Municipalities are preparing a decent slate consisting heavily of taxable bonds for sale this week following a holiday-shortened week with little activity.
Issuers plan to sell $7.07 billion of debt this week, according to The Bond Buyer and Ipreo data. That consists of $6.02 billion in the negotiated market and $1.2 billion in the competitive market. Last week, issuers sold just $2.39 billion of bonds, according to Thomson Reuters.
Build America Bonds will once again dominate the biggest batches of debt floated by municipalities.
Created under the American Recovery and Reinvestment Act in February, the BAB program enables issuers to forgo the traditional tax exemption on their bonds and instead sell taxable bonds and collect a federal subsidy equal to 35% of the interest costs.
By accessing new types of tax-advantaged investors such as pension funds, issuers have obtained cheaper borrowing costs in the taxable bond market.
BAB issuance has picked up momentum since the summer and municipalities have sold $55.5 billion of BABs this year. Almost 20% of municipal debt sold this year has been floated in the taxable market, according to Thomson Reuters, by far the biggest share ever.
Among negotiated deals, the biggest sale will be by the University of California Regents, which oversees the 10-campus public university system in the Golden State.
The university system plans to sell $539 million of BABs secured by revenue from the system’s medical center.
Barclays Capital is underwriting the deal, which is expected to price Thursday.
Another big BAB deal comes from Massachusetts, which is planning to sell $500 million of taxable general obligation bonds underwritten by Goldman, Sachs & Co. That deal prices tomorrow.
Tennessee also plans to bring a sizeable GO deal to market this week. The Volunteer State expects to sell $290 million of bonds in the negotiated market, of which $235.8 million is tax-exempt and $54.2 million is taxable.
The proceeds will be used to finance capital projects and retire some of the state’s commercial paper.
The tax-exempt bonds carry serial maturities from 2011 to 2030, with the principal payments spread evenly over that time. The taxable bonds have maturities from 2013 to 2029, with the principal payments loaded more heavily to the later years.
Barclays Capital is lead underwriter, with Public Financial Management listed as financial adviser.
These deals come after a slow week in which municipal bonds exhibited renewed strength.
Munis last month endured a harsh sell-off, with the yield on the 10-year triple-A GO spiking 45 basis points, according to the Municipal Market Data scale.
State and local government debt has recovered this month. Borrowing costs for highly rated borrowers have sunk 20 basis points this month, according to a Moody’s Investors Service index tracking yields on newly issued 10-year triple-A GOs.
In one of his daily commentaries last week, Thomson Reuters analyst Randy Smolik noted retail investors were “reaching,” especially on shorter-term debt.
He said the sparse calendar slated for this week may have encouraged investors to chase deals last week. Smolik said “there is little to draw concerns” about this week, with so few big tax-exempt deals on the calendar. Especially with $18 billion in reinvestment money coming next month, the market should be able to absorb the supply, he said. The Tennessee GO deal is really the only one tax-exempt bond traders need to watch for, Smolik said.