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The Week Ahead

California Goes for The Gold With $12B

Cash-strapped California is poised to dominate the municipal arena this week with two separate offerings that account for 85% of the estimated $14.11 billion in new volume expected in the long-term market, according to Ipreo LLC and The Bond Buyer.

New issuance — anchored this week by the two mammoth California issues worth a combined $12 billion —- is surging ahead of the impending expiration of the Build America Bond program at year’s end.

The upcoming slate of ­new-money debt is nearly double the $7.9 billion average recorded during the first 43 weeks of this year.

“We’ve got a pretty sizeable calendar next week, so people are looking ahead to that,” a New York trader said Friday after a fairly flat afternoon marked by light secondary trading.

In the single largest short-term deals ever sold in the ­municipal market, the Golden State plans to sell $10 billion of revenue ­anticipation notes to support its cash-flow needs for the 2010-2011 fiscal year when lead manager JPMorgan prices the ­offering on Wednesday. The deal breaks the previous record, also set by California, with its sale of $9 billion of Rans in ­October 2002, according to date from Thomson Reuters.

In another California deal, Citi is expected to price $2 billion of taxable various-purpose general obligation BABs on Thursday following a retail order period Wednesday.

California’s deals “must ­contend with the competition from what appears to be a record glut of municipal debt issuance, nearing $40 billion, that will need to be digested in the next two weeks,” said Peter ­Delahunt, national institutional sales manager at Raymond James & ­Associates in New York.

“One would suspect that spreads will need to widen across the board for the market to absorb the cornucopia of debt and avoid any indigestion before the Thanksgiving feast.”

The deals come to market as California faces a projected $25.4 billion operating deficit, according to state officials.

Gov. Arnold Schwarzenegger and lawmakers enacted a budget last month that requires the closing of a $19 billion gap for the current fiscal year, which began July 1.

The state still is expected to be short $6 billion in the current fiscal year and $19 billion in the 2011-2012 fiscal year due to the temporary nature of most of  this year’s legislative budget-balancing actions and the sluggish economic recovery.

Simultaneously crowding the market, Delahunt said, will be a “BAB-alanche” of taxable securities from issuers racing to market ahead of the program’s possible expiration.

It’s unclear if Congress will renew the taxable BAB program, and its 35% federal subsidy, in the wake of a mid-term election that saw Republicans regain control of the U.S. House.

In addition, The Bond Buyer’s 30-day visible supply rose $4.137 billion to $17.303 billion.

“The potential for a technical supply imbalance coupled with the possible perception of the need for an illiquidity premium for what may become an orphaned product, could result in a 'BAB-ortunity’ to buy bonds at more attractive spreads than we are presently experiencing in relation to corporate debt,” Delahunt said.

The two California deals alone exceed all of last week’s revised $10.37 billion of total new long-term volume, according to Thomson Reuters.

Note sales are not calculated in the week’s total estimated volume. About $50 billion in notes volume has come to market overall so far this year, according to The Bond Buyer.

The California Rans, whose principal and interest is payable exclusively from unapplied money in the state’s general fund, are expected to be rated MIG1 by Moody’s Investors Service, SP1-plus by Standard & Poor’s, and F2 by Fitch Ratings.

California’s long-term GO ratings stand at A1 from Moody’s and A-minus from Standard & Poor’s and Fitch.

Four of the week’s other large deals are being planned by Texas issuers.

The Texas Public Finance Authority is preparing a $1.2 billion sale of unemployment compensation obligation-assessment revenue bonds on behalf of the Texas Workforce Commission. They will be priced Thursday by senior book-runner Bank of America-Merrill Lynch. The commission administers the state’s unemployment insurance program.

Rated Aa1 by Moody’s, AAA by Standard & Poor’s, and AA-plus by Fitch, the Series 2010A bonds are structured to mature from 2011 to 2017, according to a Merrill underwriter.

They are payable from and secured by a lien on pledged revenue. Sale proceeds will be used to pay unemployment benefits and repay principal and interest on advances from the federal unemployment trust fund, according to the preliminary official statement.

The Dallas Independent School District is readying $871.1 million of taxable school building bonds, which are slated to be sold in the competitive market Tuesday with a structure maturing from 2021 to 2035. The bonds are expected to be rated Aa2 by Moody’s, A-plus by Standard &Poor’s, and AA by Fitch.

The North Texas Tollway Authority is poised to issue $490.8 million of tax-exempt first-tier revenue refunding bonds Wednesday when Bank of America-Merrill prices the offering with a structure maturing from 2017 to 2025, with term bonds in 2032, 2039, and 2043, according to the POS.

The bonds are subject to optional and mandatory sinking-fund redemptions, and are rated A2 by Moody’s and A-minus by Standard & Poor’s. The NTTA is considering qualifying the issue for bond insurance, according to the POS.

The bonds are special limited obligations, payable from and secured by the tolls and other revenues of the NTTA, a successor to the Texas Turnpike Authority, which was abolished in 1997.

Proceeds will refund all or part of the Series 1997A Dallas North Tollway System revenue refunding bonds, all or a portion of the system’s Series 1998 revenue refunding bonds, all of its Series 2008H first-tier put bonds, all of the Series 2008J first-tier revenue bonds, and all of the first-tier put Series 2008L-1 bonds.

Meanwhile, a $498.7 million sale of Houston public improvement refunding bonds will be priced Tuesday by Jefferies & Co., following a retail order period Monday.

The deal consists of Series 2010A tax-exempt bonds, Series 2010B taxable BABs, and Series 2010C taxable pension obligation refunding bonds — all rated AA by Standard & Poor’s and Fitch. The bonds are payable from an annual ad-valorem tax levied on taxable property within the city.

The market absorbed just over $10 billion of new supply last week, led by the $875 million Los Angeles Department of Airports senior revenue sale on behalf of Los Angeles International Airport. The issue was priced by JPMorgan with a final 2040 maturity yielding 5.05% with a 5% coupon.

The generic, 30-year triple-A GO scale moved up by 23 basis points by week’s end, finishing at a  4.20% yield on Friday, compared with ending at a 3.97% last Monday, according to Municipal Market Data.

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