With the year's first sizable high-yield airport deal in California about to take flight, there is evidence that eager portfolio managers have already begun to make room for the new batch of attractively priced supply.
Officials at lead book-runner Salomon Smith Barney Inc. said they are hoping to get the deal off the runway tomorrow and that it is expected to have ratings of B1 from Moody's Investors Service and BB-minus from Standard & Poor's.
The airport lease revenue offering is expected to be worth $320 million and will be issued through the Los Angeles Regional Airports Improvement Corp. on behalf of American Airlines, the largest and most active airline with a hub at Los Angeles International Airport. The deal had initially been expected to take place earlier this month.
There will be an interesting cross section of activity taking place in the California market this week, given that the airport deal is slated to come on the heels of today's mammoth $1.1 billion competitive California general obligation refunding. Market players are hoping to see yields in the neighborhood of 8.50% for the American deal.
In an earlier, somewhat related, deal, the secondary market this week hosted a small -- but attractively priced -- block of American Airlines bonds. The $195,000 block of Alliance, Tex., Airport Authority special-facility revenue bonds on behalf of American, with a 7.50% coupon due in 2029, traded six times on Monday. The bonds, which are rated B1 by Moody's and BB by Standard & Poor's, traded with an 8.04% yield to maturity.
How "yieldy" the new bonds end up being will be tempered by the recent rise in price and decline in yield of American Airlines paper in the secondary market, said one high-yield portfolio manager.
"Airline paper has traded up and up and up for a month and a half," said B. Clarke Stamper, a portfolio manager and president of Stamper Capital & Investments Inc. in Santa Cruz, Calif.
"It's like a small tail of the huge dog airline paper, and just because a little tail has traded up doesn't mean the whole dog is worth more," he added.
But, that will probably be the case when underwriters price the new deal tomorrow, he said.
One reason the new issue might be priced richer than one would expect is that similarly secured airport bonds in the secondary are available at big discounts, a factor that provides investors with better upside potential, Stamper explained.
In terms of the expected ratings, he believes they may be "a little low," since the security on the bonds -- lease payments from American -- "seems reasonable."
However, he said the ratings are probably justified by a "funky" 18-month call on the bonds. Although it is a "strange" feature, Stamper said "it will keep the bonds from trading up that much" after the new issues price.
Though he believes it will be a hard sell, since the bonds might not be as attractive as buyers expect, he said he will still watch the deal.
"We have plenty of cash, and I have plenty of room if I decide to buy it," he said.
"I was hoping it would come really cheap and keep pressure on the airline sector ... but, they'll get to price it richer than they could have a month ago" because of the pricing structure on similar airport debt in the secondary, Stamper explained.
