First Build America Bonds Hit the Primary

Against a backdrop of firmness in municipals, the first public offering of Build America Bonds priced in the primary market.

JPMorgan yesterday priced $250 million of taxable Build America Bonds for the University of Virginia, the first benchmark issuance by any higher education or municipal borrower under the program created from the American Recovery and Reinvestment Act of 2009, signed into law in February.

The bonds were issued as a 30-year bullet maturity and will go to fund certain new capital expenditures for the university. The bonds, which are rated triple-A by all three major ratings agencies, were five times oversubscribed, allowing them to price at a taxable rate of 6.22%, according to a JPMorgan press release. They also yield 154 basis points more than yesterday's Municipal Market Data triple-A GO yield curve. The yield is 32% higherthan the tax-exempt scale. The issuer will receivea 35% cash subsidy under the legislation.

"Under the Build America Bond program, the university will receive a cash subsidy for 35% of its interest cost from the U.S. Treasury - resulting in significant savings relative to traditional tax-exempt bonds," the press release stated. "JPMorgan estimates that the university saved over 80 basis points through the Build America Bond issuance relative to a tax-exempt financing, or over 13% present value savings. The university's transaction is expected to be followed by a number of Build America Bond transactions in the coming weeks from California, New York Metropolitan Transportation Authority, and New Jersey Turnpike Authority, among others."

The bonds also yielded 255 basis points higher than yesterday's 30-year Treasury scale, which yielded 3.67%.

The market is expecting an increase in taxable supply over the next week in the form of BABs, with a University of Minnesota offering expected this week.

Also yesterday, Moody's Investors Service assigned an A2 rating and Fitch Ratings assigned an A rating while Standard & Poor's late Tuesday also assigned an A rating to California's planned $5 billion taxable general obligation sale. The agency said will include $3.5 billion of BABs that will be structured with bullet maturities in 2034 and 2039.

The deal is slated to come to market early next week. Standard & Poor's also affirmed it's A rating with a stable outlook on the state's $68.9 billion of existing GO debt and its SP-2 rating on $5 billion of revenue anticipation notes.

Meanwhile, in the secondary market, yields were slightly lower by roughly two or three basis points in moderate activity.

"It was a bit quiet in the morning, but I think we're noticeably firmer at this point," a trader in New York said. "I'd call it better by two, maybe three basis points. There's not really much going on over on the short end, but the long end, it might even be cheaper by about four or so basis points."

Elsewhere, Banc of America Securities LLC priced $400 million of capital improvement limited obligation bonds for North Carolina. The bonds mature from 2010 through 2029, with yields ranging from 1.20% with a 2% coupon in 2011 to 4.73% with a 4.625% coupon in 2029. Bonds maturing in 2010 will be decided via sealed bid. The bonds, which are callable at par in 2019, are rated Aa1 by Moody's and AA-plus by both Standard & Poor's and Fitch.

JPMorgan priced for retail investors $246.7 million of revenue bonds for Georgia's Private Colleges and Universities Authority. The bonds mature from 2009 through 2029, with term bonds in 2032 and 2035. Yields range from 0.68% with a 3% coupon in 2010 to 5.05% with a 5% coupon in 2035. Bonds maturing in 2009 will be decided via sealed bid. The bonds, which are callable at par in 2019, are rated Aa2 by Moody's and AA by Standard & Poor's.

Merrill Lynch & Co. priced $173 million of taxable and tax-exempt bonds for the Florida Municipal Power Agency. Bonds from the $157.8 million series A mature from 2012 through 2028, with a term bond in 2031. Yields range from 2.45% with a 3% coupon in 2012 to 5.78% with a 6.25% coupon in 2031. The bonds are callable at par in 2019. The deal also contains a $15.2 million taxable component, which matures in 2019, yielding 6.40%, priced at par. The bonds are not callable. The credit is rated A1 by Moody's and A-plus by Standard & Poor's.

Goldman, Sachs & Co. priced $154.4 million of economic development road revenue bonds for the Kentucky Turnpike Authority. The bonds mature from 2011 through 2027, with a term bond in 2029. Yields range from 1.42% with a 2% coupon in 2011 to 4.98% with a 5% coupon in 2029. The bonds, which are callable at par in 2019, are rated Aa3 by Moody's, AA-plus by Standard & Poor's, and AA-minus by Fitch.

The Treasury market showed some losses yesterday. The yield on the benchmark 10-year note, which opened at 2.79%, was quoted near the end of the session at the same level. The yield on the two-year note was quoted near the end of the session at 0.86% after opening at 0.84%. The yield on the 30-year bond, which opened at 3.65%, was quoted near the end of the session at 3.67%.

As of Tuesday's close, the triple-A muni scale in 10 years was at 111.2% of comparable Treasuries, according to MMD. Additionally, 30-year munis were 128.7% of comparable Treasuries. Also, as of the close Tuesday, 30-year tax-exempt AAA-rated general obligation bonds were at 141.9% of the comparable London Interbank Offered Rate.

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