Investors bought up a $322 million issue of Los Angeles Department of Water and Power revenue bonds, deeming them an attractive alternative to the state's general obligation bonds, market participants said.
"There are a lot of California GOs, every time I look for a piece of California all I find are California GOs," a trader in New York said. "The L.A. water and power is a good way to get California yield with relative safety."
Barclays Capital priced the bonds with yields ranging from 1.17% with a 5% coupon in 2019 to 3.6% on a 5% coupon in 2043.
The deal has a sinking fund with a term bond in 2043, and an optional call at par in 2024.
The bonds earned an Aa3 from Moody's Investors Service, and AA-minus from Standard & Poor's and Fitch Ratings.
"I think the Los Angeles Department of Water and Power deal has an appeal, particularly to people who need California paper," a second trader in New York said.
"It's a Los Angeles utility issuer, and an infrequent issuer, so [it's] good for people who need to diversify their portfolios of California paper. It's appealing because of the quality of its name and because it's an infrequent issuer."
Investors opting to get states' or local municipalities' debt into their portfolio by purchasing utility bonds from the region instead of its GOs is an increasing trend, according to market participants.
"[Utility bonds] have performed well, because they are essential purpose and people would rather have that than a local GO credit that has to deal with," a trader in New Jersey said.
The trader in New Jersey said that part of the reason investors are buying utility bonds over GOs is because they are concerned about pension costs associated with GO bonds.
"People worry about pension revenues with GOs, especially local GOs," he said.
"They are concerned about the burden pension costs are placing on local credit. When you buy water and sewer, there's less of an issue of pensions overwhelming particular kind of issuer. The [pension] issue doesn't go away, but water and sewer is one [sector where] pension costs don't overwhelm the issuers."
The second trader in New York said that headlines about pension damaging municipalities' ability to pay back GO bondholders has caused some investors to choose utilities instead.
"With water and sewer versus a GO for same municipality, if buyers tend to feel if credit same they tend to feel more security with water and sewer and essential service bonds," he said.
The first trader in New York said the appeal of buying an essential service bond is also a sweetener.
"Yeah, I think people are kind of looking at what the GOs really do and stand for vs. the utility," he said.
"Utilities are required, rather than state coming along going 'oh I'll pay you' and having nothing behind it besides a promise. Utility bonds actually do something," he added.
Barclays Capital wrote that water and sewer bonds are attractive because they are trading wider than the muni index, in a report released on Friday.
The report also noted there are not many water and sewer bonds expected in the near future.
Barclays wrote the latest 30-day visible supply outlook showed future water and sewer issuance off 20%, the largest decline by sector.
Along with the wider credit spreads, high ratings, and the decline in water and sewer issuance in the near future, Barclays noted that water and sewer bonds are desirable because they are essential services.
Barclay's Capital repriced a two-part deal totaling $774.6 million of Chicago Midway Airport revenue and revenue refunding bonds, the largest deal of the week, on Wednesday.
Yields on $485.5 million of alternative minimum tax bonds ranged from 2.48% with 5% coupon maturing in 2021 to 4.38% with 5% coupon in 2041.
Yields on $289.1 million of non-alternative minimum tax bonds ranged from 1.45% with a 5% coupon in 2019 to 4.30% with a 3.97% in 2036.
The deal is callable at par in 2024 and is rated A3 by Moody's Investors Service and A-minus by both Standard & Poor's and Fitch Ratings.
JPMorgan repriced $146.3 million of Harris County Cultural Education Facilities Finance Corporation hospital revenue bonds.
Yields ranged from 0.48% with a 4% coupon in 2016 to 3.77% with a 4% coupon in 2031.
The deal is callable at par in 2024 and is rated A1 by Moody's and A-plus by S&P.
Barclays Capital priced $322 million of Los Angeles Department of Water and Power System revenue bonds.
Yields ranged from 1.17% with a 5% coupon in 2019 to 3.60% with a 5% coupon in 2043.
The bonds mature serially from 2019 to 2032 with a term bond in 2043.
The bonds are callable at par in 2024 and are rated Aa3 by Moody's and AA-minus by S&P and Fitch.
Munis strengthened Wednesday, with yields on the intermediate part of the curve falling as much as four basis points.
Yields on bonds maturing beyond 2026 dropped as much as five basis points, according to the Municipal Market Monitor triple A-scale.
The two-year's yield dropped by one basis point to 0.33%, and the 10-year's and 30-year's by four basis points to 2.17% and 3.44% respectively.
Treasuries were mixed on Wednesday, with 30-year yields and the 10-year benchmark falling eight basis points each to 3.29% and 2.45%, respectively.
The two-year note inched up two basis points to 0.38%.
