WASHINGTON - Maryland will begin selling bonds to retail investors on a negotiated basis tomorrow for three days and will then sell bonds to institutional investors on a competitive basis on Wednesday in a $485 million hybrid transaction.
The underwriting structure indicates a gradual return to competitive deals, which traditionally have been less costly for issuers, particularly those with gilt-edged ratings, market participants said. But the credit crisis has made such deals harder to do, they said.
The dollar amount of competitive deals declined 17% the first half of 2009 compared with the same period last year, according to Thomson Reuters.
But with the hybrid structure, large high-grade issuers "may be a half-step back" to competitive deals, said Matt Fabian, managing director of Municipal Market Advisors in Concord, Mass.
The hybrid structure offers retail investors a better opportunity to buy local debt. Maryland officials and other issuers who have tried this structure said investors have called asking for opportunities to buy state or county debt, the interest of which is exempt from local, state and federal income taxes.
However, some wealth managers and other market participants said bond yields, especially from these high-grade issuers, may be too low to attract retail demand.
Maryland used this same structure for a $410 million deal in March. The state is one of at least four issuers to try a hybrid transaction this year. Triple-A Arlington County, Va., sold a $70.5 million hybrid GO deal earlier this month and Massachusetts issued $621.4 million the same way in May. Triple-A Delaware has financed its GO debt with the structure since at least 2006, according to Karen Morton, debt manager in the state treasurer's office.
"The motivation for Maryland has been the desire of Maryland residents to own triple-A bonds," said Patti Konrad, director of debt management in that state treasurer's office. Institutions would "gobble up" the state bonds, leaving little opportunity for the state's retail investors to buy them, she said.
The bonds, rated triple-A by Standard & Poor's, Moody's Investors Service and Fitch Ratings, will be sold in three series. The $235 million sale of Series A begins tomorrow and continues on Monday and Tuesday. The $200 million of Series B bonds will be sold to institutions on Wednesday. Maturities for these bonds will range from three to 14 years.
The $50 million of Series C bonds will be sold on Wednesday as either tax-exempt bonds or taxable direct-pay Build America Bonds. Broker-dealers will submit two bids, one for tax-exempt bonds and one for BABs, and the state will take the lower of the two. The Series C bonds will have a 15-year maturity. However, the amounts are preliminary and could be changed at pricing according to demand, Konrad said.
To attract retail buyers, Maryland has had to publicize the deal. Konrad said the state has spent about $50,000 on advertising and for a Web site, www.buymarylandbonds.com.
Some investors are not convinced Maryland will have the retail demand it would like for this deal. In Maryland's March deal, retail investors scooped up the high-grade munis, Konrad said. But market observers said yields currently have dropped to the point where retail investors may look elsewhere.
Derek Johnson, vice president and director of Ferguson Asset Management Inc., in Potomac, Md., who manages assets for families and small businesses, said he has not received any expressions of interest from clients for the Maryland bonds. He said his clients would only be interested in short-term debt because of the potential for interest rates to rise.
"Why lock in this low rate now for such a long period of time?" he said. Though investors would be attracted to the security of a triple-A issuer, "it keeps yields very low. It's a double-edged sword," he said.
A 10-year Maryland GO bond had a yield of 3.03% yesterday, or 82% of a 10-year Treasury yield, according to Municipal Market Data.
"Retail is driven by nominal yields," Fabian said. "When nominal yields get too low, retail demand dries up." It will be harder for Maryland to attract retail investors with this deal versus the one in March because of the lower yields and uncertainty about inflation, he said.
The negotiated portion of the deal has 10 underwriters, with Citi serving as lead. Rounding out the syndicate are M&T Securities Inc., Merrill Lynch & Co., RBC Capital Markets, Siebert Brandford Shank & Co., Barclays Capital, Goldman, Sachs & Co., JPMorgan, Loop Capital Markets LLC, and Morgan Keegan & Co.
Kutak Rock LLP is bond counsel and Miles & Stockbridge PC is underwriters' counsel. Public Financial Management Inc. will serve as financial adviser.