As the foliage turned crimson last fall, institutional investors were dropping out of muni deals like so many dead leaves spiraling to the earth.

"Retail" was the word as individual investors became the dominant buyers for downsized bond issues. Now, some major New York issuers say institutional investors have started to return, but they are fewer in number than before the financial meltdown of 2008 and they are being more cautious about what they buy.

"Since the turn of the year the institutions seem to be back," said New York City deputy finance director Alan Anders. "In the fall there were some weeks where we really only had pretty much retail investors and so we were limited to only the roughly $350 million that we could reliably get from a retail order period."

The city saw institutional investors come back last month on a general obligation deal that initially was sized at only $400 million. But with institutional demand the city upped the offering to $720 million.

"It's a dramatic improvement over the fourth quarter," said Adela Cepeda, president of A.C. Advisory Inc., a financial advisory firm. "Institutional investors are back [but] they are not back to the same level as pre-September 2008 - they seem to be much more cautious and they don't seem to have the level of cash flows available for munis that they used to have."

When the Dormitory Authority of the State of New York sold $550 million of personal income tax bonds in February, about two thirds of them were picked up by institutional investors, a reversal from November when institutional investors picked up only $265 million of a $665 million PIT deal from DASNY.

"We wouldn't necessarily call this a trend ... our attitude is always it's deal-to-deal," DASNY spokesman Marc Violette said.

The increased institutional participation hasn't translated into lower borrowing costs for the issuer, either.

"It's not so much a case where the presence of institutional investors helps us realize lower rates, it's more a case where the participation of institutional investors helps us get the deal done," Violette said.

When the Empire State Development Corp. went to market on Jan. 9 with $1.1 billion of PIT bonds, institutional and priority allotments totaled $506.5 million compared to $489.3 million of retail and $83.5 million of member allotments.

"This is definitely more in institutional orders than we would have seen last fall," ESDC chief financial officer Frances Walton said in an e-mail.

By luck of timing, the New York State Thruway Authority didn't need to sell bonds in the rough waters of last fall and priced $238 million of bonds on its second general highway and bridge trust fund credit last month, filling $127 million of retail orders.

"We had $150 million in [retail] orders, but we just thought we would cap it off at $127 million because we had so much institutional demand," said Thruway chief financial officer John Bryan.

Still, institutional demand was weaker than in the past, when retail would have accounted for only about 40% of participation, he said.

And even with institutional investors returning to the market, New York City isn't planning large deals, such as the $1.1 billion GO deal it priced the Friday before Lehman Brothers collapsed in September.

Outside of New York, issuers have seen a healthier level of institutional participation as well. The Los Angeles Unified School District's $950 million deal last month drew $635.6 million of institutional investors compared to $253.8 million of retail. The underwriting group picked up the remaining $60.6 million.

Connecticut's $400 million general obligation deal on Feb. 19 saw $150 million got to retail and $250 million to institutional investors.

While market participants say institutional demand comes from a broad range of buyers, some previously active buyers, such as arbitrage funds and tender option bond programs, have been conspicuously absent since the financial crisis deepened.

Their absence is "what's making bond issues harder for everyone these days," Anders said. "So that's a whole level of demand that's not there ... we have to rely more on retail and traditional institutions."

Financial adviser Doreen Frasca, president of Frasca & Associates LLC, said institutional investors see opportunities in the municipal market given its current turbulent conditions.

"Gradually institutions have gotten more and more comfortable with higher rated credits and appreciate - and are taking advantage of - the vast and unprecedented spread between munis and Treasuries, which could evaporate once Treasury starts issuing bonds to pay for stimulus," Frasca said in an e-mail.

One portfolio manager says increased institutional participation could continue to be restrained.

"There's been a modest increase in flows into the mutual funds space in general," said Joseph Darcy, a portfolio manager at Drefyus. "I guess that's generating a little bit of buying activity. I wouldn't characterize it as overwhelmingly robust."

While Darcy said that institutional demand is stronger, he is skeptical about a return to business as usual.

"I think it's somewhat temporary in that when the calendar cranks up you're going to challenge the buying capacity of the market," he said. "If you survey the landscape of finance needs on the part of issuers and compare it to the depth of the liquidity in the market, I think you're going to go through periodic bouts of indigestion."

The mid-range maturities are not as in demand as are bonds in the short and long ends.

"Retail investors are more focused on the short end, and institutional investors are looking at the long end," DASNY's Violette said in an e-mail. "Everyone struggles with the middle of the yield curve."

When New York City went to market last week with $400 million of Transitional Finance Authority building aid revenue bonds, it wasn't able to increase that offering because it didn't sell out some middle maturities. Laws applying to those bonds require that the all maturities be sold before the amount can be increased.

Evan Rourke, portfolio manager at Eaton Vance, said it was too soon to say whether institutional demand will continue at the levels seen in January and February.

"Some of the demand is driven by reinvestment flows," Rourke said. "As the markets have stabilized, munis have rationalized a little bit [and become] more normalized. I think it's encouraged them to come back when they have cash, and of course they had cash at the beginning of the year."

R. Jed McCarthy, managing member at 1861 Capital Management LLC, said attracting both institutional and retail interest in the coming months could be more difficult for issuers than it was in the past two months.

"Seasonally you're going into a tough period - a lot of times municipal bonds have stalled around this time because you're getting into tax season," McCarthy said. "A lot time you see a pickup in supply ... fund flows are usually less because people have redemptions where they sell bonds or mutual fund shares to pay their tax bills."

Retail continues to be an essential part of getting deals done. Witness New York's $454.7 million general obligation deal last week which priced through negotiation. The state traditionally markets its GOs competitively, but this time it went negotiated, as have other states recently.

New York Division of Budget spokesman Jeffrey Gordon said the state decided to sell through negotiation in order to focus on retail and because of the size of the deal. The strategy paid off, with retail picking up 73% of the bonds.

However, the Port Authority of New York and New Jersey will not be going negotiated with a $100 million deal this week even though its staff has lately discussed breaking a tradition of competitive pricings. The agency would use negotiated deals "only as a last resort," treasurer Anne Marie Mulligan said.

"The Port Authority prefers to issue under the traditional means we have, under the competitive process," she said. "We intend to continue to issue that way unless there is no market acceptance or market availability."

Still, the authority has downsized the deal in recognition of the tough market.

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