March Comes in Like a Lion With Three Sizeable Deals on Tap

On the heels of a fairly lackluster February, a trio of super-sized deals will kick off March in the Texas, California, and Puerto Rico markets. An estimated $10.16 billion is expected to be priced into a relatively weak municipal market clouded by failed auction-rate transactions and the problems still facing bond insurers as a result the general contraction in liquidity.

At least one of the deals - a $1.6 billion Puerto Rico Aqueduct & Sewer Authority new-money revenue and refunding offering - could get some keen attention from yield-hungry investors if underwriters decide to price the bonds without insurance and only on the merits of its Baa3 underlying rating from Moody's Investors Service and BBB-minus from Standard & Poor's and Fitch Ratings.

Priced as triple-B bonds, the deal could present attractive yields when compared to the national, Municipal Market Data triple-A yield curve scale. For instance, the yield on 30-year bonds was 5.14% last Friday, after a noticeable back-up due to a combination of economic, market, and interest-rate volatility compared to a week earlier when the yield was 4.70% on Feb. 22.

Citi is expected to price Puerto Rico's Series 2008 A senior lien bonds on Thursday with a structure that includes capital appreciation bonds maturing from 2012 to 2016, and current interest bonds maturing from 2017 to 2027. Term bonds will be offered in 2032, 2037, and 2047. Series A refunding bonds totals $161.5 million.

Taxable senior-lien Series B totals $22 million and Series B refunding bonds, also taxable, total $125.3 million.

The two other mammoth offerings on tap this week include a highly market sensitive, $2.3 billion revenue refunding from the North Texas Tollway Authority and a $1.75 billion state of CaliforniaGO sale.

This week's billion-dollar-plus slate far out-shadows last week's activity when the largest deal was a $400 million state of Maryland GO sale, followed by $180 million of personal income tax revenue bonds from the New York State Dormitory Authority.

Depending on market conditions, this week's upcoming NTTA deal could be priced by Bear, Stearns& Co. on either Wednesday or Thursday. The deal has a multi-faceted structure - the majority of which includes $1.4 billion of Series 2008A first tier current interest bonds - however the exact maturity schedule for each series was still being discussed at press time on Friday.

The remainder of the deal is structured to include $233.2 million of Series 2008B first-tier current interest bonds maturing from, $19.1 million of Series 2008 C first-tier taxable current interest bonds, $150 million of Series 2008 D first-tier capital appreciation bonds insured by Assured Guaranty Corp. and $500 million of Series 2008 E put bonds.

Except for the Series D CABs, the NTTA's deal will carry ratings of A2 from Moody's and A-minus from Standard & Poor's. Proceeds will provide the first phase of refinancing for the $3.2 billion in bond anticipation notes that were issued in November 2007 to provide interim financing for the ongoing State Highway 121 project.

Fitch, meanwhile, downgraded the NTTA's outstanding debt to BBB-plus from A-minus earlier this week because of significant risks associated with the SH 121 project, which the agency said will more than triple its existing debt. At the request of the authority, however, Fitch was asked to withdraw its rating - even though it did not apply to the new bonds - because it marred the credit's A-category status.

In the Golden State, meanwhile, retail investors will get first-crack at the California GO bonds today and tomorrow, and the deal will be priced for institutional investors on Wednesday by Siebert, Brandford, Shank & Co.

The state's GO bonds are rated A1 by Moody's, and A-plus by both Standard & Poor's and Fitch, and the deal is expected to mature from 2009 to 2038.

Despite all the volatility in the market recently, the deal should be well received by both retail and institutional investors - especially at the market's adjusted levels.

"There might be some new nominal yields for people to look at given all the movements in the MMD" over the past week, said Sherman Swanson, managing director at Siebert.

A New York trader said the mammoth deals in the market this week would have a very hard time getting priced due to the potential for yields to readjust higher before the deals come and a general lack of liquidity amid all the turmoil in the market.

Meantime, Clark Wagner, director of fixed income at First Investors Management in New York, said the market has cheapened up ahead of this week's hefty volume, and he expects nontraditional buyers, like hedge funds, to find a buying opportunity during a week when the market is expecting one of the largest calendars in a while and municipals are offering the rare combination of being attractive on both a relative and absolute basis.

"It's a big week under any circumstances, and certainly these aren't normal circumstances," said Wagner, who manages $1.5 billion of tax-exempt assets.

Besides the hedge funds, he said strong retail demand chasing 4% yields in 10 years and the rare availability of 5% yields on the long end - when comparable Treasury bonds on Friday were yielding 3.71% and 4.55% - should strengthen demand for the deals.

"These round numbers attract retail, so retail is exceptionally strong right now, and I would expect that to continue," he said.

Wagner said he will be looking at the New York, Puerto Rico, and California deals, but is being selective about spending cash.

"Where we have cash we are looking, but until the market stabilizes, trading and swapping is difficult right now because the market is so volatile. We need a stable market to re-engage," he said.

In other activity, Arizona's Salt River Agricultural Improvement and Power District is planning to sell $797.6 million electric system revenue bonds this week in a negotiated deal being priced by Bear Stearns tomorrow.

The bonds, which will come uninsured and are rated Aa1 by Moody's and AA by Standard & Poor's, are structured to mature serially from 2016 to 2028 with term bonds in 2033 and 2038.

The New York Thruway Authority, meanwhile, is also scheduled to sell $724 million of second general highway and bridge trust fund bonds that will be rated AA by Standard & Poor's and AA-minus by Fitch.

Following today's retail order period, Goldman, Sachs & Co. is expected to price the deal tomorrow for institutions with a structure that includes serial bonds maturing from 2009 to 2028.

For reprint and licensing requests for this article, click here.
Buy side
MORE FROM BOND BUYER