Issuers in the Midwest and Northeast are expected to serve up a meaty $11.27 billion of post-holiday fare in the municipal market this week, according to Ipreo LLC and The Bond Buyer, as they hope to take advantage of last week’s firmness following recent supply and pricing volatility.
Last week, according to Thomson Reuters, a revised $2.58 billion came to market as $3.1 billion left municipal bond mutual funds as redemptions — the highest in more than 10 years — caused net-asset values to drop more than $11 billion, according to data from Lipper/AMG Inc.
The redemptions came as growing investor fears over volatility — spurred by a glut of new supply arriving the previous week — sparked a sell-off that caused bonds to weaken by as much as 20 basis point on the long end before regaining ground.
While volatility wreaked havoc in recent weeks, the market was firmer Tuesday as the Los Angeles Department of Water and Power priced $760.2 million of Build America Bonds before market activity began to dwindle on Wednesday ahead of Thanksgiving.
The LADWP deal included term bonds maturing in 2041 that yielded 7% at par, or 4.55% after the 35% federal subsidy, and a 2045 maturity that yielded 240 basis points over the 30-year Treasury yield, which was quoted at a 4.18% near the end of Tuesday’s session.
The credit is rated Aa3 by Moody’s Investors Service and an equivalent AA-minus by Standard & Poor’s and Fitch Ratings.
LADWP will make its second appearance in as many weeks Tuesday when it sells $492.7 million of water system revenue bonds structured as BABs in a deal slated to be priced by joint managers JPMorgan and Siebert Brandford Shank & Co. The bonds are rated Aa2 by Moodys, AA by Standard & Poor’s, and AA-plus by Fitch.
Tim McGregor, director of municipal fixed-income portfolio management at Northern Trust Investments, wrote in a Nov. 23 report that volatility stems from pricing.
“Issues have recently been priced to move, and prices have therefore been rising and falling faster due to seasonal technicals,” he wrote.
This week, the Illinois Railsplitter Tobacco Settlement Authority will sell $1.4 billion of tobacco revenue bonds after negative credit action two weeks ago that jolted the market. Standard & Poor’s downgraded 51 ratings for 16 tobacco settlement securitizations, mostly into junk territory from BBB, with the assumption that most of the structures could not withstand a future decline in cigarette consumption.
The upcoming Citi-led Illinois deal received Fitch’s highest tobacco rating of BBB-plus, while Standard & Poor’s rates the serial bonds A and the term bonds A-minus. The higher ratings for this issue are due at least in part to the deal’s structure. It includes a 17-year final maturity and debt-service coverage levels that would ensure adequate revenue to repay investors even if there is a 10% drop in tobacco consumption.
The deal is expected to be priced on Wednesday after a retail order period on Monday and Tuesday, and is structured to mature from 2012 to 2021 with term bonds in 2024 and 2027.
Last week, the tobacco bond market witnessed forced selling from select high-yield municipal bond mutual funds and levered investors after the downgrades, which affected bonds with a face value of $22 billion.
In other Midwest activity, a $667.4 million offering from Ohio’s American Municipal Power Inc. will enter the market on Wednesday when Wells Fargo Securities prices the taxable and tax-exempt Series 4 revenue bonds on behalf of the Meldahl Hydroelectric Project.
The region’s activity will also include a $502.2 million Chicago general obligation sale structured as Series 2010B taxable Build America Bonds, and Series C traditional taxable project bonds. Both will be priced by Loop Capital Markets LLC on Tuesday or Wednesday and are rated Aa3 by Moody’s, A-plus by Standard & Poor’s, and AA-minus by Fitch.
The Northeast activity will be led Wednesday by a $1.1 billion sale of state personal income-tax bonds from the NewYork State Urban Development Corp. issued as traditional taxable BABs and tax-exempt securities.
The deal is structured to include $349.3 million of Series 2010C BABs and $328.3 million of traditional Series B taxable bonds, both of which are slated to be priced by Citi. An additional $427.1 million of Series 2010A general purpose tax-exempt paper is to be priced by Morgan Stanley . The issuer on those bonds is the related Empire State Development Corp.
The UDC’s PIT bonds are expected to be rated AAA by Standard & Poor’s and AA-minus by Fitch.
By contrast, an $840 million sale of special-project senior terminal revenue bonds for John F. Kennedy International Airport from the Port Authority of New York and New Jersey will likely offer relatively attractive yields due to its mixed ratings of triple-B minus from Moody’s and Standard & Poor’s, and BB from Fitch. Citi is expected to price the offering on Tuesday.
On Wednesday, generic, triple-B rated GO bonds due in 2040 yielded 5.73% — roughly 142 basis points higher than the 30-year triple-A GO scale, which ended at a 4.31% yield, according to the Municipal Market Data scale. The benchmark yield on Tuesday also ended at a 4.31% — five basis points lower than where it ended last Monday, according to MMD.