Amid a flat to weaker secondary, California came to the municipal market yesterday with a $3.5 billion refunding of economic recovery bonds, by far the largest deal to hit the market in a new-issue dominated week.
Barclays Capital priced the massive California deal in two series. Bonds from the $2.96 million Series A mature from 2010 through 2023, with yields ranging from 2.48% with a 3% coupon in 2013 to 4.85% with a 4.75% coupon in 2023. Bonds maturing from 2010 through 2012 will be decided via sealed bid. Bonds are callable at par in 2019, except bonds maturing in 2022, which are callable at par in 2016. Bonds from the $500 million Series B contain three split maturities in 2023, all yielding 3.375%, with coupons of 3.5%, 4%, and 5%. The bonds are not callable.
“The results of this sale show that no one should ever underestimate California’s strength as a bond issuer, or its record of producing great results for taxpayers,” Tom Dresslar, spokesman for Treasurer Bill Lockyer, said in a press release.
The institutional pricing follows a two-day retail order period in which $2.49 billion of the deal was sold, comprising 71.5% of the $3.5 billion total. During Wednesday’s second day of retail pricing, California reduced expected yields quoted to investors by five basis points from Tuesday’s initial quotes, due to high demand, along with opening up the 2018 maturity, which was originally closed to retail. After the reductions, retail yields ranged from 2.50% in 2013 to 5.00% in 2022, and were further decreased in yesterday’s institutional pricing.
The bonds are rated A1 by Moody’s Investors Service, A-plus by Standard & Poor’s, and A by Fitch Ratings. All three rating agencies said they planned to upgrade the state’s outstanding ERBs — which currently match the state’s general obligation ratings of Baa1 from Moody’s, A from Standard & Poor’s, and BBB from Fitch — if the deal proceeded as planned.
In the secondary market, traders said tax-exempt yields were flat to slightly elevated.
“There’s a bit of a weaker tone, but it’s fairly quiet,” a trader in New York. “As has been the case all week, all eyes are on the primary. The secondary has been a bit of an afterthought in the face of all this supply.”
“We’re a bit cheaper on the long end,” a trader in Los Angeles said. “Maybe a basis point or two. But overall, I’d probably call it mostly flat. But there is some weakness out there.”
The Treasury market showed losses yesterday. The yield on the benchmark 10-year note opened at 3.42% and finished at 3.51%. The yield on the two-year note opened at 0.94% and finished at 0.99%. The yield on the 30-year bond finished at 4.35% after opening at 4.26%.
Yesterday’s Municipal Market Data triple-A scale yielded 3.05% in 10 years and 3.81% in 20 years, following levels of 3.04% and 3.77%, respectively, on Wednesday. The scale yielded 4.22% in 30 years, following Wednesday’s level of 4.18%.
As of Wednesday’s close, the triple-A muni scale in 10 years was at 89.4% of comparable Treasuries, according to MMD, and 30-year munis were 98.6% of comparable Treasuries. As of Wednesday’s close, 30-year tax-exempt triple-A rated GOs were at 101.2% of the comparable London Interbank Offered Rate.
Elsewhere in the new-issue market yesterday, JPMorgan priced $337 million of debt for Florida, including $274.5 million of taxable Build America Bonds. The BABs mature from 2015 through 2023, with a term bond in 2029.
Yields range from 4.277% in 2015, or 2.78% after the 35% federal subsidy, to 6.825% in 2029, or 4.44% after the subsidy, all priced at par.
The bonds were priced to yield between 160 and 262.5 basis points over the comparable Treasury yields.
The bonds, which are callable at par in 2019, also have a make-whole call at Treasuries plus 35 basis points for bonds maturing prior to 2019. The $62.5 million tax-exempt series matures from 2010 through 2014, with yields ranging from 1.48% with a 2% coupon in 2011 to 2.83% with a 5% coupon in 2014.
Bonds maturing in 2010 will be decided via sealed bid. These bonds are not callable. The credit is rated Aa2 by Moody’s, AA-plus by Standard & Poor’s, and AA by Fitch.
Morgan Stanley priced $139.9 million of revenue notes for the Southern California Public Power Authority. The notes mature in 2010, and yield 0.43% with a 2% coupon. The notes, which are not callable, are rated MIG-1 by Moody’s and SP-1-plus by Standard & Poor’s.
Morgan Keegan & Co. priced $105.1 million of bonds for Texas’ Plano Independent School District, including $87.4 million of taxable BABs.
The BABs mature from 2016 through 2024, with term bonds in 2029 and 2035. Yields range from 4.04% priced at par in 2016, or 2.63% after the 35% federal subsidy, to 6.10% with a 6.27% coupon in 2035, or 4.08% after the subsidy.
The bonds were priced to yield between 100 and 185 basis points over the comparable Treasury yield. The $17.7 million tax-exempt series matures from 2011 through 2015, with yields ranging from 0.70% with a 4% coupon in 2011 to 2.57% with a 4% coupon in 2015. The bonds, which are not callable, are rated Aa1 by Moody’s and AA by Standard & Poor’s.
