Denver, Memphis-Shelby deals done as market sees new supply hit the screens

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Municipal bond buyers saw some new offerings come to market on Tuesday, led by a Denver city and county deal.

Primary market
Citigroup priced the city and county of Denver’s $241.573 million of Series 2018A dedicated tax revenue bonds consisting of Series 2018A-1 current interest bonds and Series 2018A-2 capital appreciation bond; and $60 million of Series 2018B taxable bonds.

The deal is rated Aa3 by Moody’s Investors Service, AA-minus by S&P Global Ratings and AA by Fitch Ratings.

Raymond James & Associates priced the Memphis-Shelby County Airport Authority’s $119.62 million of Series 2018 airport revenue AMT bonds.

The deal is rated A by S&P and Fitch and A-plus by Kroll Bond Rating Agency.

RBC Capital Markets priced for retail the Rhode Island Housing and Mortgage Finance Corp.’s $105.375 million of homeownership opportunity bonds, consisting of Series 69A bonds subject to the alternative minimum tax, Series 69B non-AMT bonds and Series 69T taxable bonds.

The bonds are rated Aa1 by Moody’s and AA-plus by S&P

Since 2008, the agency has sold about $1.3 billion of bonds with the most issuance occurring it 2016 when it offered $295.5 million of debt. It sold the last amount of bonds in 2011, when it issued $26 million of debt.

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On Wednesday, Texas is selling $7.2 billion of Series 2018 tax and revenue anticipation notes.

The financial advisor is George K. Baum and the bond counsel is Orrick Herrington. The deal is rated SP1-plus by S&P, F1-plus by Fitch and K1-plus by Kroll.

On Thursday, Massachusetts will sell $1.5 billion of general obligation revenue anticipation notes in three sales consisting of $500 million each of Series 2018A, Series 2018B and Series 2018C RANs.

The financial advisor is Public Resources Advisory Group and the bond counsel is Mintz Levin. The deal is rated MIG1 by Moody’s, SP1-plus by S&P and F1-plus by Fitch.

Topping the bond slate, JPMorgan Securities is set to price Illinois’ $920 million of Series of September 2018AB GO refunding bonds on Wednesday.

The deal is rated Baa3 by Moody’s, BBB-minus by S&P and BBB by Fitch.

Impact of Tax Rates

With issuance waning in the remainder of the late summer, municipals are faring well overall, with some challenges with respect to supply, demand, and the impacts of tax reform, according to a report from George Friedlander, managing partner at Court Street Group Research. This week, issuance dropped to $4.5 billion, from last week’s $11 billion.

“The much lighter calendar enabled munis to keep pace with Treasuries all along the curve, at the slightly elevated ratio levels that prevailed coming out of the pretty strong Treasury rally during the prior week” due to Turkey’s financial turmoil and its impact on other emerging market economies, he said.

Meanwhile, he said the municipal market is still feeling the overall impact of tax reform. “Within the context of general market trends, however, we think that it’s important to note that the strict limits on deductibility of state and local taxes clearly seem to be helping debt from major high-tax states — California and New York in particular,” Friedlander said.

For instance, a California Unified School District deal came 23 basis points lower in yield than the implied triple-A Municipal Market Data curve, he said. “New York Ports and MTAs have a spread to the AAA, but it is very tight by historical standards,” with shorter maturities in high-tax states are staying especially rich, he wrote. “It seems clear that high effective tax rates for wealthy investors who have used up their $10,000 SALT deduction cap are generating additional in-state demand.”

Some of the other impacts include weaker corporate demand in the aftermath of the drop in the tax rate from 35% to 21%,, according to Friedlander, who said both banks and property and casualty firms are selling shorter paper. “One saving grace on the long end is that P&Cs crave high-quality, longer paper to an extent that exceeds the impact of lower tax rates,” he said in the report.

Most of the institutional demand is in the primary market, “which is perceived to provide significantly better value than the secondary market, along with the better liquidity that new paper provides,” Friedlander wrote.

In addition, he said there has been no tangible evidence that direct retail is back in the market taking up the slack created by weaker institutional demand. “Yields just aren’t high enough to pull substantial cash off the sidelines,” the report stated. “The cash is there; but not willing to move out on the muni curve as yet for a modest increase in after-tax income.”

Friedlander said there has been a modest increase in issuance using shorter calls, and it has been fairly well absorbed. On the other hand, the use of lower coupons “has seen no success,” he said. “4s have actually widened out a bit against 5s since the beginning of the year.”

Other impacts from tax reform include issuance potentially moving somewhat higher over time, “as the advanced refundings that couldn’t come this year get within 3 months of the first call date, when they can come as current refundings,” Friedlander said. He expects that to occur by early 2019.

Meanwhile, liquidity is likely to stay weaker than pre-tax reform, according to Friedlander, as underwriters and dealers remain cautious in the face of weaker secondary market demand from corporate buyers, he wrote.
“We do not envision the muni market adjusting to Tax Reform in any way that fully responds to the voids on the demand side from lower corporate tax rates,” he added.

“The demand side void will, we think, show up to a larger degree over time, as current refunding issuance combines with growing new-money issuance to push total volume up closer to pre-tax reform levels,” Friedlander wrote, noting that he expects the pattern to surface by next year.

Tuesday’s bond sales

Colorado
Click here for the Denver pricing

Tennessee
Click here for the airport pricing

Rhode Island
Click here for the housing retail pricing

Bond Buyer 30-day visible supply at $9.34B
The Bond Buyer's 30-day visible supply calendar increased $144.8 million to $9.34 billion for Wednesday. The total is comprised of $3.37 billion of competitive sales and $5.95 billion of negotiated deals.

NYC TFA details $1.65B bond sale
The New York City Transitional Finance Authority said it plans to sell $1.675 billion of future tax secured subordinate bonds, comprised of approximately $900 million of tax-exempt fixed rate bonds, $500 million of taxable fixed rate bonds and $275 million of tax-exempt variable-rate demand bonds.

The negotiated pricing of $900 million of tax-exempt fixed rate bonds is expected to take place on Thursday, Sept. 6, via the TFA’s underwriting syndicate led by book-running lead manager Loop Capital Markets, with Bank of America Merrill Lynch, Citigroup, Goldman Sachs, Jefferies, JPMorgan Securities, Ramirez & Co., RBC Capital Markets and Siebert Cisneros Shank & Co. serving as co-senior managers.

There will be a two-day retail order period starting on Tuesday, Sept. 4.

Also on Thursday, Sept. 6, TFA intends to competitively sell $500 million of taxable fixed-rate bonds.

Additionally, TFA intends to price $275 million of tax-exempt variable-rate demand bonds during the week of Sept. 24, bringing the total bond sale to approximately $1.675 billion.

Proceeds from the bond sale will be used to fund capital projects, with the exception of proceeds from approximately $150 million of the tax-exempt fixed rate bonds, which will be used to convert outstanding floating rate bonds into fixed rate bonds.

Secondary market
Municipal bonds were mixed on Tuesday, according to a late read of the MBIS benchmark scale. Benchmark muni yields fell less than one basis point in the 14- to 18-year maturities, rose less than a basis point in the one- to 13-year and 20- to 28-year maturities and remained unchanged in the 19-year and 29- to 30-year maturities.

High-grade munis were also little changed, with yields calculated on MBIS’ AAA scale falling less than one basis point in the one- and two-year and 28- to 30-year maturities, rising less than a basis point in the three- to 13-year and 17- to 26-year maturities and remaining unchanged in the 14- to 16-year and 27-year maturities.

Municipals were mixed on Municipal Market Data’s AAA benchmark scale, which showed the yield on the 10-year muni general obligation rising one basis point while the yield on 30-year muni maturity remained unchanged.

Treasury bonds were weaker as stock prices rose on Tuesday.

On Tuesday, the 10-year muni-to-Treasury ratio was calculated at 85.8% while the 30-year muni-to-Treasury ratio stood at 99.9%, according to MMD. The muni-to-Treasury ratio compares the yield of tax-exempt municipal bonds with the yield of taxable U.S. Treasury with comparable maturities. If the muni/Treasury ratio is above 100%, munis are yielding more than Treasury; if it is below 100%, munis are yielding less.

A modest softening and declining volume combined to create lackluster activity Tuesday morning, a New York trader said, suggesting that summer doldrums “are playing into the somewhat quiet tone” in the market. He described the new issue market as a roller coaster ride with volume up as high as $11 billion last week and down this week as $4.5 billion arrives.

“It would be nice if it would average out and we could have a set $8 billion a week versus these swings,” the trader said, adding the erratic volume confuses investors. “I think when people see volume flip-flopping it makes them wait for the next week until issuance is back up, but then we get a dead week,” he said. “This industry sees volume fluctuate, but not like these recent swings.”

Besides volume declining from last week’s highs, the trader said market technicals have not cooperated. “Things are obviously not as attractive as they were two weeks ago especially where rates are,” he said. He hinted a Treasury sell-off would help the municipal market gain some strength.

Meanwhile, he noted, this week’s negotiated calendar led by the $920 million Illinois revenue sale should be “interesting” given the state’s recent outlook change to stable by Moody’s in July.

Illinois general obligation bond spreads tightened on MMD to 12-month lows throughout the yield curve after Moody’s removed its negative outlook on the state. Spreads narrowed in secondary market trading to a range of 150 basis points to 153 basis points over the MMD’s top-rated benchmark spread compared to recent trading levels at 165 basis points, MMD reported on July 23. The trader said it will be “interesting to see how retail creeps back in” to participate in that credit.

The trader also pointed to the $240 million Denver city and county sale and the $160 million New York Triborough Bridge & Tunnel Authority revenue sale as attractive and eye-catching in the current market.

"It’s New York and we can always use paper,” he said of the Triborough authority deal. “I think they will get a good response simply because even though a lot of people don’t really have their minds around buying something at the end of summer, there’s not a lot of paper around,” and investors need to take advantage of strategic buying when the deals are available, the trader said. “If you don’t buy now, the next time around volume could disappear and you could miss out.”

Aside from the negotiated deals, some of the competitive deals on the calendar include a $200 million Miami Dade County Florida remarketing structured with serials from 2019 to 2046, as well as a $105 million Pennsylvania Higher Educational Facilities Authority revenue refunding maturing from 2019 to 2043.

Previous session's activity
The Municipal Securities Rulemaking Board reported 38,144 trades on Monday on volume of $9.01 billion.

California, New York and Texas were the municipalities with the most trades, with Golden State taking 13.54% of the market, the Empire State taking 12.308% and the Lone Star State taking 10.641%.

Treasury sells $70B 4-week bills
The Treasury Department Tuesday auctioned $70 billion of four-week bills at a 1.910% high yield, a price of 99.851444.

The coupon equivalent was 1.939%. The bid-to-cover ratio was 2.80.

Tenders at the high rate were allotted 59.25%. The median rate was 1.880%. The low rate was 1.860%.

Gary Siegel contributed to this report.

Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation. Click here for a brief tour of the Workstation, or contact Ziad Saba at 212-803-6079 for more information.

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