, and have natural triple-A ratings from Standard & Poor's and Fitch.

The California Department of Transportation, meanwhile, has plans to sell $96.02 million of federal highway grant anticipation bonds on Thursday, following a retail order period on Wednesday through a negotiated deal being led by JPMorgan. The bonds are rated Aa3 by Moody's and AA-minus by Standard & Poor's and Fitch.

In the competitive market, meanwhile, a $750 million Massachusetts general obligation revenue anticipation note deal, which was postponed last Wednesday, was to be priced this Thursday. The deal includes two series of $375 million of the notes, which are sold to help the state with cash flow needs prior to the Treasury Department collecting federal reimbursements and income tax receipts.

Also scheduled is $124 million of Broward County School District, Fla., tax anticipation notes on Wednesday.

Whether or not these deals actually make it to market depends on unforeseen market conditions this week. Many other deals previously scheduled are still waiting in the wings, including over $210.3 million in negotiated deals, which were supposed to price last week, but were moved to the day-to-day calendar late last Thursday.

In addition, over $462.6 million in negotiated deals that were recently moved to the day-to-day calendar were removed completely as of late Thursday.

Last week, one of the largest deals that actually priced amid the uncertainty of the rescue plan was a $300 million New York City Transitional Finance Authority building aid revenue bond offering priced by Merrill, Lynch & Co. The deal, which sold $144 million to retail investors during the one-day order period, offered a final maturity in 2038 that was priced to yield 5.75% with a 51/2% coupon.

Richard Williamson, Yvette Shields, Shelly Sigo, and Gavin Murphy contributed to this story.

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