As the third quarter begins to wind down this week, long-term volume is expected to improve slightly, with several significantly sized deals from state and local governments contributing to $9.42 billion in estimated new issuance earmarked for pricing in the primary market, according to Ipreo LLC and The Bond Buyer.
This week’s calendar is expected to increase by $1.26 billion from a revised $8.16 billion last week, according to Thomson Reuters.
The Dallas Area Rapid Transit Authority will test the waters with its recently downgraded senior-lien sales tax revenue credit when it issues $829 million of the bonds in the week’s largest deal.
The authority lost its coveted triple-A rating from Standard & Poor’s on Sept. 17 when the rating agency lowered its rating and underlying rating on approximately $2.6 billion of outstanding senior-lien sales tax revenue bonds to AA-plus from AAA with a stable outlook.
Standard & Poor’s assigned its AA-plus long-term rating and stable outlook to this week’s deal, which senior-manager Bank of America Merrill Lynch will offer to retail investors on Monday ahead of Tuesday’s official pricing.
The financing consists of $95 million of Series 2010 A tax-exempt senior-lien bonds and $729 million of Series 2010 taxable Build America Bonds. Moody’s Investors Service rates the DART bonds Aa2.
The downgrade by Standard & Poor’s was prompted by an 8.4% decline in sales tax revenue, to $378.4 million in fiscal year 2009, and additional declines expected in fiscal 2010 — both of which could lead to reduced coverage levels — as well as an acceleration in the transit system’s bonding program, said analyst Russell Bryce.
“Because DART relies on sales tax revenues to support operations, we believe that it would be unlikely that farebox revenues would be available for debt service if sales tax collections declined below the level of required debt-service payments,” Bryce wrote.
Larry McCormick, managing director of trading at Samco Capital Markets Inc. in Dallas, said last week’s Texas market was fairly slow-going and the retail market was quiet.
“It’s tough sledding,” he said. “Most deals were getting done, but it was a struggle.”
McCormick attributed the sluggishness to low absolute levels and the arrival of the end of the quarter, when institutional investors close out their books and postpone new purchases until the first of the month.
A $977.7 million financing of general obligation highway improvement bonds from the Texas Transportation Commission last Thursday included $815.4 million of BABs priced by JPMorgan at par with a final 2040 maturity to yield 4.68% — 95 basis points higher than the comparable Treasury yield at the time.
The bonds had an expected average life of 26.62 years, and are subject to a make-whole call at the Treasury rate plus 20 basis points.
The 2018 final tax-exempt maturity carried a 5% coupon that was priced to yield 2.18% — 25 basis points higher than the generic, triple-A GO scale in 2018 at the time of the pricing, according to Municipal Market Data.
The bonds are rated triple-A by both Moody’s and Fitch Ratings, and AA-plus by Standard & Poor’s.
Switching gears to Arizona, a $500 million electric system revenue bond sale this week will be the first taxable BAB issue for the Salt River Project Agricultural Improvement and Power District. The deal — on behalf of the state agency that generates, transmits, and markets energy from its plants and hydroelectric dams — comes amid an economic downturn in Arizona. Recessionary pressures and a collapsing housing market are impacting the district’s service area and revenues, according to district officials and rating agency analysts.
The district’s 2012 retail electric sales levels are about 5% less than 2009 estimates, and wholesale sales projections for 2012 are nearly 20% lower. At the same time, the state itself is looking for ways to cut spending or raise revenues to cover budget shortfalls.
The bonds are rated Aa1 by Moody’s and AA by Standard & Poor’s with a stable outlook. Senior manager Goldman, Sachs & Co. will take retail orders for them Wednesday ahead of Thursday’s official pricing.
Despite the declining electric sales projections and the state’s economic struggles, supply-starved Arizona investors familiar with the Salt River credit will be eager to buy the bonds, according to a Phoenix trader.
“There haven’t been a lot of big deals lately and it’s a strong enough national name, so I think there should be good demand,” he said.
Besides the Series 2010A BABs — proceeds of which will be used to fund capital projects — the deal also includes $140 million to as much as $250 million of tax-exempt refunding bonds in Series 2010B that will likely retire bonds issued between 1997 and 2001, according to district officials.
Among the other large deals slated for this week, Ohio is planning to sell $581.6 million of refunding debt for higher education, school, infrastructure, and conservation project bonds in a deal with four series expected to be priced by JPMorgan on Wednesday, following a retail order period on Tuesday.
The bonds are rated Aa1 by Moody’s and AA-plus by both Standard & Poor’s and Fitch. They are tentatively structured to mature from 2013 to 2022.
New Jersey will bring its GO credit to market this week when it sells $574.3 million of refunding bonds on Thursday in a negotiated deal being senior-managed by Morgan Stanley.
The deal is rated Aa2 by Moody’s and AA by Standard & Poor’s and Fitch. The maturity structure was not available at press time.
Elsewhere, on Tuesday in the competitive market, New York’s Empire State Development Corp. is planning to issue $470.7 million of service contract revenue refunding debt, while North Carolina plans to sell $320.1 million of its GO debt, which is rated triple-A by all three major rating agencies.
