The municipal market was quiet Monday as investors geared up for Puerto Rico's $3 billion general obligation bond sale, which may offer bonds maturing in 2035 at a yield in the 8.625% to 8.875% range.
The pricing of the sale is set for Tuesday with a coupon of 8%, according to a document obtained by The Bond Buyer.
The deal is structured as a one-term bond with a final maturity in 2035 and a tentative sinking-fund schedule beginning in 2022, with the largest tranche of $408.4 million coming in 2034.
The bonds are callable at par in 2020, according to preliminary pricing information obtained from underwriters working on the deal.
"Although Puerto Rico bonds have been downgraded, the market does not appear to be reacting to that," said J.R. Rieger, global head of fixed income at S&P Dow Jones Indices.
"Investors are more concerned with yield; it is more of a high- yield market. Investors are also concerned with whether the risk is worth the reward."
Puerto Rico GOs have been trading at yields ranging from 8% to 7.5% after low issuance in January and February drove bond prices higher. Year-to-date issuance was $33.66 billion as of Feb. 29, down from $51.68 billion a year earlier, according to data compiled by The Bond Buyer.
Rieger says the yield is still attractive relative to taxable bonds making investors willing to take the risk.
Yet some investors are looking warily at the risks outlined in the preliminary official statement for Tuesday's issuance.
"There is some language in the risk section that is not very customary," said Ashton Goodfield, the head of municipal bond trading at Deutsche Asset & Wealth Management.
"It differs a little bit from what we're accustomed to seeing in, for example, a state GO deal," Goodfield said. "The language in the issue next week is very comprehensive, and there is more language about restructuring."
Other than the yield, the GO bonds are gaining attention because they are marketed not toward traditional municipal investors, but toward those who are used to assuming more risk.
"What I've heard is [the commonwealth] is marketing this issuance to funds that would purchase a minimum of $50 million," Daniel Berger, senior market strategist at Thomson Reuters, said in an interview.
"It is targeting institutional investors and more sophisticated investors, including hedge funds and crossover buyers," Berger said. "I don't think this issuance will attract traditional municipal bond buyers or a lot of retail investors, though this is pure speculation."
A trader based in the Northeast noted that "the deal is not structured for traditional retail investors."
Robert Donahue, the managing director at Municipal Market Advisors, said in a report that the 14-page list of risks the commonwealth provided in its POS means the bonds are suitable only for purchasers in $100,000 denominations.
The list of risks provided in the POS also emphasized that buyers are those "who can bear the risks of price declines, limited liquidity and the possible failure to pay debt service."
The Puerto Rico GO issuance may not reflect on supply-demand patterns in the broad-based municipal marketplace, Citigroup analysts George Friedlander and Mikhail Foux said in a report Monday.
"After their massive run-up going into the deal, we think that GO paper will hit its ceiling," they wrote. "The rest of the P.R. debt complex should outperform going forward."
Citi said that trades it likes in Tuesday's issuance are bonds with maturities of one to three years, because there are some taxable Government Development Bank bonds that are cheap, making them attractive instruments.
Citi also is looking at bonds with 8.5% to 9.5% yields with five to 10 year maturities, because Citi believes the curve should steepen.
Citi also noted that in its muni portfolio it added 10 year Puerto Rico electric utility, or PREPA paper several weeks ago, and believes that long-dated second-lien COFINA sales-tax bonds are cheap relative to GOs.
While Citi does not believe Puerto Rico bonds will be a good indicator of current supply-demand patterns, it believes the rest of the issuance this week will be a good test of the market's liquidity.
Issuance this week is expected to total $11 billion, according to data compiled by Ipreo and The Bond Buyer.
"There has been such a lack of new issuance, and now it all seems to be coming at once," Goodfield said.
"Trading desks are going to need all hands on deck next week. With Puerto Rico and California, it is a big week of new issuance," she said. "I think it's going to be well-received because of the dearth of bonds so far this year."
Municipal bond yields as measured by Municipal Market Data's AAA scale jumped as much as three basis points on bonds maturing in 2016 to 2020, while those maturing outside that range were stable.
MMA's triple-A scale saw yields rise one or two basis points from 2017 through 2022, but was otherwise mostly unchanged.
Treasury yields firmed Friday, with the 30-year inching up one basis point to 3.73% and the 10-year benchmark sliding to 2.78%. Two-year notes were unchanged at 0.38%.
Trades in the secondary market showed weakening, according to data from Markit.
Buckeye Ohio Tobacco Settlement Financing Authority bonds maturing in 2024 gained two basis points in yield to 7.08%, while Louisiana general obligation bonds maturing the same year gained three basis points to 2.75%.
Yields on Massachusetts Bay Transportation Authority sales tax revenue bonds maturing in 2018 climbed one basis point to 0.90%, and La Vernia, Texas, independent school district refunding bonds maturing in 2019 gained two basis points to 1.31%.
