Volume Set at $5.5 Billion, Yet Taxable Glut Takes Some Supply Off the Table

Municipal volume is forecast to come in above $5 billion this week, though tax-exempt supply appealing to traditional tax-free investors will be closer to $4 billion.

Ipreo LLC and The Bond Buyer predict that long-term new issuance of $5.5 billion will arrive on the heels of a revised $4.4 billion that actually came to market last week as reported by Thomson Reuters.

Traditional investors will gravitate toward the large tax-exempt deals, and will be less interested in the $750 million taxable health financing on behalf of Dignity Health, according to a New York trader at a large Wall Street firm.

San Francisco-based non-profit formerly known as Catholic Healthcare West will issue fixed-rate taxable bonds in a JPMorgan Securities-led deal scheduled for pricing on Tuesday.

The bonds are rated A3 by Moody's Investors Service and A by Standard & Poor's and Fitch Ratings. The maturity structure wasn't yet available at press time.

The deal is part of $1.4 billion of debt in private placements and open market deals this month from the provider, which has hospitals in California, Arizona, and Nevada.

Meanwhile, $250 million of taxable bonds planned for pricing as part of a $650 million issue from the Port Authority of New York and New Jersey will also take some supply off the table as far as retail investors are concerned, he said.

The bonds are structured to mature in 2034 and will be priced on Tuesday, following indications of interest on Monday by senior book-runner Wells Fargo Securities.

They will prefer the larger, $400 million serials because of its tax-exemption and structure of serial bonds between 2015 and 2034, the trader said. Those bonds are subject to the alternative minimum tax.

Overall supply will be manageable and demand will be steady, he said.

"All the deals that have priced in the last two weeks were very well received - whether it was $1 billion of Texas Trans, or $2 billion of New York STARs," he said on Friday.

The largest deal to price last week was a $1.1 billion Texas Transportation Commission sale of highway improvement general obligation bonds that was highly sought after because of its size, liquidity, sector, and quality. It was rated triple-A by all three major rating agencies.

The 10-year maturity was priced at a 10 basis point spread to Municipal Market Data's triple-A 5% curve, or 2.22%, on Thursday.

"There's a feeling that customers have money, rates are in a range, and the market is set to stay firm," the trader said on Friday ahead of this week's upcoming slate.

In other activity, a $525 million offering of school facilities construction bonds from the New Jersey Economic Development Authority is slated for pricing on Tuesday by JPMorgan, following a retail order period on Monday. Rated A2 by Moody's and A-minus by the two other major rating agencies, the deal is structured as serial and terms.

The District of Columbia is planning to issue $523.43 million of general obligation bonds for both new money and refunding purposes. The negotiated deal is slated for pricing on Tuesday by Loop Capital Markets. Structured to mature serially from 2015 to 2038, the D.C. GOs are rated Aa2 by Moody's and AA by Standard & Poor's and Fitch.

In the Southwest, a $462 million sale of unlimited tax school building and refunding bonds is on tap from the Cypress-Fairbanks Independent School District in Texas. JPMorgan is expected to price the bonds on Thursday. The structure wasn't available. The school bonds are rated triple-A by Moody's and Standard & Poor's.

Other large offerings expected to generate interest due to their size, geographic location, and diversity include a $450 million revenue sale from the Los Angeles Department of Water & Power and a $314 million tax-exempt and taxable revenue offering from the Grand River Dam Authority.

The Los Angeles water revenue bonds are expected to be priced by RBC Capital Markets on Thursday following a retail order period on Wednesday. They are rated Aa3 by Moody's and AA-minus by Standard & Poor's and Fitch. The Grand River bonds are slated for pricing by JPMorgan on Wednesday and will come in two series, both of which are rated A1 by Moody's, A-plus by Standard & Poor's and A by Fitch.

Series 2014 A is $227.55 million of tax-exempt debt while Series 2014 B is $86.48 million and is federally taxable - another portion that is expected to be less appealing for traditional investors, according to the New York trader.

Meanwhile, the strength from last week's Texas deal, which was priced by JPMorgan on Thursday, is expected to continue boosting municipals, especially when coupled with an improving Treasury backdrop, traders said.

The MMD triple-A 5% scale was largely flat as the market digested the activity on Thursday. Bonds maturing between 2015 and 2018 and from 2038 through 2044 were steady Thursday while those maturing between 2019 and 2037 fell as much as one basis point, according to information provided by TM3.

The New York trader said that strength was still evident on Friday morning.

"All the deals are bellwether names and all very manageable sizes, accounts have money, and Treasuries continue to hang in there relatively tight," he said. "There are very few sellers and the Street is light, so that combination is going to keep the market going."

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