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New Deals May Shrink To $905M

DEC 16, 2011 7:42pm ET
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New issuance in Muni Land kicks into holiday mode this week.

Industry estimates place this week’s total volume at under $1 billion, which is to be expected, given the approaching holidays. Accordingly, potential new-issue volume is expected to top out at just $905.2 million this week.

Digging down into the number, municipal bond offerings scheduled for negotiated sale this week are expected to total $365.5 million, versus a revised $3.58 billion last week.

Bonds scheduled for competitive sale this week are expected to total $539.8 million, following $1.52 billion last week.

At the moment, the wafer-thin supply is meeting barrel-scraping muni and Treasury yields, as well as a tiny percentage of investors who are still at their desks. Nonetheless, conditions are still favorable for some decent activity, all things considered. 

For one, yields for issuers are attractive, said John Dillon, chief municipal bond strategist at Morgan Stanley Smith Barney. Also, muni-Treasury ratios, though they’ve fallen considerably over the past couple of weeks, remain relatively attractive to investors.

The 10-year muni-Treasury ratio dropped to 95.63% 10 days ago, according to Municipal Market Data. But Treasury yields started to rally on Wednesday, pushing ratios back above the 100% barrier.

“So, it gives you a little more room for munis to play catch-up,” Dillon said. “And in the absence of any real substantive supply, there’s no reason we couldn’t hold these levels, or strengthen a tiny bit into January.”

This week’s action, such as it is, should fall largely on the competitive side of the market.

In the pole position, Massachusetts is expected to issue $400 million of Series 2011E consolidated loan general obligation debt. The bonds, rated AA-plus by Fitch Ratings, should go up for bid on Tuesday.

Suffolk County, N.Y., should follow with two sales of tax anticipation notes over two days that total $400 million.

The notes are rated MIG-2 by Moody’s Investors Service and F1-plus by Fitch.

The first series, at $300 million, is expected for Tuesday. A second series, at $100 million, is expected to follow on Wednesday.

Collier County, Fla., is expected to sell around $95 million of special obligation refunding revenue bonds.

The bonds are rated AA by Standard & Poor’s and Fitch and are expected to be sold on Monday.

In the negotiated market, the largest deals should all fall below $100 million. 

Rice Financial Products leads the way as it expects to price about $90 million of Jackson, Miss., Redevelopment Authority urban renewal revenue bonds for the central business district development program project in two series.

The first series is expected to amount to around $60 million in tax-exempt securities. The second series, at $30 million, is expected to arrive in a taxable form.

The bonds will be used for hotel construction, according to Howard Mackey, president of the broker-dealer unit at Rice. The bonds are expected to reach the market on Wednesday. At press time, the firm was still nailing down the specifics for the bonds’ structure, ratings and insurance coverage.

“The bonds come with a pledge from the city of Jackson’s general fund,” Mackey said.

“So, it gets an extra layer of security which would be fairly important and interesting to potential investors.”

Market technicals will likely continue to drive price action for the market, MMD analysts Randy Smolik and Domenic Vonella wrote in a research post.

Next to light supply, redemption data should continue to quell any significant muni-selling pressure.

In this market environment of low yields and extremely limited supply, individual investors would be better served as buyers than sellers, Morgan Stanley’s Dillon said, because there’s likely to be a fair amount of holiday-induced illiquidity in the next couple of weeks.

“So, you may not get as strong a bid side as you otherwise would,” he said. “But keep some ready cash at hand, should something interesting come out of the bid during those holiday weeks.”

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