The New York City Transitional Finance Authority's $675 million revenue bond sale was two-times oversubscribed during the intuitional sale on Wednesday, after the supply drought the weeks before and after the July 4th holiday left investors hungry for large, big-name deals.
The $450 million of bonds left for institutional buyers after the deal's two-day retail order period encountered such demand from intuitional buyers that the lead underwriter Morgan Stanley was able to lower yields on bonds maturing from 2027 to 2038 one or two basis points, Alan Anders, deputy director for finance at the mayor's Office of Management and Budget, said in an interview.
Yields on the bonds ranged from 0.66% with a 4% coupon in 2017 to 3.71% with a 5% coupon in 2039. The yields had already been lowered during the retail period before the bonds entered their institutional sale. From the beginning of retail pricing to final pricing yields on the 2022 maturity fell the most, five basis points, to 2.20%. Bonds with maturities from 2026 to 2034 fell one basis point.
"We're taking advantage of this time of year because there are a lot of redemptions, and we continue to be told there's a scarcity of supply relative to investors who want to put money to work," Anders said. "For other New York issuers it's a good time to be in the market."
There is a sealed bid in 2016. The bonds are callable at par in 2024 with a possible mandatory tender on or after August 1, 2024. The bonds will be in fixed-rate mode until the call date.
The NYC TFA also auctioned $125 million for institutional sale on Wednesday, with RBC Capital markets winning the bid. The bonds were priced at par with yields from 2.42% in 2020 to 3.34% in 2025.
One of the more unusual features of the negotiated part of the deal is that the bonds are issued in a multimodal model with a mandatory tender on Aug. 1, 2024.
"[The NYC TFA deal] is fairly priced," Fred Bacani, Head of Fixed Income & Trading at Veritable LP in Newtown Square, Pa., said in an interview. "I spoke to one of the bankers and was surprised there weren't as many calls into the banker about the structure. A lot of [mandatory tender deals] are structured differently."
In terms of reinvestment risk, he said, the bonds are no different from any bonds that can be called in 10 years.
"The multimodal structure is a bit new, but did in a TFA deal in April," Anders said. "[The multimodal structure with a mandatory tender is] an alternative to a call, we're not doing anything to bonds until the 10th year when we can call bonds. We wanted additional feature change mode rather than just a call. There may be a yield advantage in changing the remaining maturities, it's really just to give us a little bit of flexibility."
Anders said that part of evidence for the demand for Wednesday's TFA issuance is that the spread to MMD is tighter than the April issuance's spread.
Bacani said that while there is strong demand for the TFA bonds in the new issue market, Veritable is looking at the issuer's bonds trading in the secondary market.
"Although [the TFA deal is] fairly priced, we are not participating in the deal because there are more opportunities [on TFA bonds] in the secondary," he wrote in an email. "For example, we bought TFAs maturing in 2026 with a 2021 call [cusip: 64971QJT1] that provided a better kick to maturity (~ 20 basis points) versus the new deal."
The most actively traded NYC TFA bonds are the future tax-secured revenue 2013-I 5s in 2042 that are trading at a yield of 3.71%, according to data provided by Markit. The issuer's future tax secured tax-exempt subordinate - fiscal 2012 subseries F 5s in 2026 are trading at 1.47%.
The NYC TFA bonds received a Aa1 from Moody's Investors Service and triple-A ratings from Standard & Poor's and Fitch Ratings.
The market strengthened Wednesday with yields falling by one basis point for bonds maturing in three to five years, two basis points for bonds maturing in six to nine years and 12 to 30 years, and three basis points for bonds maturing in 10 to 11 years, according to Municipal Market Data's triple-A scale.
The 10-year and the 30-year yields fell by one basis point to 2.32% and two basis points to 3.49% respectively, according to Municipal Market Advisors' data. The two-year held steady at 0.32%.
Treasuries mostly strengthened Wednesday, with 30-year yield falling two basis points to 3.34% and the 10-year benchmark slipping two basis points to 2.54%. The two-year note was unchanged at 0.49%.
Goldman Sachs priced and repriced a three part revenue bond deal for the Oregon Department of Administrative Services Lottery in sections totaling $104.97 million, $91.04 million, and $19.34 million. The $104.97 part of the deal had yields ranging from 0.12% with a 2% coupon in 2015 to 2.58% with a 5% coupon in 2025.
The $91.04 part of the deal has yields ranging from 0.12% with a 2% coupon in 2015 to 2.8% with a 5% coupon in 2027.
The $19.34 section's yields go from 014% with a 5% coupon in 2015 to 2.8% with a 5% coupon in 2027.
The bond all have an optional call in 2024 at par.
The deal is rated Aa2 by Moody's and AAA by S&P.
"It's a good revenue bond, its triple-A, people like putting triple-A bonds in a client's account," a second trader in Chicago said.
Bacani noted the spread has been trading more tightly in recent years
"We like the lottery revenue sector and this name in particular from a credit perspective given the strong debt service coverage levels," he said. "However, credit spreads have contracted significantly in this sector, and we are finding less opportunities in the space. For example, 10-year Florida Lotteries were issued at a +26 basis points credit spread this year compared to +58 basis points credit spread a couple years ago."
He said the Oregon Lottery name typically trades tighter than other lottery revenue bonds, as Oregon is a specialty state.
"With a credit spread of plus-17 basis points in the 10-year maturity, we would only be interested for Oregon clients given the high state income tax rate," he said."
