New issuance for this week got underway in earnest yesterday as two Build America Bond offerings hit the market with spreads tighter to Treasuries than some of the larger BAB deals that entered the market last month.
Meanwhile, in secondary trading the market finished unchanged in light to moderate activity.
"It might be a little bit weaker, but nothing substantial either way," a trader in Chicago said. "There were some mixed reads on some of the new issues, just some inconsistencies out there. And that new market is what's going to drive the secondary."
The focus was on new issues as Goldman, Sachs & Co. priced $200 million in electric revenue taxable BAB bonds for the Sacramento Municipal Utility District. The bonds mature in 2036 and are priced at par to yield 6.322% - a 225 basis point spread to Treasuries. The bonds, which are subject to a make-whole call provision of Treasury plus 35 points, are rated A1 by Moody's Investors Service, A-plus by Standard & Poor's, and A by Fitch Ratings.
That pricing compares favorably to other issuers that have entered the BAB market. California, for instance, on April 22 paid 365 basis points above Treasuries on its 25-year and 30-year maturities on its $5.23 billion BAB offering. The University of Virginia, which is rated triple-A, priced at 250 basis points above Treasuries for its $250 million issue.
Taking into account the 35% subsidy, SMUD will pay a net of about 4.11% on the bonds, at least 100 basis points better than the rates it was quoting in the tax-exempt market. The district had previously entertained the option of pricing the deal as BABs or tax-exempt. The $60 million in interest-rate savings - $32 million on a net present-value basis - was enough to make it worth sacrificing its call option, said SMUD treasurer Noreen Roche-Carter.
Secondary market trades on the bonds have a weighted average yield of 6.265%, according to BondDesk's MuniTicker, a bit stronger than at primary pricing. Yields on some of the bigger BAB deals had fallen as much as 42 points in next-day trading, according to a presentation made by Public Resources Advisory Group's Janet Lee recently at a Municipal Analysts Group of New York luncheon.
"We benefited some from not being the first out," Roche-Carter said. "We were thrilled" with the pricing.
George K. Baum & Co. also priced $132.5 million of BABs for the Wichita Unified School District No. 259. The sinking-fund term bond matures in 2028 with the sinking fund beginning in 2025.
The bonds yielded 6.22% - just 215 basis points above Treasuries - which makes for an effective yield of 4.043%, taking into account the 35% subsidy. The school district is rated Aa3 by Moody's and AA by Standard & Poor's. The University of Minnesota, rated Aa2 by Moody's and AA by Standard & Poor's, paid 270 basis over Treasuries on its $35 million, 20-year maturity April 15.
Elsewhere in the new-issue market, Merrill Lynch & Co. priced $464 million for triple-A rated Georgia, upsizing the deal to include a $149 million refunding portion. Final pricing information was not yet available at press time.
In addition, Banc of America Securities LLC priced $442 million of senior sewer revenue bonds for the San Diego Public Facilities Financing Authority in the largest deal of the week. The bonds mature 2010 through 2029 with term bonds in 2034 and 2039.
Yields range from 1.83% with a 2.75% coupon in 2011 to 5.43% with a 5.25% coupon in 2039, with bonds in 2010 sold via a sealed bid. The bonds, which are callable at par in 2019, are rated A2 by Moody's, A-plus by Standard & Poor's, and AA-minus by Fitch.
Merrill Lynch also priced for the San Bernardino County, Calif., Transportation Authority $250 million of sales tax revenue notes maturing in 2012. The notes were priced in three tranches, with all yields at 3.10% on 3.50%, 4%, and 5% coupons. The bonds are rated MIG-1 by Moody's, SP-1-plus by Standard & Poor's, and F1-plus by Fitch.
On the competitive side, the Clark County, Nev., School District sold to Citi $128.1 million of general obligation limited tax refunding bonds at a true interest cost of 1.4101%. The bonds mature in 2010 and 2011, with neither maturity reoffered.
Triple-A rated Utah also sold to Morgan Stanley $111.1 million of GOs at a true interest cost of 1.6932%. The bonds mature 2010 through 2015, with yields ranging from 1.23% with a 4% coupon in 2012 to 2.13% with a 4% coupon in 2015. Bonds maturing 2010 and 2011 were not reoffered.
In the secondary market, traders said Fitch's Monday-night downgrade of Assured Guaranty Corp. to AA had little impact on trading. With Moody's having stripped Assured's Aaa rating last November, Assured carries a top rating from just Standard & Poor's.
Municipal Market Advisors managing director Matt Fabian said the downgrade doesn't "really affect much at all" and that a double-A rating is "fine." However, the change to rating watch evolving is more troubling for the bond insurance industry.
"It should not interrupt their demand necessarily, but the rating watch evolving is a disappointment," Fabian said. "We need to get to a stable indicator in order for that business to begin to grow again. And to give enough confidence that smaller issuers can get enough benefit from it."
Wachovia Capital Markets LLC noted in an equity research report that Assured's paper already traded with split ratings and that it doesn't believe the downgrade will have "a meaningful impact upon the stock."
It continues to rate Assured Guaranty Ltd.'s stock at "outperform" saying the company is "positioned to still deliver high single-digit ROEs in an extremely difficult environment."
"That's going to happen," one municipal trader said of the Assured downgrade. "I don't think it's a big deal right now."
The Treasury market was weaker yesterday. The yield on the benchmark 10-year Treasury, which opened at 3.15%, was quoted recently at 3.16%. The yield on the two-year note was quoted recently at 0.96% after opening at 0.94%. The yield on the 30-year bond, which opened at 4.05%, was quoted recently at 4.06%.
In economic data released yesterday, the Institute for Supply Management's non-manufacturing index rose to 43.7 in April from 40.8 in March, beating economists expectations. Economists polled by Thomson Reuters had expected a reading of 42.0.
Data to be released this week also includes first-quarter productivity tomorrow and the April unemployment rate and nonfarm payroll numbers on Friday.
