In a year that so far has seen as many $1 billion-plus deals sold than were completed in all of 2001, market sources say knowing the potential investor pool and catering to the particular interest of buyers is key as underwriters work to place the hefty issuances.
This week alone, two mammoth sales hit the market, both on Wednesday -- the New York City Transitional Finance Authority's first-ever advance refunding negotiated by Lehman Brothers, as well as $1.1 billion of insured revenue bonds from the Metropolitan Pier & Exposition Authority in Chicago negotiated by Salomon Smith Barney Inc.
The deals have come as interest rates edge down toward the lows set in 2001 and investor demand -- encouraged by the seasonal reinvestment season -- is especially strong. That combination of factors has made these and other large transactions a successful sell overall.
"At the moment there is reasonable interest in municipals, so it is not a major challenge" to get new deals done, even those of above average market size, according to Joe Deane, managing director of fixed income at Citigroup Asset Management, which oversees $6.5 billion of tax-exempt portfolios.
Buyers in general have lots of cash to spend and retail investors in particular have been overly active in the municipal market since mid-April, noted Paul Kuhns, managing director of underwriting at Merrill Lynch & Co.
And regardless of their size, this flurry of billion-dollar deals is directly benefiting from the current need to reinvest proceeds from coupon payments and called and maturing bonds, Kuhns said.
"These large deals are getting done handily," he continued, noting that volatility in the stock market combined with the conservativeness of the typical retail muni buyer are contributing to the success of the unusually large deals of late.
"They are getting very strong interest rates given the size," he said. Many of the deals priced to date are enjoying good liquidity, but at the same time, have seen little secondary trading, indicating ownership is in the hands of buy-and-hold individual and large institutional accounts, according to Kuhns.
Merrill and Salomon, which is part of Citigroup, were members of the negotiated syndicates responsible for bringing at least three of the more recognizable, recent billion-dollar transactions in New York.
Although Bear, Stearns & Co. was the lead book-runner when the New York Metropolitan Transportation Authority initiated a massive refunding of $2.9 billion on May 9, Salomon, Merrill, and J.P. Morgan Securities Inc. were co-senior managers.
The MTA again sold $1.8 billion of state service contract refunding bonds a month later on June 4 at which time Merrill and Salomon were co-managers with lead book-runner Lehman. For the $1.5 billion New York City general obligation offering on May 23, Salomon was the lead book-running manager, while Merrill was a co-senior manager, and for this week's TFA deal, Merrill was a co-senior, while Salomon was a co-manager.
"A lot of people talked about the MTA being a difficult transaction given the size and number of other deals" expected in New York around the same time, Kuhns said, "but that didn't seem to be a problem. Given all the supply, the demand is still strong and deals are getting done at good levels."
Hefty-sized deals do, however, put underwriters in a position to cater to the particular interests of investors to ultimately get the deal done -- more than on an average sized transaction, sources said.
"When there are structuring considerations, like offering zero-coupon bonds or par coupons, the deals become harder to do," explained Chris Dillon, vice president and municipal strategist at J.P. Morgan. But "at the end of the day if the underwriters have enough flexibility in structuring the deals -- barring any credit issues -- they are usually doable."
New York and California -- the two largest state issuers -- as well as others, rely on the highly successful use of retail order periods to get as much of their bonds presold to individual investors as possible.
This year was no exception and the order periods again proved successful. For instance, the New York City deal netted $285 million in retail orders during a two day order period, and the MTA's $2.9 billion offering netted $ 513 million after two days.
Besides the big New York deals, California was in the market with two separate billion-dollar long-term GO offerings -- $1 billion of new-money debt on Feb. 20, and $1.1 billion of GO refunding bonds on March 13.
The first big sale of the year's slate was the $1.1 billion offering of Puerto Rico Highway & Transportation Authority revenue refunding bonds back on Jan. 25 led by Salomon.
FOR SOME, SIZE DOESN'T MATTER
On the buy side, one manager says the size of a municipal deal matters less than its credit quality, structure, and pricing when it comes to their view of and participation in a transaction.
"We don't care if they are big, medium, or little," said Citigroup's Deane. "Whether it's $10 million or $2.5 billion, you'll get the same look from us. I don't view the size of a deal as a positive or a negative ... it is neutral for us."
More important questions, he said, include "is it attractive, do we like the market, is it structured the way we'd like it to be structured, and is it priced appropriately?"
However, in some cases, Deane will cast a discriminating eye on a deal of size.
"We want to make sure they are not going away to nontraditional, highly leveraged buyers," he said. "We like to see a reasonable number of the bonds in any deal going to more traditional buyers, like insurance companies, individual retail, and institutions, as opposed to highly leveraged arbitrage accounts. If we see too much of a deal going that way that would be somewhat of a negative."
Municipalities' need to improve their balance sheets contributed to the influx of strategically marketed, billion-dollar deals so far this year, which already outnumber not only all of last year's but also exceed the total number of such deals in 1999 and 2000 combined. Issuers continue to use the current low rate environment and excess demand as an opportunity to restructure debt. That was the case with the MTA, and is among the goals of New York City.
"With the Federal Reserve Board expected to make few moves before the end of the year, issuers want to take advantage of the market and solve their budgetary needs," Merrill's Kuhns said.
As another example besides the MTA, he cited the $11.1 billion California Department of Water Resources power bond issue that the market has been long anticipating.
That deal would easily be the largest municipal bond deal ever, surpassing the state's own $4 billion GO sale back on July 20, 1994, for the coveted title.
THE TOBACCO DIFFERENCE
Found more commonly in the Treasury and corporate bond markets, billion-dollar financings can be a tougher sell in the municipal market if they appear in a controversial or less familiar sector, like tobacco bonds.
"Tobacco is a difficult sector to place, especially in retail-type hands," Kuhns said, largely because of the questionable liquidity and inherent risks of the sector at large.
This year, amid an increasing volume of tobacco deals, the Badger Tobacco Asset Securitization Corporation was created to sell the state of Wisconsin's first-ever tobacco deal, a $1.6 billion transaction on May 2 -- the largest-ever such deal so far. The 2032 final maturity carried a 6.375% coupon, had a projected final turbo redemption of 2018 and project average life of 14.5 years, and was reoffered to yield 6.60% by lead book-runner Bear Stearns.
Kuhns noted, however, that the single-A-rated asset-backed deals are getting more widely accepted every time a new one comes to market. "The more deals you have the more people will get involved," he said.
J.P. Morgan's Dillon said if huge tobacco debt issues are more highly scrutinized by investors it is because of credit issues rather than size.
According to Kuhns, the current brisk demand should last through at least the middle of July, and in some cases the end of the summer since, some states experienced hefty rollover payments in August.
"Not every June and July is the same, but certainly this year there seems to be a good underlying tone to the market" with respect to reinvestment demand, agreed Dillon.
Upcoming behemoth deals expected to dominate the forward calendar range in size from two separate $1 billion offerings from the New York City TFA to the $11.1 billion California power deal.
The TFA's sales include a $1 billion variable-rate deficit financing bond issue expected the week of July 1, as well as a $1 billion offering of recovery bonds to permanently finance the $1 billion in TFA bond anticipation notes issued in October 2001.
