Municipal bonds finished stronger on Thursday as the last of this week’s larger new issue deals hit traders' screens.
Primary market
Bank of America Merrill Lynch priced and repriced the city of Charlotte, N.C.’s $305.8 million of airport revenue bonds for the Charlotte Douglas International Airport on Thursday.
The $168.45 million of Series 2017A bonds not subject to the alternative minimum tax were priced as 5s to yield from 1.04% in 2019 to 3.05% in 2037; a 2042 maturity was priced as 5s to yield 3.12% and a 2047 maturity was priced as 5s to yield 3.21%.
The $16.37 million of Series 2017B AMT bonds were priced as 5s to yield from 1.24% in 2019 to 3.37% in 2037; a 2042 maturity was priced as 5s to yield 3.44% and a 2047 maturity was priced as 5s to yield 3.49%.
The bonds are rated Aa3 by Moody’s Investors Service and AA-minus by Fitch Ratings. Both rating agencies assign a stable outlook to the credit.
Since 2007, Charlotte has sold roughly $4.91 billion of bonds, with the largest issuance occurring in 2009 when it sold $1.13 billion.
The Queen City has sold less than $1 billion every year other than 2009, with the smallest issuance in 2012 when it sold $196 million. With Thursday’s sale, the city has already issued more bonds in 2017 than it did in all of last year.
Citigroup priced the Tennessee Housing Development Agency’s $175 million of residential finance program bonds for institutions after holding a one-day retail order period on the offering.
The $23.11 million of Issue 2017-2A bonds subject to the alternative minimum tax were priced as 4s to yield 2.19% in 2042 as a planned amortization class bond with an average life of five years.
The $151.89 million of Issue 2017-2B non-AMT bonds were priced at par to yield from 0.90% and 1.00% in a split 2018 maturity to 3.15% in 2030, and to yield 3.35% in 2032 and 3.70% in 2036. A 2042 PAC bonds was priced as 4s to yield 2.07% with an average life of five years.
The deal is rated Aa1 by Moody’s and AA-plus by S&P Global Ratings.
RBC Capital Markets priced the Colorado Education and Cultural Facilities Authority’s $119.45 million of Series 2017A tax-exempt revenue bonds for the University of Denver.
The issue was priced as 4s to yield from 2.99% in 2030 to 3.47% in 2037. A 2040 maturity was priced as 5s to yield 3.22%, a 2043 maturity was priced as 5s to yield 3.27% and a 2047 maturity was priced as 5s to yield 3.33%.
The deal is rated A1 by Moody’s and AA-minus by Fitch.
RBC received the official award on the Frisco Independent School District, Texas’ $206.45 million of Series 2017 unlimited tax school building and refunding bonds.
The issue was priced to yield from 0.90% with a 2% coupon in 2018 to 3.30% with a 4% coupon in 2037; a 2042 maturity was priced as 4s to yield 3.44% and a 2047 maturity was priced as 4s to yield 3.52%.
The deal, which is backed by the Permanent School Fund guarantee program, is rated triple-A by Moody’s and S&P.
Goldman Sachs received the written award on the Massachusetts Development Finance Agency’s $103.24 million of revenue bonds for Williams College.
The $52.77 million of Series 2017S bonds were priced as 5s to yield from 1.45% in 2023 to 2.43% in 2030; a 2046 maturity was priced as 4s to yield 3.46%.
The $50.47 million of Series 2011N bonds were priced as a remarketing at par to yield 1.45% in 2041 with a mandatory tender date in 2021.
The deal is rated Aa1 by Moody’s and AA-plus by S&P.
Secondary market
The yield on the 10-year benchmark muni general obligation fell one basis point to 2.01% from 2.02% on Wednesday, while the 30-year GO yield dropped one basis point to 2.87% from 2.88%, according to the final read of Municipal Market Data's triple-A scale.
U.S. Treasuries were mixed on Thursday. The yield on the two-year Treasury rose to 1.26% from 1.24% on Wednesday as the 10-year Treasury yield gained to 2.22% from 2.21% while the yield on the 30-year Treasury bond was unchanged from 2.90%.
The 10-year muni to Treasury ratio was calculated at 90.0% on Thursday, compared with 91.1% on Wednesday, while the 30-year muni to Treasury ratio stood at 98.7%, versus 99.3%, according to MMD.
MSRB: Previous session's activity
The Municipal Securities Rulemaking Board reported 47,313 trades on Wednesday on volume of $18.18 billion.
Janney: Taxable munis make up 9% of issuance in 2017
The annual percentage of taxable municipal bonds in past years have ranged from 7% last year to 35% in 2010, when Build America Bonds (BABs), a creature of the 2009 American Recovery and Reinvestment Act (ARRA), captured the attention of non-traditional muni investors. During the 21 month 2009-2010 period of BABs issuance, about $181 billion were successfully offered, expanding the market for state and local government debt beyond the typical tax adverse individual investor. With the 2010 sunset of the BABs program, the visibility of taxable municipal bonds diminished, but a steady, although narrower stream of taxable offerings continues, said Alan Schankel, managing director of Janney, in a new report.
The report continued to say that BABs are taxable because the 2009 ARRA legislation, in an attempt to make infrastructure financing more affordable for state and local government entities, subsidized interest on qualified issues. Using theoretical rates as example, a state that could borrow through tax free issuance paying a 5% interest rate, now had the option to borrow using taxable bonds with a 7% rate, receive a federal subsidy for 35% of the interest cost (subsequently reduced due to sequestration), and take advantage of the lower effective borrowing cost of 4.55%.
"Away from the unique BABs program, taxable bonds are typically issued by state and local governments and related entities because they do not qualify for tax exempt treatment under IRS guidelines and rules,” said Schankel. “Pension obligation bonds (POBs) are the most prominent example. Interest on debt issued to fund public pension plans cannot qualify for tax exempt treatment based on a loophole-closing 1986 law. Beyond POBs, bonds issued for purposes that have no or little public benefit do not qualify for use of the tax exemption. The various IRS regulations restricting use of proceeds from tax free bond offerings may require ongoing oversight on the part of the issuer, so some, particularly large universities and healthcare systems, choose to issue taxable debt and thus avoid IRS limitations and oversight, retaining flexibility on the use of proceeds.”
The report talks about how taxable bonds are often used for diversification and yield pickup. For investors who gain little or no benefit from tax exempt interest, taxable municipal bonds are an attractive diversification tool, representing an alternative asset class to corporate bonds, mortgage backed securities, and US agency bonds (Freddie, Fannie).
“Of course structural and credit considerations are as important with taxable municipal bonds as is the case with their tax free counterparts," Schankel said. "Credit quality ranges from strong AAA rated issues to higher yielding, below investment grade rated bonds. As the graph shows, the yield differential between AA rated corporate issues and AA rated taxable municipal issues (10 year maturities) is well above its average of the past two years, and in the A rating category, the yield differential or spread is even wider.”
Schankel also noted that due to the wider potential market, taxable municipal bonds often enjoy stronger protections from early redemption than do tax free bonds. The “make whole call”, often applicable to taxable munis, and a common feature of corporate bonds, largely eliminates the issuer benefit of refinancing (and early redemption) to achieve interest savings.
“Rather than being callable at par, bonds with make whole call features are callable at a price which gives the owner a payment (in addition to par) which represents the present value of future interest payments," he said. "This punitive (for the issuer) provision makes early redemption unlikely. And although interest earned from taxable municipals is subject to federal income tax, it is often free from state and local income tax.”
Tax-exempt money market fund outflows
Tax-exempt money market funds experienced outflows of $210.1 million, lowering total net assets to $129.51 billion in the week ended May 15, according to The Money Fund Report, a service of iMoneyNet.com.
This followed an inflow of $1.17 million to $129.72 billion in the previous week.
The average, seven-day simple yield for the 232 weekly reporting tax-exempt funds decreased to 0.33% from 0.37% from the previous week.
The total net assets of the 856 weekly reporting taxable money funds decreased $6.91 billion to $2.483 trillion in the week ended May 16, after an outflow of $5.24 billion to $2.490 trillion the week before.
The average, seven-day simple yield for the taxable money funds was changed at 0.44% from the prior week.
Overall, the combined total net assets of the 1,088 weekly reporting money funds decreased $7.12 billion to $2.613 trillion in the week ended May 16, after outflows of $4.07 billion to $2.620 trillion in the prior week.
