The Michigan Finance Authority stole the attention in the municipal market Tuesday, pricing a mammoth $1.8 billion of local government loan program revenue bonds for the Detroit Water and Sewerage Department.
The underlying senior lien credit is rated Ba2 by Moody's Investors Service, BBB-plus by Standard & Poor's, and BBB-minus by Fitch Ratings. The underlying second lien credit is rated Ba3 by Moody's, BBB-plus by S&P, and BB-plus by Fitch.
Detroit's bankruptcy and the concern over possible debt restructuring in commonwealth has increased yield on the bonds. At the same time a drought in bond issuance has driven up demand, and therefore the price of bonds.
Citi released tentative pricing on the deal late Tuesday in two series, split into 15 smaller subseries.
Bonds from the $937.5 million Series C were split into eight subseries. The $121.2 million Series C-1 matures in 2044, yielding 4.85% with a 5% coupon. The $30.1 million Series C-2, subject to the alternative minimum tax, matures in 2044, yielding 5.10% with a 5% coupon. The $447.2 million Series C-3, backed by Assured Guaranty Municipal, matures from 2020 through 2033, with yields ranging from 2.30% to 4.42%, all with 5% coupons. The $95.5 million Series C-5, enhanced by National Public Finance Guarantee, matures from 2017 through 2020, with yields ranging from 1.24% to 2.39%, all with 5% coupons. The $143.6 million Series C-6 matures in 2015, 2016, 2032 and 2033, with yields ranging from 0.73% with a 2% coupon in 2015 to 4.68% with a 5% coupon in 2033. The $76.9 million Series C-7 is insured by NPFG and matures from 2019 through 2036, with yields ranging from 2.29% in 2019 to 4.87% in 2036, all with 5% coupons. The $23.1 million Series C-8 matures from 2015 through 2018, with yields ranging from 0.98% with a 2% coupon in 2015 to 2.17% with a 5% coupon in 2018.
Bonds from the $855.3 million Series D were split into seven subseries. The $206.9 million Series D-1 is enhanced by AGM and matures from 2015 through 2023, with term bonds in 2035 and 2037. Yields range from 0.35% to 4.52%, all with 5% coupons. The $184.1 million Series D-2 is also backed by AGM, maturing from 2023 through 2028 with yields ranging from 3.24% to 4.09%, all with 5% coupons. The $62.1 million Series D-3 is insured by NPFG and matures from 2018 through 2020, yielding 1.60%, 2%, and 2.39%, all with 5% coupons. The unenhanced $312.5 million Series D-4 matures from 2015 through 2017, and from 2029 through 2034, with yields ranging from 0.73% with a 2% coupon in 2015 to 4.73% with a 5% coupon in 2034. Bonds from the $9.3 million taxable Series D-5 mature in 2019, yielding 2.85% priced at par. NPFG insures the $65.6 million Series D-6, with yields ranging from 2.29% in 2019 to 4.87% in 2036, all with 5% coupons. And the $14.8 million Series D-7 matures from 2015 through 2018, with yields ranging from 0.98% with a 2% coupon in 2015 to 2.17% with a 5% coupon in 2018.
"Insurance protects the bonds," a trader in New York said. "There are basically two types of buyers, those that understand the underlying ratings and understand the bankruptcy court, and want to buy them naked. And there are the others who want them insured so they have backing in case something does not go well. In this environment, it makes sense to buy the bonds uninsured because people are hungry for yield, and if you can get a rating people will buy it. Everyone is clamoring for yield right now."
A trader in Chicago said that he wouldn't buy Detroit bonds just because they have insurance. He did say that these days "everyone is looking for a little bit of spread in the market."
Yield is particularly valued this week as weekly supply has dropped to a six-month low before the Labor Day holiday this weekend. Supply is scheduled to come in at $2.5 billion, down from $3.5 billion last week. A trader in New York said that he would "rather trade Puerto Rico than Detroit right now because it's a much more liquid market".
Some investors, however, said they see more value in Puerto Rico paper.
"There's liquidity in Puerto Rico," he said. "That does not mean that one is less risky than the other but I would absolutely rather trade Puerto Rico right now."
Puerto Rico is currently the seventh most actively traded United States state or territory, according to data provided by Bloomberg. Michigan is the 16th.
Yields on the benchmark Commonwealth GO 8s in 35 are 8.9%, while the Puerto Rico Public Building Authority 5.625s in 39 that account for most of the Authority's trading carried yields of 7.9%.
Detroit 5.25s in 41, which accounted for most of Detroit trading on Tuesday were trading at 4.8%.
A trader in Florida said Puerto Rico has more outstanding debt and more issuers, while with Detroit there is just the city.
"For Puerto Rico there are all the Puerto Rico credits like COFINA and the GO," he said. "Overall they can all be wrapped in guilt by association, but there is reason to differentiate the credits. It gives investors the opportunity to search out value at certain times, while dodging news headlines. For speculators, hedge funds who are willing to take a shot at it, there could be a sizable reward for taking an opinion and going long."
Elsewhere in the primary market, Texas competitively sold $5.4 billion of tax and revenue anticipation notes to various bidders. The credit is rated MIG-1 by Moody's, SP-1-plus by Standard & Poor's, and F1-plus by Fitch.
The largest piece of the deal went to JPMorgan, which took home $2.13 billion of the securities over two tranches - a $1.13 billion piece with an effective rate of approximately 0.14%, and a $1 billion component with an effective rate of 0.13%.
Bank of America Merrill Lynch won $1 billion of the deal over five different tranches, all with effective rates of 1.5%.
Other winning bidders include Barclays Capital, Citi, Goldman Sachs & Co., Mitsubishi UFJ Securities, Morgan Stanley, Piper Jaffray, RBC Capital Markets, and Wells Fargo Securities.
Municipal bond yields varied across the curve on Tuesday with yields for bonds maturing in one year rising by one basis point, according to Municipal Market Data's triple-A scale. Bonds maturing in four to eight years yields fell by one basis point, and by two basis points for nine to 30-year maturities. The rest of the curve remained unchanged. The two-year held steady at 0.30%, and the 10-year's yield fell by two basis points to 2.11% and the 30-year by three basis points to 3.26%, according to Municipal Market Advisors' data.
