On the heels of last week’s robust calendar, volume will be noticeably lighter this week as only a handful of sizable deals deliver an estimated $4 billion to the municipal market amid abbreviated trading due to the observance of yesterday’s Memorial Day holiday, according to Ipreo LLC and The Bond Buyer.
By comparison, last week the market saw the arrival of a revised $7.69 billion, according to Thomson Reuters, $1.02 billion higher than the $6.67 billion originally anticipated.
Municipal market players said retail demand is being sustained by large new issues in the market recently — and in some cases by attractively priced taxable Build America Bonds — and is expect to continue to see retail participation continue following the holiday-shortened week and as the spring reinvestment season gets underway.
Timing new issues ahead of or after this week — particularly during the week of June 7 — could increase potential retail demand for upcoming financings among investors just as the June rollover season starts, according to Tom Kozlik, vice president and municipal credit analyst at Janney Montgomery Scott in Philadelphia.
However, the lighter calendar next week will still manage to attract interest, he said.
Bill Mason, senior vice president of trading and underwriting at David Lerner & Associates Inc. in Syosset, N.Y., said retail demand will continue to chase higher-yielding BAB paper.
“As the Treasury yield has declined, the spreads on new BABs have begun to widen out a bit for the first time since the program began,” he said. “We have found that retail has been attracted to BABs by the higher yields than those that can be found in other taxable instruments.”
Investors will have some opportunity to buy new BAB paper this week, even though the primary market pales in comparison to last week when the largest deal was a $1.1 billion historic sale of general obligation BAB from Washington — the state’s largest-ever bond issue and the fourth-largest BAB deal of 2010.
In spite of the holiday-induced slow-down, the Metropolitan Government of Nashville and Davidson County, Tenn., hopes to capture investors’ attention with its $575 million sale of general obligation improvement and refunding bonds in what will be the week’s biggest offering.
The deal consists of $275 million of improvement and refunding GO bonds in Series 2010 A; $250 million of improvement GOs that are designated as taxable, direct-pay BABs in Series 2010B; and $50 million of refunding GOs structured as traditional taxable bonds in Series 2010 C.
Goldman, Sachs & Co. is planning to price the deal on Thursday following a retail order period tomorrow.
The bonds are expected to be rated Aa1 by Moody’s Investors Service, AA by Standard & Poor’s, and AA-minus by Fitch Ratings.
A $315.3 million sale of revenue debt is also being planned by the California Health Facilities Financing Authority on behalf of Stanford Hospital and Clinics.
The sale, expected to be rated Aa3 by Moody’s, A-plus by Standard & Poor’s, and AA-minus by Fitch, is planned for pricing by Morgan Stanley on Thursday, following a retail order period tomorrow. The deal’s structure was not available at press time on Friday.
In the Northeast market, meanwhile, a $313.8 million sale of multi-family housing revenue bonds from the Montgomery County, Pa., Industrial Development Authority, which was originally expected to price last week, is earmarked for pricing on Thursday by Goldman.
The financing, which is comprised of Federal Housing Administration-insured mortgage revenue bonds, is subject to the alternative minimum tax and is being sold on behalf of the New Regional Medical Center project, a new hospital facility opening in 2012 in East Norriton, Pa.
The bonds are structured to mature serially from 2013 to 2020, and contain term bonds maturing in 2025, 2030, and 2038.
Elsewhere in the region, the New Jersey Economic Development Authority plans to issue $216 million on behalf of a Montclair State University student housing project.
RBC Capital Markets LLC is expected to price the offering on Thursday with a single Moody’s rating of Baa3.
One of the few sizable deals in the market will be $256.9 million Arkansas sale of federal highway grant anticipation and tax revenue refunding GOs being priced by Stephens Inc. tomorrow.
The bonds, which are rated Aa1 by Moody’s and AA by Standard & Poor’s, are structured to mature from 2011 to 2014.
Herman Charbonneau, a senior vice president of public finance at Roosevelt & Cross in New York City, said recent new issues have met with solid retail demand — but not as strong as the demand of nearly a month ago — partly due to the upcoming holiday and because “absolute rates on new-issue bonds have been driven progressively lower.”
“Municipals look great against Treasuries, but the absolute returns on prime grades are down below 2% inside five years and don’t reach 3% until you get beyond 10 years,” he explained. “The average buyer has a hard time working up much enthusiasm about that.”
Demand going forward should be stimulated by the large volume of redemptions in June and July, he said, “but that may be a little slow to develop.”
Mason of David Lerner said the municipal market should benefit from a flight to quality going forward due to the growing retail demand for tax-exempt securities in the face of increased risk in the equity market.
