Prices of top-quality municipal bonds were weaker at mid-session, traders said, with yields on some maturities strengthening by as much as three basis points.
In the primary, California's big general obligation bond offering was priced for institutions after a one-day retail order period.
Secondary Market
The yield on the 10-year benchmark muni general obligation on Wednesday was stronger by as much as two basis points from 2.13% on Tuesday, while the yield on the 30-year GO was from one to three basis points stronger from 3.05%, according to a read of Municipal Market Data's triple-A scale.
Treasury prices were mixed on Wednesday, with the yield on the two-year Treasury note unchanged from 0.64% on Tuesday, while the 10-year yield remained flat from 2.12% and the 30-year yield increased to 2.88% from 2.85%.
The 10-year muni to Treasury ratio was calculated on Tuesday at 100.0% versus 104.7% on Monday, while the 30-year muni to Treasury ratio stood at 106.9% compared to 110.4%, according to MMD.
Primary Market
Morgan Stanley priced California's $1.91 billion of various purpose general obligation and GO refunding bonds for institutions after holding a retail order period on Tuesday.
The $550 million of various purpose GO bonds were priced to yield from 0.66% with a 4% coupon in 2017 to 2.32% with a 5% coupon in 2024. A split 2045 term bond was priced as 4s and as 5s to yield 3.95% and 3.47%, respectively. A 2016 maturity was offered as a sealed bid.
The $1.36 billion of various purpose GO refunding bonds were priced to yield from 0.62% with 2% coupon, 3% coupon and 5% coupon in a triple-split 2017 maturity to 3.26% with a 5% coupon in 2035. The 2016 maturity was offered as a sealed bid.
For retail, the $550 million GOs were priced to yield from 0.61% with a 4% coupon in 2017 to 2.23% with a 5% coupon in 2024. A split 2045 term bond was priced as 4s and as 5s to yield 3.80% and 3.35%, respectively. The $1.35 billion GO refunding bonds were priced to yield from 0.61% with 2% and 3% coupons in a split 2017 maturity to 3.14% with a 5% coupon in 2035.
The deal was rated Aa3 by Moody's Investors Service, AA-minus by Standard & Poor's and A-plus by Fitch Ratings.
About $1.4 billion from the sale will be used to refinance existing debt, with the remainder providing permanent financing for capital facilities or other voter-approved projects and public facilities.
Since 1995, the state of California has issued roughly $130.42 billion of debt. The highest issuance years were in 2007 and 2009, when it issued $12.19 billion and $23.18 billion, respectively. The Golden State saw lows issuance years in 1995 and 1996 of $1.25 billion and $660 million, respectively.
The California deal followed hard on the heels of a $2 billion offering from New Jersey. The N.J. Economic Development Authority sold tax-exempt and taxable school facilities construction and refunding bonds on Tuesday. The deal was rated A3 by Moody's, A by S&P and A-minus by Fitch.
Some participants noted the difference between the two bond deals.
"It's been a while since we've seen a state general fund tax backed (via appropriation) issue produce a 5% yield (Illinois in February 2014)," Janney Municipal Strategist Alan Schankel said in Wednesday's market comment. "The N.J. issue carried yields above 5% in the 2034 and longer maturities, with 5% coupon to yield 5.10% in 2037 and 5.25% coupon at 5.10% yield (to the 10-year call call) in 2040. Ten-year bonds were 5% at 4.37%."
He noted the California sale benefited from recent credit rating upgrades.
"In contrast to New Jersey's recent multiple downgrades, the Golden State is enjoying a tailwind from two upgrades this year, and the contrast is evident in initial pricing of this week's new issue," Schankel said.
Barclays Capital received the official award on Guam's $410.49 million of Series 2015D business privilege tax refunding bonds.
The bonds were priced to yield from 1.17% with a 3% coupon in 2017 to 3.82% with a 5% coupon in 2035; a split 2039 maturity was priced as 4s to yield about 4.181% and as 5s to yield 3.91%. The issue was rated A by S&P and A-minus by Fitch.
The bonds are special limited obligations secured by a lien of 3% out of the 4% general business privilege tax levied on goods and services. The legal provisions provide sufficient insulation from general fund operations to result in a rating on the BPT bonds that is significantly higher than would be the case for a general obligation pledge, Fitch analysts said. The BPT is collected and held outside of the general fund and transferred on a weekly basis to the trustee.
Bank of America Merrill Lynch is slated to price the Kentucky Economic Development Finance Authority's Series 2015A Next Generation Kentucky Information Highway Project senior revenue bonds. The issue is rated Baa2 by Moody's and BBB-plus by Fitch.
JPMorgan is set to price Lake Havasu City, Ariz.'s $164.69 million of senior lien wastewater system revenue bonds consisting of Series 2015A GO refunding bonds and Series 2015B refunding bonds.
PRASA Deal Debated
Municipal bond market participants on Wednesday were discussing the latest developments surrounding the Puerto Rico Aqueduct and Sewer Authority's bond offering.
A report published in The New York Times said the commonwealth has decided to cancel the sale because of global market conditions and a lack of investor appetite for the bonds.
However, no official word has been released on the status of the sale, either from PRASA officials or the commonwealth.
The PRASA deal had been expected to price last week, but was pushed back and placed on the day-to-day new issue calendar.
A New York source told The Bond Buyer that as of midday, he was told by Bank of America Merrill Lynch the deal was still listed on the day-to-day calendar.
"I did not hear that the deal is dead, but rather it is postponed to after the plan is released, so after Sept. 1," a second source told The Bond Buyer on Wednesday.
The commonwealth faces a deadline for the commonwealth's fiscal stability and economic development plan and a Puerto Rico Electric Power Authority (PREPA) restructuring plan. The commonwealth has also asked the U.S. Supreme Court for a ruling to overturn a ban that prevents Puerto Rico public agencies from restructuring.
On Monday, Government Affairs Secretary Jesús Manuel Ortiz told Caribbean Business "the process to achieve the issuance continues. We are confident that we can finalize it as soon as possible. We are, right now, working to close the transaction."
On Tuesday, however, it was reported PRASA executive president Alberto Lázaro told the local newspaper El Vocero the deal was being evaluated and remains day-to-day.
"The issuance won't be this week and we will continue as early as the first week of September or a little bit later," he said in El Vocero.
He added that PRASA was talking to Banco Popular about getting an extension on a $90 million payment the authority owes on Aug. 31, which would have been provided by the bond sale. He told the paper that while the money was available for the payment, it would better for authority's cash flow position if an extension could be worked out.
There was "[s]ome dissension amongst investors over inclusion or lack thereof regarding level of covenant protections," a source told The Bond Buyer on Tuesday. "So some are pleased it was pulled, while others are upset."
On Wednesday, Moody's Investors Service weighed in on the uncertainty surrounding the sale.
"The Puerto Rico Aqueduct and Sewer Authority's (rated Caa3/negative outlook) further postponement of a $750 million bond offering after repeated delays shows the difficult obstacles blocking Puerto Rico's capital market access," Ted Hampton, vice president at Moody's, said in a statement. "Investor sentiment has deteriorated sharply since the commonwealth's last public offering almost a year and a half ago. If underwriters can eventually complete the PRASA sale, it may signal a return to some degree of market access that would help maintain liquidity."
MSRB Previous Session's Activity
The Municipal Securities Rulemaking Board reported 37,696 trades on Tuesday on volume of $7.486 billion.
Bond Buyer Visible Supply
The Bond Buyer's 30-day visible supply calendar fell $4.70 million to $7.42 billion on Wednesday. The total is comprised of $2.98 billion competitive sales and $4.44 billion of negotiated deals.
Christine Albano contributed to this report
