California Sells Major Muni Deal

California came to market yesterday with the fourth-largest municipal deal in history amid a backdrop of declining yield levels in the secondary market.

The Golden State priced $6.85 billion of taxable general obligation bonds to fund infrastructure projects, including $5.23 billion of Build America Bonds. The deal marks the largest BAB deal to date, by far, and was upsized substantially from an expected $4 billion. Interest on the entire deal is federally taxable, but exempt from state income taxes.

The bonds were priced by a syndicate led by co-senior managers Goldman, Sachs & Co., JPMorgan, Barclays Capital, and Morgan Stanley.

The bonds yield 5.126% with a 5.25% coupon in 2014, 5.326% with a 5.45% coupon in 2015, 5.859% with a 5.95% coupon in 2016, and also contain maturities in 2034 and a split maturity in 2039. The 2034 maturity contains $2 billion of BABs, which yield 7.43% with a 7.5% coupon, while the $3 billion 2039 BAB maturity yields 7.43% with a 7.55% coupon. The other 2039 maturity, which yields 5.526% with a 5.6% coupon, has a mandatory put in 2013.

The 2034 and 2039 maturities yielded 365 basis points higher than 30-year Treasuries, while the 2014 maturity yielded 325 basis points higher than the five-year Treasury, and the 2015 and 2016 maturities yielded 345 and 340 basis points higher than the seven-year Treasury, respectively. The 7.43%-yielding BABs also yield 308 basis points higher than the 30-year triple-A Municipal Market Data GO scale, though the call structures on BABs and tax-exempt GOs are quite different.

California's GO credit is rated A2 by Moody's Investors Service and A by Standard & Poor's and Fitch Ratings.

According to a press release from the state, the net interest rate on the BABs after the 35% cash subsidy from the federal government, all in 25-year and 30-year maturities, is 4.83%. The state last month sold $6.5 billion of tax-exempt GO debt, which yielded 5.90% in 24 years and 6.10% in 29 years.

"This deal is being exceptionally well received. People love it," a trader in Los Angeles said. "It's oversubscribed already. I know someone who put in for $150 million of them and got less than a million. It's the deal of the month."

In the release, state Treasurer Bill Lockyer said: "With this sale, California's infrastructure financing program continues its recovery from the harm inflicted by chaos in capital markets and the state's prolonged budget stalemate."

"The funding will help secure thousands of jobs for workers and millions of dollars in revenues for businesses which depend on infrastructure projects," he said. "And with the Build America Bonds, we're providing this much-needed economic stimulus at a substantial savings for taxpayers."

In the secondary market overall, tax-exempt yields were lower by about two or three basis points yesterday.

"We're doing a bit better, probably a little firmer overall," a trader in New York said. "A lot of the firmness we've seen this week is from these BABs, obviously. People seem to be very interested in them, and ... this California deal [is] no exception."

On Monday, Morgan Stanley priced $1.375 billion of revenue BABs for the New Jersey Turnpike Authority. The bonds, which mature in 2040, are priced at par to yield 7.41%. In its pricing Monday, the deal priced 370 basis points over the 30-year Treasury. The bonds are rated A3 by Moody's, A-plus by Standard & Poor's, and A by Fitch.

New York's Metropolitan Transportation Authority said yesterday that it is now soliciting indications of interest on $750 million of BABs, before locking in final pricing today. The MTA boosted the BAB portion to $750 million from $200 million.

JPMorgan yesterday priced $500 million of tax-exempt dedicated tax fund bonds for the MTA. The bonds mature from 2010 through 2030, with a term bond in 2034. Yields range from 1.20% with a 3% coupon in 2010 to 5.10% with a 5% coupon in 2034. The bonds, which are callable at par in 2019, are rated AA by Standard & Poor's and A-plus by Fitch.

Elsewhere in the new-issue market yesterday, Morgan Stanley priced $392 million of GO bonds for Tennessee in two series.

Bonds from the $291.5 million Series A mature from 2010 through 2029, with yields ranging from 1.05% with a 3% coupon in 2011 to 4.38% with a 4.375% coupon in 2029. Bonds maturing in 2010 will be decided via sealed bid. These bonds are callable at par in 2017.

Bonds from the $100.6 million Series B mature from 2009 through 2021, with yields ranging from 1.60% with a 5% coupon in 2013 to 3.39% with a 5% coupon in 2021. Bonds maturing in 2009 and 2010 will be decided via sealed bid. The bonds are not callable. The credit is rated Aa1 by Moody's and AA-plus by both Standard & Poor's and Fitch.

JPMorgan priced for retail investors $581.3 million of Connecticut GO bond anticipation notes in two series. Bans from the $353.1 million Series A mature in 2010, yielding 0.45% with a 2% coupon. Bans from the $228.2 million Series B contain three maturities in 2011, all yielding 1.00%, with coupons of 2%, 3%, and 5%.

The overall credit is rated Aa3 by Moody's and AA by both Standard & Poor's and Fitch. The short-term debt is rated MIG-1 by Moody's, SP-1-plus by Standard & Poor's, and F1-plus by Fitch.

The Treasury market showed losses yesterday. The yield on the benchmark 10-year Treasury note, which opened at 2.90%, finished at 2.94%. The yield on the two-year note was quoted near the end of the session at 0.97%, after opening at 0.93%. The yield on the 30-year bond, which opened at 3.74%, was quoted near the end of the session at 3.81%.

The sale of BABs, begun in earnest with the sale last week by the University of Virginia, has sparked a rally on the long end of the municipal curve.

As of Tuesday's close, the triple-A muni scale in 10 years was at 96.9% of comparable Treasuries, according to MMD. It is the first time since early February that the 10-year muni scale was less than 100% of comparable Treasuries.

Additionally, 30-year munis were 116.8% of comparable Treasuries, the lowest level of the year.

As of the close Tuesday, 30-year tax-exempt triple-A rated GOs were at 129.3% of the comparable London Interbank Offered Rate.

Also yesterday, The Bond Buyer's One-Year Note Index fell 9 basis points, to an all-time low of 0.59%. The previous record was 0.65% three weeks ago. The index began in July 1989.

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