A $3.2 billion sale of economic recovery bonds by California will test the choppy waters of the municipal market this week, headlining an estimated $6.18 billion slate of new-issue volume in the primary market.
Last week, the market ended January with a revised $4.77 billion in weekly new-issue volume, according to Thomson Financial.
The California deal will arrive in a challenging market on the heels of a dramatic 47.2% drop in total January volume to $16.5 billion from last January’s $31.2 billion, and as investors are trying to adjust to the changing market dynamics amid both continued easing by the Federal Reserve Board and ongoing uncertainty surrounding the state of the bond insurance industry.
For the second time in as many weeks, the Fed last week cut the overnight lending rate it charges banks — this time by another 50 basis points to 3.00% — immediately following its surprise intra-meeting cut the prior week by 75 basis points to 3.50%.
Analysts say the January volume decline — the lowest since 2001 — stems from a 70.5% plunge in the use of insurance during that month compared to January 2006, as the turmoil among bond insurers exposed to subprime mortgages continues to unfold.
The California deal, which is being negotiated by Lehman Brothers, is expected to be offered to individual investors in a retail order period tomorrow and Wednesday ahead of the institutional pricing on Thursday. The bonds are tentatively scheduled to mature from 2008 to 2011 with a 2023 term bond, and there are mandatory tenders in 2010 and 2011.
The bonds are rated Aa3 by Moody’s Investors Service, AA-plus by Standard & Poor’s, and AA-minus by Fitch Ratings.
Elsewhere in California, the only other somewhat sizable deal will hail from Glendale in the form of a two-pronged revenue offering tomorrow that totals $110 million.
The city will competitively sell $60 million of electric system revenue bonds in a series that matures from 2018 to 2038 and rated Aa3 by Moody’s and A-plus by Standard & Poor’s and Fitch. It will also sell a separate $50 million series of water revenue bonds in the competitive market that run from 2013 to 2038 and are rated Aa3 by Moody’s, AA by Standard & Poor’s, and AA-minus by Fitch.
Another large deal will be begin pricing Thursday, when New York City starts a three-day retail order period for a $475 million tax-exempt fixed-rate general obligation sale that the city put on the calendar late last week. The sale is the first piece of a planned $650 million GO issuance and will be led by Loop Capital, which is making its debut as a senior manager for the city.
The sale will also include $75 million of taxable fixed-rate GOs and $100 million of tax-exempt variable rate GOs later in the month, city officials said.
New York City is rated AA by Standard & Poor’s, Aa3 by Moody’s, and AA-minus by Fitch.
Besides these, the supply of other sizable deals is limited to a handful of smaller offerings in the Northeast, Midwest, and Southwest.
The Maryland Heath & Higher Education Facilities Authority will issue $261.2 million of revenue debt on behalf of the Washington County Health System.
Merrill, Lynch & Co. is expected to price the offering on Wednesday with a structure that matures from 2012 to 2043. The Series 2008 bonds will come uninsured and will carry ratings of BBB-minus from Standard & Poor’s, and BBB from Fitch.
The Northeast activity will also include a $205.1 million sale of local highway and bridge service contract bonds from the New York State Thruway Authority.
Morgan Stanley will offer the bonds to retail investors on Wednesday, followed by an institutional pricing on Thursday. Details about the structure and expected ratings were not available at press time on Friday.
Denver on Wednesday will sell $175 million of general obligation bonds in the only sizable deal expected in the Midwest.
That deal, which is being priced by Piper Jaffray & Co., is structured to mature from 2008 to 2025 and is rated Aa1 by Moody’s, AA-minus by Standard & Poor’s, and AA-plus by Fitch.
Nearby, the Texas calendar is expecting two deals, but because they involve refundings the deals are rate-sensitive and their pricings will depend on market conditions this week, according to underwriters involved in the deals.
The larger offering is a $175 million GO refunding sale from Austin, which is being priced by Lehman and is structured to mature from 2008 to 2021. The bonds are rated Aa1 by Moody’s, AAA by Standard & Poor’s, and AA-plus by Fitch.
In addition, the Harris County Flood Control District is slated to sell $140 million of refunding bonds in a deal being priced by Morgan Keegan& Co. Structured to mature from 2008 to 2021, those bonds are expected to have ratings of Aa1 from Moody’s and AA-plus from Standard & Poor’s and Fitch.
In the competitive market, one of the only larger deals is a $69.6 million Cambridge, Mass., GO sale expected tomorrow. The bonds have natural triple-A ratings from all three rating agencies and are scheduled to mature from 2009 to 2028.
Last week’s largest deal was a $236.9 million King County, Wash., limited-tax GO refunding that was priced by Goldman, Sachs & Co. last Tuesday, which offered as little as three basis points and as much as 38 basis points more than the national triple-A GO scale on the same day.
For instance, the deal, whose bonds are payable with sewer revenues, contained a 2011 serial bond that carried a 5% coupon and was priced to yield 2.38% at a time when the same maturity was yielding a 2.35%, according to Municipal Market Data’s generic, triple-A GO scale.
On the longest end of the deal, the 2034 final maturity carried a 4 ¾% coupon and was priced to yield a 4.72% — 38 basis points cheaper than where the national triple-A GO scale was priced in the same maturity that day, according to MMD.
