Sell Side

Market Sees Fifth Biggest March Ever

Led by the fourth-largest bond sale on record, primary issuance in the municipal market registered its fifth biggest March ever.

Click here to see the largest issues.

With California's well-received $6.5 billion offering headlining the month, a total of 823 issues with a par value of $37.3 billion came to market in March, according to Thomson Reuters. Volume fell 14.8% from last March, when issuers had rushed to refinance auction-rate securities to avoid penalty rates on failed auctions amid that market's collapse.

Overall issuance in 2009 is nearly on pace with last year, down just 1.9% to $83.8 billion. Revised issuance data for February showed an increase of 8.6% over last year to $23.2 billion, compared to the 4.9% decline first reported.

"It's been a continuation of how our new-issue market is running this year and that is strong retail-order periods are necessary," said Colin O'Neill, founder of Bond Advisors LLC, an investment advisory firm. "And that's allowing these good-size deals to get done."

Click here to see Year-to-Date Long Term Bond Sales.

California's sale came to market one week after Wisconsin had offered a $1.5 billion deal that was oversubscribed and repriced at most maturities. The Golden State had not entered the market since last June, while lawmakers battled over a budget crisis.

The California deal attracted strong enough retail demand to upsize it to $6.54 billion from the initial plans of $4 billion. Closing one day earlier than expected, it marked the largest deal to enter the market by any issuer since the state issued $7.92 billion of economy recovery bonds in May 2004.

"The California issue showed that properly structured and properly priced, the muni market can clear even the largest issues," Bank of America-Merrill Lynch Research fixed-income strategist Philip Fischer wrote in a weekly report.

Although market participants focused on the California and Wisconsin in March, other deals still received decent reception, market participants said.

"The big deals were getting a lot of buzz in the market," said Robert Lamb, president of financial adviser Lamont Financial Services. "We did not get perhaps as much investor focus as we would have if they hadn't been in the market, but we were still able to get our deals done at pretty attractive levels."

From an investor's perspective, underwriters have recently priced deals at attractive levels because they have less capital to commit to holding bonds, according to Bob Millikan, director of fixed-income at BB&T Asset Management.

The market, though, still retains its bifurcation between high grade and all other credits, which makes it a more difficult market for weaker issuers, market participants said. The spread between a triple-A rated, 30-year general obligation bond and a Baa-rated, 30-year GO bond stood at 239 basis points Monday compared to 78 basis points one year ago, according to Municipal Market Data.

In addition, GO bond issuance has risen 13.6% through March to $36.4 billion, while revenue bond issuance has fallen 11.2% to $47.5 billion. That could reflect investors seeking safer GO credits and shunning revenue bonds that could be affected by the weakened economy, notes McDonnell Investment Management LLC managing director and chief research officer Richard Ciccarone.

"The better-quality bonds were able to come to market during the first quarter getting reasonably good yields," Ciccarone. "GOs are considered higher-grade securities and were also reinforced by stimulus money that went to the states and some of that is flowing through to local governments. Being the weaker component dependent on economic activity, there were more concerns about some of the revenue bonds that come to market, so that slows them down."

Other new-issue data through March also reflects provisions of the economic stimulus package, Ciccarone said.

Sales of bank-qualified bonds, for instance, jumped 112.3% in March to $2.6 billion, following an increase of the small-issuer limit to $30 million from $10 million and changes to the de minimis rule. Issuance of bank-qualified bonds rose 62.4% through March to $6.2 billion.

Transportation issuance, on the other hand, has fallen 67.8% this year to $5.3 billion. This could suggest issuers are using federal stimulus money in lieu of bond issuance, although "the verdict is still out," Ciccarone said.

Another piece of the stimulus package - the use of taxable Build America Bonds - have yet to show up in the data. Wells Fargo Brokerage Services recently agreed to buy $3.65 million of taxable general obligation promissory notes from Stevens Point, Wis., in what is believed to be one of the first uses of the BAB program.

It remains unclear the extent to which the program will have an impact on new issuance, Ciccarone said.

"The governmental issuers who are allowed to issue the Build America Bonds and get the rebate of 35% may very well move the market into a new light and may actually diminish the growth rate of tax-exempt bond market," he said. "That has major implications for the market. ... It could - although it hasn't in the past - very well be at the expense of tax-exempt supply. That's probably one of the most important things will be looking for over the next nine months is whether we will we be supplanting tax-exempt supply with taxable supply."


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