Prices of top-quality municipal bonds finished weaker on Wednesday, traders said, with yields on some maturities strengthening by as much as six basis points on the long end.
In the primary market, 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 two basis points stronger at 2.15% from 2.13% on Tuesday, while the yield on the 30-year GO was up six basis points to 3.11% from 3.05%, according to the final read of Municipal Market Data's triple-A scale.
Treasury prices were lower on Wednesday, with the yield on the two-year Treasury note rising to 0.66% from 0.64% on Tuesday, while the 10-year yield rose to 2.16% from 2.12% and the 30-year yield increased to 2.93% from 2.85%.
The 10-year muni to Treasury ratio was calculated on Wednesday at 99.2% versus 100.0% on Tuesday, while the 30-year muni to Treasury ratio stood at 106.2% compared to 106.9%, according to MMD.
Primary Market
Morgan Stanley priced and then re-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 re-priced to yield from 0.175% with a 2% coupon in 2016 to 2.35% 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.
The $1.36 billion of various purpose GO refunding bonds were re-priced to yield from 0.175% with 2% coupon in 2016 to 3.26% with a 5% coupon in 2035.
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.
PRASA Deal Debated
Municipal bond market participants on Wednesday were actively 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 a change to the status of the sale, either from PRASA officials or from 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 he was told by Bank of America Merrill Lynch that the deal was still listed on the day-to-day calendar.
Another New York source said that he heard the deal will be priced "after Aug. 31."
"However, Labor Day week may be challenging, too, if the market hasn't relaxed by then," the source added.
"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 third market 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.
"In our opinion they would need to price it near double digits to get it done," said Howard Mackey, vice chairman of Rice Financial.
He added that his firm isn't involved in the deal and hadn't heard of any recent updates on it.
"All we've heard is that it's postponed until past the 31st, assuming the commonwealth restructuring plan does get released this weekend," said Triet Nguyen, Managing Director at Financial Markets Advisory. "Whether the deal can come at all will depend on how the market interprets the plan. In the meantime, it makes perfect sense for investors to wait and see what actually gets proposed."
He added that the decision to appeal to the Supreme Court regarding the Recovery Act also contributed to the delay of the PRASA deal.
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 dissention amongst investors over inclusion or lack thereof regarding level of covenant protections," a source told The Bond Buyer on Tuesday. "So some were pleased it was pulled, while others were upset."
According to a market note from Nuveen Investments the sale remained in negotiations, "with the pricing, security and size of the deal uncertain."
The note said volatile markets could make it more difficult to secure orders for the deal, which is expected to appeal mostly to hedge fund buyers.
"The Government Development Bank reports liquidity sufficient to operate until November," Nuveen said. "In addition, the Department of Justice has designated Puerto Rico a 'high risk grantee,' requiring Puerto Rico to account for how they spend federal funds going forward."
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."
Christine Albano and Keeley Webster contributed to this report
