Illinois’ $3.7 billion general obligation bond issue that was postponed last week will return to the calendar this week, the highlight of an otherwise bleak primary market.
Issuers and underwriters are keeping new issuance to a minimum in light of Presidents Day and expectations that many investors are preoccupied with winter-break vacation plans. Ipreo LLC and The Bond Buyer expect an estimated $5.44 billion of long-term new issues will be priced this week, almost $3 billion short of the typical $8 billion. The light volume comes on the heels of a revised $3.39 billion that entered the market last week, according to Thomson Reuters.
“We’ve had a light calendar for a number of weeks and this particular week there is a good reason for it — you will have a number of buyers and portfolio managers and their families on vacation,” said Howard Mackey, president of trading, underwriting and sales at Rice Financial Products in New York City.
The taxable Illinois deal should pump some life into the recently lackluster primary when it is priced Tuesday and Wednesday by joint book-runners Morgan Stanley and Loop Capital Markets LLC, market players said.
The deal, originally scheduled for last Thursday, was postponed after officials decided last Monday to give investors time to digest Gov. Pat Quinn’s new budget proposal that was released last Wednesday.
The budget includes deep cuts and increased borrowing to pay off a backlog of bills. The state could face a deficit as high as $15 billion by the end of fiscal 2011, according to officials. The bond proceeds will fund the state’s fiscal 2011 pension fund contributions. They will mature from 2014 to 2019 and are rated A1 by Moody’s Investors Service, A-plus by Standard & Poor’s, and A by Fitch Ratings.
Strong demand for the Illinois deal is expected nationally and overseas, market observers said.
“With all the negative Illinois press dragging out the spreads, it will be yieldier relative to corporates in the A-rated space,” a New York taxable trader said.
The expiration of the taxable Build America Bond program on Dec. 31 has also created a lot of pent-up demand for taxable municipal paper — especially on the short end of the market, where this loan is structured, the trader said.
“There are a lot of buy-side accounts that are looking to pick up yield that haven’t been able to find a lot of short paper during the life of the BAB program,” he said. “There has never been enough munis on the short end to satisfy the demand from these buyers looking for corporate bond alternatives.”
Houston is planning to sell $280.9 million of first-lien combined utility system revenue refunding bonds on Wednesday. Rice Financial is set to price the deal with a structure of bonds maturing from 2027 to 2031 with a term bond in 2033. The bonds are expected to be rated AA by Standard & Poor’s and AA-minus by Fitch.
Mackey expects the deal to be dominated by institutional demand, with some retail interest on the 2027 maturity.
“There’s been a scarcity of supply, and this is a good, strong, stable credit, so it should generate a lot of institutional demand,” he said on Friday.
On Friday, the generic triple-A GO bond due in 2033 ended at a 4.59%, while the 2041 maturity ended at a 4.76% yield, according to Municipal Market Data.
The Kentucky Asset/Liability Commission is set to issue $269.7 million of taxable funding notes in a negotiated deal by JPMorgan on Wednesday.
The deal is tentatively structured to mature serially from 2012 to 2022 and ratings are expected to be Aa2 from Moody’s, A-plus from Standard & Poor’s, and AA-minus from Fitch. Proceeds will refinance loans Kentucky obtained from the teacher’s pension fund to pay the state’s share of promised medical benefits. The loans carried 7.5% interest rates and the note sale will lower financing costs.
