Chicago made a quick return to the municipal bond market during the week, this time with a sales tax-backed bond offering a sweetener in the form of what the city called pledged revenues and increased bondholder protections.
Only a week after the city sold $670 million of general obligation bonds, RBC Capital Markets remarketed $112 million of sales tax bonds for Chicago.
In this sale, the city was converting 2002 floating-rates to fixed-rates. RBC priced the deal with a top yield of 4.62% in 2034.
Ahead of the sale, Chicago posted an investor presentation and made dealer calls highlighting what it said were the strong coverage and bondholder protections on its sales tax credits. The bonds were secured by revenues from the city's 1.25% home rule sales and use tax and the city's 16% allocation of revenues from the state's 6.25% sales and use tax.
The ratings on the sales tax bond sale were even more split than on the GO deal, with the issue being rated triple-A by Standard & Poor's, triple-B-plus by Fitch Ratings and double-A-plus by Kroll Bond Rating Agency. Moody's Investors Service, which downgraded the city to the junk bond status of Ba1 last month, was not asked to rate the deal.
Chicago's GO sale was rated A-minus by S&P and Kroll and BBB-plus by Fitch. Moody's, which rates the city's GOs Ba1, was unsurprisingly not asked to rate that sale either.
"The dispersed ratings are definitely having an impact, there needs to be a comprehensive solution for Chicago," one trader said about the new deal. "With Chicago's revenue stream, you can't overleverage the credit."
While the sales tax deal fared a lot better than the GO sale, Chicago city still paid penalties of up to 165 basis points for some maturities, as measured against Municipal Market Data's top-rated benchmarks. On the GO sale, the spread was 264 basis points over the MMD scale on the longest maturities.
The Week's Primary Market
There was a lot of other action in the primary market as well.
New York City came to market with separate negotiated and competitive deals totaling about $966 million. JPMorgan priced the city's $615.67 million of Fiscal 2015 Series F, Subseries F-1 and Fiscal 2015 Series 1 GOs following a two-day retail order period. JPMorgan also priced the city's $50 million of Fiscal 1995 Series F Subseries F-2 tax-exempt bonds as a remarketing.
The Big Apple also offered two separate competitive sales totaling $300 million. Citi won the $200 million of Fiscal 2015 Subseries F-3 taxable GOs with a true interest cost of 3.99%. JPMorgan won the city's $100 million of Fiscal 2015 Subseries F-2 taxable GOs with a TIC of 2.72%.
All of the city's issues were rated Aa2 by Moody's and AA by S&P and Fitch.
Citi priced the District of Columbia's $534.44 million of GOs, consisting of $500 million new money bonds and $34.44 million refunding bonds. The issue was rated Aa1 by Moody's and AA by S&P and Fitch
"Generally, we are very pleased with the deal," said Jeffrey Barnette, Washington, D.C. Treasurer, "We had over $2 billion in orders, which makes it over four times oversubscribed."
Bank of America, Merrill Lynch priced the Lower Colorado River Authority, Texas' $245.66 million of Series 2015 transmission contract refunding revenue bonds for the LCRA Transmission Services Corp. The issue was rated A by S&P and A-plus by Fitch except for the 2033, 2034, 2035 and 2040 maturities, which were insured by AGM, and rated A2 by Moody's and AA by S&P.
Traders reported oversubscriptions on the LCRA deal too, especially on longer maturities.
Citi priced the Dormitory Authority of the State of New York's $503.98 million of Series 2015A bonds for the North Shore Long Island Jewish Health System. The DASNY issue was rated A3 by Moody's, A-minus by S&P and A by Fitch.
In the competitive sector, the Maryland DOT sold two separate bond issues totaling $408.45 million. Both issues are rated Aa1 by Moody's, triple-A by S&P and AA-plus by Fitch. Bank of America Merrill Lynch won the $272.45 million of refunding Series 2015 consolidated transportation bonds with a true interest cost of 1.84%. Morgan Stanley won the $136 million of Series 2015 second issue consolidated transportation bonds with a TIC of 2.75%.
Also in the competitive arena, the East Bay Municipal Utility District, Calif., sold two separate issues totaling $183.06 million. Both issues were rated Aa1 by Moody's triple-A by S&P and AA-plus by Fitch.
Wells Fargo Securities won the MUD's $110.72 million of Series 2015B water system revenue green bonds with a TIC of 3.72%. Wells also won the MUD's $72.34 million of Series 2015B water system revenue green bonds with a TIC of 3.71%.
Secondary Market
Prices on top-rated municipal bonds closed lower on Friday, traders said, after the release of a strong May employment report.
The yield on the 10-year benchmark muni general obligation rose six basis points to 2.36% from 2.30% on Thursday, while the yield on the 30-year GO rose five basis points to 3.32% from 3.27%, according to the final read of Municipal Market Data's triple-A scale.
Non-farm payrolls rose 280,000 in May. Average hourly earnings were up 0.3% for a 2.3% rise over the year and average hours worked jumped. However, the unemployment rate rose to 5.5%.
Muni bond prices were lower on the week as yields rose in four of the five trading sessions, leaving the 10-year muni yield 17 basis points higher and the 30-year muni yield up by 16 basis points. On Friday, May 29, the 10-year yield stood at 2.19% and the 30-year was yielding 3.16%.
Treasury prices were lower on Friday with the yield on the two-year Treasury note rising to 0.72% from 0.66% on Thursday, while the 10-year yield increased to 2.40% from 2.31% and the 30-year yield rose to 3.11% from 3.03%.
The 10-year muni to Treasury ratio was calculated on Friday at 101.8% versus 101.9% on Thursday, while the 30-year muni to Treasury ratio stood at 106.8% compared to 108.0%, according to MMD.
Tax-Exempt Bond Funds Post Outflows Again
For the fifth straight week, municipal bond funds reported outflows, bringing to eight out of 23 weeks this year the funds have suffered cash withdrawals.
The weekly reporting funds saw $380.735 million of outflows in the week ended June 3, after experiencing outflows of $205.255 million in the previous week, according to the latest Lipper data.
The four-week moving average remained negative at $177.359 million after being in the red at $134.944 million in the previous week. A moving average is an analytical tool used to smooth out price changes by filtering out fluctuations.
Long-term muni bond funds also experienced outflows, losing $73.759 million in the latest week, after seeing outflows of $120.475 million in the previous week.
Intermediate-term funds recorded outflows of $179.954 million after seeing inflows of $20.142 million in the prior week. Exchange traded funds saw outflows of $5.572 million, after experiencing inflows of $42.357 million in the previous week.
However, high-yield muni funds recorded an inflow of $15.878 million in the latest reporting week, after seeing outflows of $117.290 million the previous week.
The Week's Most Actively Quoted Issues
Illinois and California issues were among the most actively quoted in the week ended June 5, according to data released by Markit.
On the bid side, the Illinois taxable 6.63s of 2035 were quoted by 11 unique dealers. On the ask side, the California State Department of Water resources power supply revenue 5s of 2022 were quoted by 14 dealers. And among two-sided quotes, the California taxable 7.55s of 2039 were quoted by 11 dealers, Markit said.
The Week's Most Actively Traded Issues
Some of the most actively traded issues in the week ended June 5 were in New York, Pennsylvania and California names, according to Markit.
In the revenue bond sector, the Montgomery County Industrial Development Authority, Pa., heal system 5 1/4s of 2045 were traded 77 times. In the GO bond sector, the New York City 3 1/2s of 2033 were traded 82 times. And in the taxable bond sector, the California 7.55s of 2039 were traded 20 times, according to Markit.
