The Week Ahead

Skimpy Slate May Leave Buyers Wanting

A municipal bond market starved for a hearty batch of tax-exempt paper is not going to get it this week.

States and local governments are slated to sell a modest $5.56 billion of debt this week, according to data from Ipreo and The Bond Buyer, following a paltry $3.16 billion in new offerings last week.

The biggest deal on the calendar is a $710 million negotiated offering from the Phoenix Civic Improvement Corp., scheduled to price Tuesday.

The revenue bonds will come in three pieces — a $653.9 million tax-exempt series with maturities ranging from 2013 to 2040, a $34.8 million tax-exempt series with maturities from 2011 to 2025, and a 30-year recovery zone economic development bond with $21.3 million in face value.

The deal is underwritten by Barclays Capital.

Most of the proceeds from that sale will go toward financing the PHX Sky Train, which is designed to connect the city’s airport terminals with a light-rail station, parking lot, and car rental outlet. The system is expected to carry over 35 million riders annually.

The bonds are secured by revenue collected by the airport. The airport expects to report almost $100 million in revenue available to pay debt service next year, enough to cover the costs of repaying interest and principal 1.8 times over.

Moody’s Investors Service rates the deal A1, and Standard & Poor’s rates it A-plus.

Municipalities have been floating less tax-exempt paper even as buyers clamor for tax-free income.

Based on data from Bloomberg LP, a third of the $225 billion municipalities have borrowed through the bond market so far in 2010 has been in the taxable market, mainly because of the Build America Bonds program.

Through the first 30 weeks of the year, states and local governments have at times channeled significantly more than a third of their borrowing into the taxable ­market.

In the week ended July 16, municipalities floated $7 billion of bonds, of which more than half was taxable. About 43% of the $9.5 billion of bonds floated during the week ended June 25 were taxable.

A trader in New Jersey said he did not expect next week’s slate of tax-exempt debt to satiate the market.

“There isn’t enough of a calendar to really have an effect,” this trader said. “I don’t see the calendar really being much of an issue here for us.”

The yield on the benchmark 10-year triple-A municipal bond touched a record low 2.56% last week, according to ­Municipal Market Data. Municipals have delivered returns of 5.2% this year, based on the S&P AMT-Free National Municipal Bond Index.

“We continue to grind higher because of a lack of supply in the market,” the trader said.

The trader said with yields so low, some of the retail interest lately has been “begrudging.”

“Tax-exempt supply is going to be on the light side, which obviously is supporting prices at this point,” said John ­Derrick, a portfolio manager at U.S. Global Investors.

Derrick strives to find “pockets” of value in short-term municipals, which is getting harder because with Treasury rates low and supply so scarce more people are willing to accept meager returns.

“If you look at yields, particularly on the short end of the curve, it’s a little difficult to get excited,” Derrick said.

Derrick said the market could absorb more tax-exempt supply without any ­disruption.

“If anything, I think the street’s looking for more bonds,” another trader on the East Coast said.

“We expect new-issue supply to remain quite manageable in the coming weeks,” John Dillon, municipal strategist at Citi, wrote in a report last week.

Municipalities are scheduled to sell $7.97 billion in the next 30 days, according to The Bond Buyer 30-day visible supply.

The average 30-day supply this year is more than $9 billion.

Another major negotiated deal this week is the Ohio Water Development Authority’s $451.4 million revenue bond sale expected to price Wednesday.

The authority, which is rated triple-A by Standard & Poor’s and Moody’s, has not determined the breakdown of tax-exempt and Build America Bonds for this deal.

Morgan Stanley is underwriter.

In order to be eligible for federal aid for a pollution control fund that issues loans to communities, the state has to match certain federal contributions to the fund, at a rate of at least 20 cents per federal dollar.

The state expects loans from the fund to be used to build a wastewater treatment plant and implement other pollution control programs.

The bonds will be repaid by the money received when the recipients of loans from the fund repay the loans.

The biggest deal in the competitive market is a $412 million sale by Portland, Ore., of bonds secured by revenues from the city’s sewer system.

Moody’s rates the bonds Aa3, and Standard & Poor’s rates them AA.

The bonds will begin maturing next year, with a final maturity in 2035.

The money Portland is borrowing will be used mostly to pay for improvements to the city’s sewage treatment systems and stormwater programs, among other things.

The sewer system last year produced $156.7 million in revenue applicable for paying debt service, enough to cover $119.6 million in debt-service costs.


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