An $877 million sale for Rutgers University and an $800 million New York City Transitional Finance Authority financing headline this week’s busy primary market calendar, which could produce more than $7 billion in new volume. Investors, on the other hand, will be looking for concessions on yield to offset weakness in the municipal bond market, which suffered $1.47 billion in outflows last week, according to Lipper Inc.
Investors can expect to see approximately $7.87 billion of new paper, according to Ipreo LLC and The Bond Buyer, compared to the reivsed $4.52 billion that actually came to market last week, according to Thomson Reuters.
The deals from New York and New Jersey are the largest in a handful of high-quality sales tax-backed issues to arrive in the spring reinvestment season, along with a $600 million sale of Build Illinois Bonds and a $500 million Massachusetts School Building Authority financing.
“These names will see strong investor interest, but given the diminished fund demand they will have to be priced to sell,” said Alan Schankel, managing director of fixed-income research at Janney Montgomery Scott referring to the New York, Illinois, and Massachusetts sales. “The market has certainly softened since last week.”
The benchmark, triple-A general obligation bond in 2043 ended last Thursday at 3.28% -- 49 basis points higher than where it debuted a month earlier, according to Municipal Market Data.
Investors looking at the Rutger’s deal, which will be priced by Thursday by Morgan Stanley, may demand even higher yields as it arrives after recent downgrades to AA-minus from AA by Standard & Poor’s, and to Aa3 from Aa2 by Moody’s Investors Service. Both rating companies cited risks associated with a July 1 planned merger between Rutger’s and the University of Medicine & Dentistry of New Jersey. Standard & Poor’s said the merger would result in $1.7 billion in outstanding debt, as well as increased operational, financial, and credit risks. Moody’s said it would be difficult and time consuming to merge the two systems that have different cultures and systems.
The deal consists of tax-exempt and taxable general obligation refunding bonds and tax-exempt, new-money GOs, and is also rated AA-minus by Fitch Ratings.
The NYC TFA sale of future tax-secured, tax-exempt, subordinate bonds will be priced for institutions by Loop Capital on Wednesday, following a two-day retail order period on Monday and Tuesday. The bonds are rated Aa1 by Moody’s and triple-A by both Standard & Poor’s and Fitch.
The Massachusetts sale of senior dedicated sale tax revenue bonds will be priced by Bank of America Merrill Lynch on Wednesday. The state’s fundamentally strong and wealthy economy, supported by the second highest personal income per capita,earns the authority an Aa2 rating from Moody’s and AA-plus grades from the two other major rating agencies.
“I don’t think there will be a problem absorbing this volume from a market viewpoint,” said Richard Larkin, senior vice president and director of credit analysis at H.J. Sims & Co. of this week’s calendar. “On the credit side, negative headlines on Illinois might give them some noise, but the sale should still go through, despite Illinois state GO downgrades.”.
The Build Illinois Bonds, which are rated AAA by Standard & Poor’s and AA-plus by Fitch, contrast the state GOs, which are rated the lowest among states due to ongoing fiscal turmoil stemming from budget shortfalls and pension reform and were downgraded twice last week. Fitch cut the state GOs one notch to A-minus with a negative outlook, while Moody’s lowered them one notch to A3. Standard & Poor’s rates the state A-minus with a negative outlook.
The Build Illinois bonds are backed by sales tax revenues and will be priced on Tuesday by Barclays Capital with a structure that includes serial bonds maturing from 2014 to 2026.
Despite the state GO credit stigma, the Build Illinois deal, and the other large, market-friendly names, should find buyers.
“From a credit point of view, a large issuer’s name is usually strong enough to attract money -- even Illinois,” Larkin said. “However, at some point people may bail out of Illinois debt, regardless of its status as a state. States have virtually no credit risk historically, but Illinois is challenging that axiom of municipal credit analysis.”
In other significant-sized deals, a $600 million offering from the Wisconsin Health & Educational Facilities Authority is expected to be priced on Wednesday by Morgan Stanley on behalf of Ascension Health Alliance. It also suffered a recent one notch downgrade to Aa2 from Aa1 by Moody’s.
The downgrade affects $5.2 billion of oustanding rated debt and reflects moderate operating margins over the last several years, which are likely to continue given large investments and short-term risks associated with a major enterprise resource project, according to a Moody’s report.
The deal for the largest not-for-profit health care system is rated AA-plus by both Standard & Poor’s and Fitch and includes variable-rate demand bonds, as well as tax-exempt fixed-rate securities, and taxable paper.
