Good Reception Expected for Large Slate Ahead, But Some Deals Might Face Hurdles

Two large New Jersey revenue financings will make a grand entrance in the primary market with a variety of tax-exempt and taxable bonds this week, while a Texas airport offering may or may not have a smooth landing as it sports a recent downgrade amid an estimated $7.22 billion of volume, according to The Bond Buyer and Ipreo LLC.

The calendar is slightly lighter than last week when a revised $7.53 billion came to market in the midst of demand that was strong enough for underwriters to increase the size of the week's largest deal — the California general obligation sale — by over $600 million to $2.72 billion last Thursday.

But, despite that strong demand, underwriters raised yields by as much as four basis points from the retail pricing on Wednesday to get the deal done. For instance, on the first series, the final 2043 split maturity yielded 4.02% with a 4% coupon and 3.76% with a 5% coupon. On the second series, the final 2033 maturity yielded 3.44% with a 5% coupon — 80 basis points above Wednesday's MMD scale.

"We come out of this week with deals being well received and next week there are some deals that have not been around for a while" so they, too, should get some attention, said a New York underwriter last Friday. "I think investors are being selective, but enthusiastic about the market," demonstrated by the upsized California deal, he pointed out.

On Thursday, the generic, benchmark triple-A GO scale in 2043 closed at a 2.97% yield — albeit up four basis points compared to where it started the week last Monday, according to Municipal Market Data.

Turning to this week's market, Citi hopes to meet with strong demand, yet an even stronger market tone, when it prices $646 million of New Jersey Turnpike revenue bonds on Tuesday — one of two deals expected to flood the New Jersey market with a hefty supply of new bonds.

The turnpike deal, which is rated A3 by Moody's Investors Service, A-plus by Standard & Poor's, and A by Fitch Ratings, will be comprised of SIFMA floating-rate notes, but the structure was still being finalized at press time, according to a source at Citi.

The New Jersey Transportation Trust Fund will share the spotlight on Tuesday when it sells $875 million of transportation system revenue bonds in a two-pronged deal priced by Goldman, Sachs & Co. following a Monday retail order period. The deal will consist of $540 million of Series A tax-exempt paper maturing serially from 2013 to 2024, while Series B will consist of $335 million of taxable securities maturing in 2016 and 2018.

Large deals this week should be met with an equally strong reception — buoyed by a combination of market and economic circumstances, market participants said.

"You're coming off of a week of relatively big supply, and equally big calendar next week and there's a number of players, so deals have to be priced right to move," said Fred Yosca, managing director of underwriting and trading at BNY Mellon Capital Markets LLC, citing the trust fund deal.

That credit "doesn't get as good a reception as a lot of names in New Jersey," he noted. "The name doesn't trade great in the secondary market and it's pretty much the same case in the primary market," he continued. "You've got to price that one to travel."

In addition, he said the turnpike deal is not structured for traditional fixed-rate investors as was the previous $1.4 billion turnpike offering that was priced on March 20. "The [turnpike] floaters are a non-event because they are a different market with a different audience, so it doesn't pile on in terms of supply in the fixed-rate market," Yosca explained.

Given the sub-3% yield on the long generic, triple-A GOs, some investors may consider a $367.66 million Dallas & Fort Worth, Tex., airport joint revenue improvement financing attractive given its recent downgrade to A from A-plus by Fitch in early April. However, Yosca said the downgrade speaks louder than the revised outlook to stable from negative and may distract some buyers.

"The lower rating trumps the improvement in outlook," he said. "A downgrade never helps."

The deal, which is being senior-managed by RBC Capital Markets on Thursday, is being sold to finance terminal improvements to Dallas-Forth Worth International Airport, which Fitch cited as a catalyst for the downgrade, adding that continued financing for the $4 billion-plus project, as well as ongoing capital improvements, may increase its already high leverage.

The bonds will be subject to the alternative minimum tax, mature serially from 2026 to 2045, and will also be rated A2 by Moody's and A-plus by Standard & Poor's,.

Some of the other large deals pricing this week include a $526.22 million sale of taxable and tax-exempt certificates of participation from Denver Public Schools No. 1 expected to be priced by RBC on Wednesday, as well as a $500 million sale of Illinois State Toll Highway Authority senior revenue bonds, and a $417 million GO sale from the San Diego Unified School District planned for Thursday by Loop Capital Markets after a Wednesday retail order period.

In spite of credit, timing, or structural challenges, the New York underwriter is optimistic for a productive week ahead. "The market tone continues to be very favorable and there seems to be a healthy amount of cash available in the market," he said on Friday. "The drop in Treasury rates, on the heels of more weaker than expected economic news, contributes to the strength in the market."

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