Market Close: Buy Side Waits For $1.1B Texas Trans Deal

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Investors are keeping their cash on the sidelines until the week's top deal hits the market, a $1.1 billion sale of Texas Transportation Commission highway improvement general obligation bonds that is scheduled to be priced by JPMorgan Securities on Thursday.

Traders said the deal is attractive because it is a transportation credit and because it's rated triple-A by the three major rating agencies. They said the most appealing quality of the deal though, is its size.

"Most deals so small, everyone puts in for bonds and are getting really small allotments based on what you wanted, so you put in for the next, and then next," a trader in the south said. "Texas will be a good gauge and barometer for the appetite out there."

He said his group is "keeping the powder dry" for the Texas deal.

A trader in New York said the competition for bonds are gotten stiffer in the past couple weeks, and that even the $2 billion of New York STARs and California general obligation bonds pried last week wasn't enough to satisfy demand.

"People are so hungry for anything these days, especially triple-A, especially top names like New York, California, and Texas," he said.

He said that while there are some attractive deals in the market this week, they are waiting for Texas and hoping the deal comes attractively.

Competitive Issuances Dominate Primary

The competitive market dominated the primary on Tuesday, as $215.52 million of Florida Department of Environmental Protection Florida Forever revenue refunding bonds and $150 million of Ohio Public Facilities Commission infrastructure improvement general obligation bonds came to market.

Bank of America Merrill Lynch won the bid for the Florida revenue refunding bonds, and priced them with yields ranging from 0.44% with a 4% coupon in 2016 to 2.57% with a 5% coupon in 2026. The bonds can be called at par in 2024, and are rated A1 by Moody's Investors Service, AA-minus by Standard & Poor's and A by Fitch Ratings.

The deal was downsized from an originally scheduled $223.36 million.

The Ohio GOs went to Morgan Stanley and carried yields of 0.32% with a 1% coupon in 2016 to 2.92% with a 5% coupon in 2034. They are rated Aa1 by Moody's and AA-plus by both S&P and Fitch.

Iowa Fertilizer Rallies as Trading Spikes

Bids for Iowa Fertilizer project bonds were strong on Tuesday, continuing a month-long rally, traders said.

Tuesday alone saw $39.11 million traded on the project's 5s of 2019 as yields contracted to 3.71% from 4.02% last week, according to data provided by Municipal Securities Rulemaking Board's disclosure website EMMA. Yields on the tranche have been range- bound between 3.71% and 4.14% in September, a deep discount to initially offering yield of 4.8%.

Traders were mixed on what was prompting the activity and whether it was market or event driven.

"If people are looking to take beta off the books, Iowa Fertilizer is one of the go-to names to sell, along with Foothills and Poseidon," said a New York based trader. "It's fairly liquid and has performed well since issuance."

In the current municipal marketplace of low rates and limited supply, Iowa Fertilizer emerges as one of the few high yield bonds, "if you could even call it high yield," a Midwest based trader said.

"It's an Egyptian based company, new construction, and a little behind schedule," the trader said. " At these yields you aren't remotely getting compensated for the risk." Iowa Fertilizer's parent company is Middle East giant Orascom Construction Industries.

A monthly construction report released Tuesday indicated the project was 67.30% complete, slightly behind a 70.03% projection.

"Considering it's a $1.8 billion deal, that's not terrible," the Midwest trader added.

Trading on the typically liquid Series 2013 Iowa Fertilizer Project bonds rebounded from summer levels in September, with $189.57 million in total trades recorded across all three of the projects tranches as of Sept. 30, according to EMMA. The bonds haven't received this much attention in the secondary market since January 2014 when $299.94 million in trades were recorded, according to EMMA.

However, a looming change of control and the uncertainty surrounding it may be causing the trading activity, said a second New York based trader and a legal source close to the situation.

A sell-side equity report from Bank of American/Merrill Lynch last October indicated that OCI Partners, a variable-rate master limited partnership majority owned by Orascom, was considering a long-term objective to "drop down" the Iowa Fertilizer project, potentially changing the classification of the project's debt service expense, according to trade publication Debtwire Municipals. The report deemed the MLP a "buy" and OCIP's shares enjoyed a rally until the end of December when it hit a high of $28.

Since then, OCIP hasn't completed the drop down of Iowa Fertilizer and its shares have steadily fallen, a bondholder said. The shares opened at $20 on Tuesday, up from its $19 price at initial public offering last October.

The recent spike in trading could be linked to news surrounding the drop down, which all traders and the source close described as "inevitable."

Scales

Municipal bond yields were mixed on Tuesday with bonds maturing in two years selling off by two basis points, according to Municipal Market Data's triple-A scale. The 16 to 22 year maturities strengthened by one basis point, and the rest of the curve held steady.

Treasuries were also somewhat mixed, with the two-year note's yield rising by one basis point to 0.59% from Monday's market close, the 10-year holding steady at 2.50%, and the 30-year's yield rising by two basis points to 3.20%.

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