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The Week Ahead

N.Y. Thruway's $779M Tops Slate; Illinois' $500M Follows

The municipal market needed this. That’s the response some in the market had regarding last week’s surge in new issuance and subsequent backup in yields.

High-quality credits had gotten too expensive over the early part of 2012. The sheer number of new deals last week, in addition to the bulk of heavy offerings, bogged down investor interest and presented ripe conditions for the uptick in yields.

Subsequently, this week’s smaller number and size of deals should do better, industry pros say. They have a decent chance of finding a solid fit with investors following the downshift in the primary market, according to Duane McAllister, portfolio manager at BMO Asset Management.

“We may still have some modest weakness,” he said, “but the tone next week will be better, because we’ve backed up to a point now that those with cash would be more inclined to put some of that to work.”

Industry estimates calculate that municipal bonds coming to market this week should total $5.81 billion, versus a revised $9.36 billion last week. An estimated $1.08 billion in competitive offerings are scheduled, compared with a revised $1.997 billion this week. Meanwhile, $4.73 billion of negotiated deals is slated, against a revised $7.36 billion this week.

Last week, the calendar had risen to the point where it was going to be a challenge at $9 billion, McAllister said. Alongside a “sloppy” Treasury market that saw yields rise by at least four basis points along the curve on the week, the anticipation of heavy issuance applied too much pressure on the muni market.

“But that was healthy,” McAllister said. “Buyers had gotten to the point, particularly in the highest-quality issues, where the yields simply weren’t unappealing. And [last] week, deals like [triple-A-rated] Maryland were a good example of that. No one’s really concerned about the credit; it’s a mater of what the right level is. We needed to find where that would clear.”

Yields may be at historically low levels, but they’re not deterring those issuers in the market for current refundings, said Rob Williams, director of income planning at the Schwab Center for Financial Research at Charles Schwab. But as the market struggled to absorb the higher volumes, those issuers on the margins have been affected.

“You might see a bit of a delay with some of the issuance to try to time it to when there aren’t some of these larger deals coming through, like from California and Puerto Rico,” Williams said.

Though supply in the market should slow down significantly this week, some hefty deals are still expected. Bank of America Merrill Lynch is expected to price $779.3 million of New York State Thruway Authority second general highway and bridge trust fund bonds. The bonds are rated AA by Standard & Poor’s and Fitch Ratings. They are expected to arrive Wednesday, structured as serials.

Samuel A. Ramirez & Co. is set to price $500 million of Illinois general obligation bonds. The GOs are rated A2 by Moody’s Investors Service and are expected to arrive Tuesday, structured as serials.

Siebert Brandford Shank & Co. is set to price $345 million of District of Columbia Water and Sewer Authority revenue bonds in two series. The bonds are rated Aa3 by Moody’s, AA by Standard & Poor’s and AA-minus by Fitch. The larger series consists of $175 million of public utility bonds. The second series consists of $170 million of public utility refunding bonds. Both series are expected to arrive Wednesday, structured as serials and term.

Morgan Stanley and JPMorgan are expected to follow on the heels with an expected pricing of $100 million of variable-rate District of Columbia Water and Sewer Authority revenue bonds. They should arrive as two $50 million subseries.

Morgan Stanley is also expected to price $277.9 million of Louisville-Jefferson County Catholic Health Initiatives revenue bonds. They are rated Aa2 by Moody’s and AA by Standard & Poor’s and Fitch.

In the competitive market, Boston on Wednesday is expected to auction $238.1 million of GO in three separate issues. The bonds are rated Aaa by Moody’s.

The first issue, of $121.98 million, is structured as serials between April 2013 and April 2032. The second issue, of $87.96 million, is structured as serials between February 2013 and February 2024. The final issue, of $28.17 million, is structured as serials between August 2013 and August 2018.

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