The Week Ahead

Market Faces Glut of Supply

Underwriters are bracing for a challenging and busy week as a hefty $10.22 billion of new municipal volume heads to the primary market, according to Ipreo LLC and The Bond Buyer.

Some say there is enough pent-up demand to absorb the glut of anticipated supply, which is more than double last week's revised $3.94 billion, according to Thomson Reuters.

Others believe issues will have to be made more attractive to find a home for the bonds and get the deals done.

As the market prepares for an abbreviated week due to Thursday's closure in honor of Veterans Day, it is also anticipating $16 billion of debt from from issuers over the next 30 days, according to The Bond Buyer visible supply.

"There are definitely some challenges next week with the short week and the heavy calendar, which will continue up to year-end," said a New York underwriter.

"There's definitely demand out there, and next week it very well might come down to yield. This week's performance was encouraging in both the tax-exempt and taxable space, but it's going to be a challenge next week," he said.

Parker Colvin, managing director and head of California underwriting at Stone & Youngberg LLC in San Francisco, expects the flood of California paper to be well received, especially due to the relative widening of the long taxable Build America Bond market and the Treasury rally on the front end of the market last week.

Late Friday, the 30-year, triple-A general obligation bond closed at a 3.93% yield after coughing up some of the previous day's gains early Friday morning as impending supply continued to make it tough to sell bonds. The 30-year triple-A GO ended at 3.86% last Monday, according to MMD.

Meanwhile, Treasuries were bolstered by the mid-week Federal Reserve announcement of $600 billion in quantitative easing to boost the economy by buying Treasuries with an average duration of five to six years.

By late Friday the 30-year Treasury jumped to a 4.13% yield, its highest since July 13.

In municipals, an $875.8 million Los Angeles Department of Airports revenue offering represents the largest deal of the week and headlines a bevy of California issues. Four of the largest deals of the week are from the Golden State.

The department aims to get the financing on behalf of Los Angeles International Airport off the ground Wednesday when senior book-runner JPMorgan prices the Series 2010D senior revenue bonds following a retail order period on Tuesday.

The bonds have ratings of Aa3 from Moody's Investors Service and AA from Standard & Poor's and Fitch Ratings. The maturity structure was still being discussed at press time on Friday.

"The supply is going to be a big test for the market, but we don't see any major difficulty in the market absorbing the supply," S&Y's Colvin said. "There was a lot of demand pent-up demand in August and September as supply was extremely light."

In addition, he said, municipals benefit from the recent volatility in other markets.

"I think we're at relatively attractive ratios to Treasuries, and a modest spread-widening of taxable BABs on the long end is all it has taken to generate strong demand for BABs," Colvin said.

He doesn't expect any major affects on deals or pricings as a result of the Fed's announcement on quantative easing.

"There is a fair degree of optimism, and the rally in the front end of the Treasury market makes munis appear attractive," Colvin said. "The details from the Fed were what the market was waiting for."

The bulk of the week's activity will take place in the negotiated market, where an estimated $8.91 billion of the week's total volume is expected. That represents a stark contrast to the revised $3.02 billion that arrived last week, according to Thomson figures.

The glut of California supply will also include a $760 million sale from the University of California Medical Center, which is structured as three series of pooled revenue bonds, all rated Aa2 by Moody's and AA-minus by Standard & Poor's.

Barclays Capital is planning to price the issue on Tuesday. On Monday it will take retail orders for the tax-exempt bonds in Series 2010G and indications of interest for the taxable BABs in Series 2010H, and traditional taxable bonds in Series 2010I. The structure was not available at press time.

The Los Angeles County Public Works Financing Authority will add to the new-issue activity when it sells $805 million of lease revenue debt on Wednesday following a retail order period planned for Tuesday by senior book-runner Bank of America-Merrill Lynch.

The bonds, which are rated A1 by Moody's, and A-plus by Standard & Poor's and Fitch, are structured to include $700 million of taxable BABs and recovery zone economic development bonds, as well as $105 million of tax-exempt debt.

Proceeds will be used to finance multiple capital projects within Los Angeles County.

Elsewhere in California, the Santa Clara Valley Transportation Authority is readying a $650 million sale of sales tax revenue bonds.

The deal is structured as two series of bonds: $515 million of Series 2010A taxable BABs and $135 million of Series 2010B tax-exempt bonds.

Rated Aa2 by Moody's and AA-plus by Standard & Poor's, the bonds are expected to be priced by co-senior managers Barclays and Citi. The structure was not available at press time.

In three of the other largest deals outside of California, the Massachusetts Development Finance Agency is preparing a $776 million sale of revenue bonds on behalf of Harvard University.

Morgan Stanley is planning to price the offering on Tuesday, however the maturity structure was not available late last week, according to an underwriter at the firm. The deal includes $400 million of Series 2010B tax-exempt securities, a $9 million of Series 2010A tax-exempts, and $18 million of Series 2010C taxable bonds.

The New York City Municipal Water Finance Agency is gearing up to sell $500 million of water and sewer second general-resolution revenue BABs designated as fiscal 2011 Series CC.

Ramirez & Co. will take indications of interest on Monday and price the deal on Tuesday with two bullet maturities tentatively structured in 2042 and 2043.

The bonds are secured by a subordinate lien on the gross revenues of the city's water and sewer system and a portion of the proceeds will be used to pay principal and interest on some of the agency's outstanding commercial paper notes.

Fianally, the Colorado Regional Transportation District will issue $400 million of sales-tax revenue bonds in a two-pronged offering planned for pricing by Goldman, Sachs & Co. on Tuesday, following a retail order period on Monday.

The larger portion of the financing consists of $300 million of taxable debt maturing in 2050, and $100 million of tax-exempt securities maturing in 2038.


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