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Puerto Rico, Houston and N.Y. Lead a Hefty Slate

MAR 2, 2012 6:22pm ET
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The municipal market’s calendar doesn’t appear to be slowing down this week.

Hefty deals out of Puerto Rico, Houston, New York City and Maryland should pace a strong primary market. The Commonwealth of Puerto Rico is expected to come to market with a $1.5 billion public improvement refunding deal.

The Bond Buyer estimates this week’s volume at $8.85 billion, against $5.44 billion last week. Within the total, $6.61 billion of municipal bonds are scheduled for negotiated sale this week, versus a revised $3.56 billion that were issued last week. Bonds scheduled for competitive sale this week total $2.23 billion, compared with $1.88 billion last week.

But even though muni yields rose last week, some say they will have to climb higher to generate interest. Market participants still have money to put to work, as they have thus far in 2012, but are anxious in the face of still-low nominal yields.

“You’re seeing a market that a lot of buyers don’t like, just because yields are so low,” said John Mousseau, managing director and portfolio manager at Cumberland Advisors.

Still, he added, money is cheap for issuers, when today’s yields are compared with those of a year ago. Then, it would’ve cost issuers around 5.5% to come to market, and now those same issuers can come to market and issue bonds generally at around 3.5% to 4%.

Many issuers have been doing current refundings, Mousseau said. The numbers back this up, to a degree. Refundings of all types have increased 161% year-to-date for the first two months of 2012, according to Thomson Reuters numbers.

“You’ve probably been in this mode for the last two months where you’ve had more bonds coming out of the market than are being replaced, when you add in called bonds, maturing bonds, etc,” Mousseau said. “That’s creating part of the downshift that you’ve seen in yields since the beginning of the year. I would think that’s starting to come to an end.”

This week’s largest deals continue the refunding trend. Credits hailing from Puerto Rico lead the negotiated calendar this week, as they did for much of February.

Barclays Capital is expected to price $1.5 billion of Puerto Rico public-improvement general obligation refunding bonds, Series 2012A. The bonds are rated Baa1 by Moody’s Investors Service, BBB by Standard & Poor’s and BBB-plus by Fitch Ratings. They are expected to arrive on Wednesday.

The deal should act as a bellwether for the market this week, according to Priscilla Hancock, executive director and municipal strategist for JPMorgan Asset Management. “That will be another good gauge,” she said. “It’s a large deal; it’s higher-yielding, and it’s triple-tax-exempt. So, you’ve got a lot of interesting forces working there that will give you a good idea of what the market’s tone is.”

And given the positive reception Puerto Rico bonds received last month, there is a lot of perceived demand for incremental yield in the coming deal, said James Ahn, an executive director at JPMorgan.

But the demand also relates to all fixed-income investors’ need, whether in munis or corporates, to look farther down the credit scale or out along the curve to find yield, he added.

“That’s why some of the recent Puerto Rico deals have been well-received,” Ahn said. “Next week’s Puerto Rico GO deal would probably fare similarly, as long as technicals that have been in place in our market — such as the 13 consecutive weeks of inflows into muni bond funds — are sustained.”

Morgan Stanley follows on Tuesday with an expected $520 million of Houston Airport System subordinate-lien revenue refunding bonds. The bonds are rated A by S&P and A-plus by Fitch.

The $280 million Series 2012A is subject to the alternative minimum tax and should arrive structured as serials from July 2016 through July 2030. The $220 million Series 2012B is not subject to the AMT and is also expected to arrive as serials, ranging from July 2021 through July 2032. There will be $20 million of taxable Series 2012C bonds.

M.R. Beal & Co. is expected to price $502.2 million of New York City Municipal Water Finance Authority water and sewer system second general resolution revenue bonds, Fiscal 2012 Series EE.

The bonds are rated Aa2 by Moody’s and AA-plus by S&P and Fitch. The bonds are expected to arrive on Tuesday structured as serials.

Citi expects to price $320 million of  Series 2012A Broward County water and sewer utility revenue bonds, a Series B refunding, and a Series C taxable refunding.

The bonds are rated Aa2 by Moody’s, AA by S&P and AA-plus by Fitch. The bonds, which should arrive Thursday, are expected to be structured as serials.

The competitive calendar’s largest auctions are expected to land on Wednesday. Leading off, Maryland is expected to auction $321.6 million of first Series C general obligation state and local facilities refunding bonds.

The state on Wednesday will also auction $450 million of Series B state and local facilities GOs.

The bonds in both series are rated triple-A by the major ratings agencies.

New York’s Metropolitan Transportation Authority on Wednesday is expected to auction $250 million in Series B fixed-rate notes and $150 million in three equal subseries of Series A floating-rate tender notes. The notes are rated A2 by Moody’s and A by S&P and Fitch.

The fixed-rate notes should arrive as transportation revenue bonds, Series 2012B. The floating-rate tender notes should reach the market as three $50 million tranches of transportation revenue bonds, Series 2012A, and Subseries 2012A-1, A-2 and A-3.

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