Deal in Focus

New York Issuers Step Up to the Plate

A flurry of New York issuance helped to boost supply last week in the municipal bond market as buyers grabbed $1.87 billion of debt from the Empire State.

The week’s largest deal was a $829 million New York State general obligation transaction that included tax-exempt and taxable new-money and refunding bonds in four different series. Wells Fargo Securities was the winning bidder on the bulk of the competitive transaction. Bank of America Merrill Lynch was the winning bidder on the $231 million Series 2011C tax-exempt refunding bonds.

The $478.2 million of tax-exempt new-money Series 2011A bonds priced with yields ranging from 1.05% on a 5% coupon for debt maturing in 2014 to 4.9% with a 5% coupon on debt maturing in 2041. Bonds maturing in 2012, 2013, 2016, and 2018 were not reoffered. The true interest cost was 4.25%.

Donald Lipkin, head of municipal market strategy at Wells Fargo, said this was the time to buy New York general obligation bonds. The double-A rated state tends to issue new-money GOs only once a year, while it issues appropriation-backed debt and bonds backed by its personal income-tax receipts throughout the year.

“It was a chance to buy a highly rated deal, high-quality bonds at a significant size in a market that does have little supply,” Lipkin said. “New York State issues a lot of bonds, but they don’t have a whole lot of GOs so it’s not a name that comes all the time in size.”

The municipal primary market has been quiet this year. State officials anticipated the GO deal would stand out against a backdrop of light municipal issuance.

“There’s been a light supply and, for the state, the GO bonds don’t come to market frequently,” said Emily DeSantis, spokeswoman for the state’s comptroller’s office, which executes the state’s GO bond sales. “So we usually see pretty good demand for our bonds and we were certainly comfortable.”

The refunding portion of the transaction generated a net-present-value savings of $29 million, or 8.6%, according to DeSantis.

The comptroller’s office had its eye on the GO deal, but it also helps to coordinate other New York borrowings to avoid any crowding out that might occur when multiple issuers access the market within the same time frame.

The State of New York Mortgage Agency priced $115.4 million of mortgage revenue bonds on Monday. The next day, the state issued its competitive GO deal while the New York City Municipal Water Finance Authority and the Metropolitan Transportation Authority began retail pricing on their bond sales.

The Dormitory Authority for the State of New York also jumped in on Tuesday with a $32.5 million refunding deal. On Wednesday the MWFA and the MTA opened up pricing to institutional investors while the Port Authority of New York and New Jersey sold $225 million of refunding debt subject to the alternative minimum tax.

DeSantis said that the office works with the various issuers throughout the state to ensure there is market access for everyone.

“We communicate with the other issuers listed on the calendar if we think there is a conflict,” she said. “The calendar is continually updated to reflect updated issuance scheduled. There’s a dialogue among the issuers and, ultimately, each issuer makes a decision about when it is best for them to enter the market.”

Several issuers and market participants said the mix of debt offered helped each deal stand out on its own. New York had the advantage of size and its once-a-year GO issuance, the Port Authority offered AMT bonds, the MTA’s $127.9 million transaction attracted solid retail interest with its shorter maturity schedule that went out to 2021, and the MWFA offered serial maturities when it typically issues water-revenue debt on the longer end of the curve.

The MWFA sold $250 million of tax-exempt new-money bonds and increased its refunding portion by about $40 million to $291.8 million once officials saw that there was enough demand to increase the refinancing. Thomas Paolicelli, executive director of the water authority, said the shorter maturities allowed the agency to tap into retail demand. The MWFA carries double-A ratings.

“We offered serial bonds from 2012 through 2026, which we normally don’t have,” Paolicelli said. “We tend to issue longer-dated term bonds. And I think there was a lot of pre-marketing involved by the underwriter [M.R. Beal & Co.] to make sure that they had the orders lined up.”

The MWFA Series 2011GG revenue bonds priced with yields ranging from 0.49% on a 2.5% coupon on debt maturing in 2012 to 4.19% on a 5% coupon for debt maturing in 2026. A 2043 term bond for $250 million priced with a 5.2% yield on a 5% coupon.

The combined true interest cost for the sale was 4.7%, Paolicelli said.

MTA finance director Patrick McCoy said his team and book-runner Jefferies & Co. watched the other New York deals, particularly the MWFA sale and the state GOs, to make sure the timing was right for the mass-transit provider.

“We weren’t that concerned about the water authority deal because it was initially going to structure its bonds long,” McCoy said. “Ultimately it did structure its bonds shorter, but we tried to stay out of their way and let them get their retail-order period done first and of course we waited until the state GO did its bonds.”

The authority realized net-present-value savings of $10.2 million, or 7.7%, McCoy said. Those savings will help offset costs the MTA expects to incur when it will remarket $300 million of auction-rate bonds into fixed-rate mode during the week of April 11.

A healthy retail demand helped the MTA wrap up the bulk of its dedicated-tax refunding bonds on its first day of pricing. The authority was able to sell $90 million to $95 million of the total deal to retail investors, leaving roughly $35 million to institutional buyers.

“From our perspective, the MTA’s size was manageable with the right part of the curve,” said Roy Carlberg, managing director at Jeffries.

The MTA’s Series 2011A dedicated-tax refunding bonds priced with yields ranging from .35% on a 2% coupon for debt maturing in 2011 to 3.7% on a 5% coupon for debt maturing in 2021. The true interest cost was 2.8%.

Many sources agree that the year’s low level of issuance is due in part to headline risk, outflows from muni mutual funds, lack of investor confidence, and overall fears of cash-strapped cities and towns defaulting on obligations. But it’s difficult to gauge when enough investors will return to take on higher levels of municipal issuance.

Some investors may avoid municipal credits now, but the strengths of the muni market are still the same, Wells Fargo’s Lipkin said.

“It’s still a broad and deep market with a lot of players and it’s still a great product with very attractive features,” Lipkin said. “Where else do you get high-quality fixed-income investments that are tax advantaged the way munis are?”



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