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Post-Holiday Calendar Should Satisfy Demand

NOV 25, 2012 9:48am ET
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A fairly brisk new-issue calendar will usher in the last week of November — highlighted by an $800 million Florida aviation offering — and municipal players say the deals will satisfy post-holiday demand on the heels of dwindling supply last week.

“We have a moderate calendar with pent-up demand, so depending on how they are originally priced we should get good follow through on new issues,” said Howard Mackey, manager of underwriting, sales, and trading at Rice Financial Products.

In addition, he noted that developments overseas could possibly strengthen post-holiday demand.

“If things escalate significantly in the Middle East, those factors tend to create a safe-haven mode, which causes demand to increase for Treasuries, and that would lower rates and municipals would become all the more attractive,” Mackey explained.

An estimated $7.91 billion of new supply is on tap this week, according to The Bond Buyer and Ipreo LLC. Overall, the volume — which will be led by the negotiated market — is a significant increase from the $2.28 billion the week before, according to Thomson Reuters, following the pricing of the $1.4 billion Texas Municipal Gas Acquisition and Supply Corp. sale on Monday before the holiday lull.

Yields, meanwhile, are at historical lows, but demand remains strong — especially since municipals are attractive relative to Treasuries, municipal experts said. Last week, the 30-year municipal bond was yielding 90.4% of the comparable Treasury bond, according to Municipal Market Data.

The market strengthened last week before underwriters and traders packed up and closed early on Wednesday for the Thanksgiving holiday. The 30-year triple-A general obligation bond closed at  2.54%, the same level as on Tuesday, according to Municipal Market Data. In addition, intermediate and long yields rallied and municipal bond indexes fell on all but the short end to the lowest levels in 47 years.

While Mackey said retail “has been all over the map” lately, he expects mom and pop to take notice of the week’s largest deals — namely the $808.4 million Miami-Dade County aviation revenue bond sale.

“The issue is well received in the market and depending on pricing there should be a fair amount of demand,” he said.

Scheduled for pricing on Wednesday by Bank of America Merrill Lynch, the two-pronged offering will be structured to include $700 million of aviation revenue bonds subject to the alternative minimum tax, and $108.8 million of tax-exempt aviation revenue bonds, both rated A by Standard & Poor’s.

While the structure was being finalized at press time, Mackey said retail will be most interested if the deal offers discount structures with coupons ranging from 3% to 3.75%, as well as 5% coupon bonds, particularly those with callable structures “with some kick to maturity and current interest rates.”

He said they will also be closely eying a large, three-pronged offering on Wednesday from North Carolina Municipal Power Agency #1 because of its scarcity value and brand recognition.

“There is usually high demand for the name,” he said.

Rated A by both Standard & Poor’s and Fitch Ratings, the deal will consist of $463.92 million of electric revenue refunding bonds, $80.8 million of taxable electric revenue bonds, and $71 million of tax-exempt, new-money electric revenue bonds.

The maturity structure was still being finalized at press time.

Meanwhile, in the competitive market, the largest deal was expected to be a $377.5 million Virginia College Building Authority educational facilities revenue sale on Wednesday structured to include serial bonds maturing from 2014 to 2032 and rated Aa2 by Moody’s and AA by S&P.

Overall, demand is strong and will be dictated by the flow of the calendar and pricing, according to muni market participants.

“I think the market has legs,” said Jay Alpert, executive vice president of municipal sales and trading at M.R. Beal & Co. “The customer base is there for the right credits, and price action remains firm.”

“This environment will be sustained unless we see some heavy selling by the institutional accounts,” he added. “Levels are rich versus rates, so the more manageable the new-issue calendar is, that will determine the price stability.”

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