Mass appeal: Buyer demand spurs taxable muni deal's upsize to $858M
Municipal bond buyers got an early chance to snap up deals on Monday as Massachusetts came to market with a taxable deal that almost doubled in size.
BofA Securities priced Massachusetts' (Aa1/AA/AA+) $858.435 million of taxable Series 2019D general obligation refunding bonds. The deal was originally sized at $441.23 million.
"The Commonwealth was able to take advantage of historically low interest rates and robust investor demand to advance refund bonds in the taxable market. The taxable advance refunding generated present value savings in excess of 17% and locked in long-term financing at attractive cost of funds. This refinancing also allowed the Commonwealth to diversify its investor base by attracting several new institutional investors," the State Treasurer's Office said in an emailed statement to The Bond Buyer.
“As far as demand is concerned, it is not surprising that there is enough demand to upsize the deal,” said Patrick Luby, senior municipal strategist at CreditSights. “With negative yielding debt now making up almost 30% of the Bloomberg Barclays Global Aggregate Index, the opportunity for non-U.S. investors to get into a U.S. state general obligation bond at positive yields provides a good credit diversification opportunity as well as exposure to U.S. dollar-denominated securities. Massachusetts’ GDP in 2018 ($567 billion) ranked higher than Austria ($456 billion) or Ireland ($376 billion). [Foreign GDP estimates are from the IMF.]”
Luby said that for on-shore investors, the total return of the taxable municipal bond market index has been very strong.
“According to the ICE BofAML Indices, year-to-date taxable muni total return is +17.05% (through Friday 8/23), and the Muni Index — while strong — has returned 7.67%. The Corporate Bond Index has earned 13.39%. So again, the opportunity for a taxable U.S. investor to diversify their credit risk into a large and well diversified economy can be compelling,” Luby said.
“The ability (or the hope) to get a block size allotment can pull interest in from investors who may not wish to participate in the secondary market where size, bond structure and liquidity may be less than optimal,” he said.
“From the issuer’s perspective, the ability to borrow at taxable rates in order to refinance older higher-rate tax exempt debt is a rare opportunity so having sufficient demand to upsize can mean lower costs to service their debt and therefore greater flexibility in the Commonwealth’s finances,” Luby said.
Citigroup, Goldman Sachs, Jefferies, JPMorgan Securities, Morgan Stanley, RBC Capital Markets, Siebert Cisneros Shank and Wells Fargo Securities are co-managers. PFM is the financial advisor; Mintz is the bond counsel.
On Tuesday, Massachusetts is also competitively selling $189.635 million of Series 2019E tax-exempt GO refunding bonds. Omnicap Group is the financial advisor; Locke Lord is the bond counsel.
In the competitive arena, the University of Alabama (/AA/) competitively sold $455.745 million of general revenue bonds in three offerings.
JPMorgan Securities won the $369.05 million of Series 2019A bonds with a true interest cost of 2.519%. JPMorgan also won the $72.535 million of Series 2019C bonds with a TIC of 2.191% and the $14.16 million of Series 2019B bonds with a TIC of 1.0691%.
Raymond James & Associates is the financial advisor; Maynard Cooper is the bond counsel.
The Series A bonds will current refund outstanding Series 2009A bonds and to finance capital improvements; the Series C bonds will advance refund some outstanding Series 2010C bonds; the Series B bonds will current refund outstanding Series 2009A bonds and finance some capital improvements.
The Miami-Dade County School District, Florida, (MIG1/NR/NR) is selling $400 million of Series 2019 tax anticipation notes on Tuesday. PFM Financial Advisors is the financial advisor; Greenberg Traurig is the bond counsel.
Ohio (NR/AA+/NR) is selling $300 million of Series 2019A common schools GOs on Tuesday. PFM Financial Advisors is the financial advisor; Ice Miller and Squire Patton is the bond counsel. Proceeds will be used for capital facilities for a system of common schools.
BofA is expected on Tuesday to price Atlanta, Georgia’s (Aa3/AA-/AA-) $687 million of airport general revenue bonds, consisting of Series 2019A bonds not subject to the alternative minimum tax, Series 2019B AMT bonds, Series 2019C non-AMT subordinate lien bonds and Series 2019D AMT subordinate lien bonds.
PNC Capital Markets, Ramirez & Co., Mesirow Financial, Rice Financial Products, Security Capital and UBS are co-managers. Frasca & Associates is the financial advisor; Hunton Andrews Kurth and the Kendall Law Firm are the bond counsel.
Monday’s bond sales
JPM: Building a durable income stream
“In today’s market, investors should be focused on building a durable income stream,” says Richard Taormina, portfolio manager and head of tax aware strategies at JPMorgan Asset Management. “Dips are nothing to fear; they are buying opportunities.”
In a Monday market Q&A report with Priscilla Hancock, senior fixed-income specialist, Taormina said it has been a great year so far for municipal bonds.
Looking at technicals, demand for munis seemed unabated, he said.
“There’s cash coming from everywhere; year to date, [mutual] fund flows have exceeded $43 billion,” he said.
“This is a whole new dimension for the muni market, particularly in a low-rate environment. Another source of demand is individual separate accounts,” he said. “We are on a pace that is double that of 2018, and 2018 was double 2017. People want to own their own bonds; the regulatory environment is creating higher hurdles for advisors; lack of bond insurance makes credit due diligence more difficult; and advisors are finding they can provide clients with better service by focusing on asset allocation.”
He cited tax reform as a key reason for the change.
“It’s absolutely a driver of demand, particularly in specialty states such as California and New York, where munis are the last tax haven. We are also seeing increased demand from foreign buyers who like our market for diversification, yield and high quality duration. Foreign buyers usually start by buying taxable munis, but then they see that they can pick up 30 basis points by buying out-of-index tax-exempts,” Taormina said.
He also said tax reform was impacting the supply side of the muni market.
“Tax reform eliminated issuers’ ability to advance refund, which has limited supply. In addition, states are healthier: Rainy day funds have increased, and states are being fiscally prudent, so they’re borrowing less,” he said.
One area of concern he said was muni buyer’s looking for higher yields.
“The reach for yield is causing buyers to accept weaker covenants. We have skipped some deals where there’s a poor first mortgage. You have to know what you own,” Taormina said. “Investors should be looking at their AA and A rated exposure. Weaker credits may be poised for a downgrade, particularly if we enter a recession. It’s important to do your homework.”
Looking at credit, Taormina said it was specific credits that mattered.
“We want to buy munis that are issued by fiscally prudent entities. We are analyzing credits for downgrade risk as we prepare for the future. Historically, as we neared the end of a cycle we would rotate out of tax-backed credits and into those with dedicated revenue streams,” he said. “This time is different. It’s really credit-specific. Infrastructure across the country is in trouble, with many facilities needing capital investments. The Flint, Michigan, water system is one example. On the other end of the spectrum is New York City’s system, which is well maintained. Another example is health care. We have an aging population, so life care facilities are becoming more prevalent. But there will be winners and losers.”
Munis were stronger in late trade on the MBIS benchmark scale, with yields falling by less than one basis point in the 10- and 30-year maturities. High-grades were also stronger, with MBIS’ AAA scale showing yields falling by one basis point in the 10- and 30-year maturities.
On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the 10-and 30-year year muni GOs remained unchanged at 1.24% and 1.89%, respectively.
“Municipal bonds are mixed today on light volume,” ICE Data Service said in a market comment/ “For the pre-Labor Day week, a healthy [more than] $6.2 billion in new issues is expected to come to market.”
The 10-year muni-to-Treasury ratio was calculated at 80.2% while the 30-year muni-to-Treasury ratio stood at 92.4%, according to MMD.
Treasuries were mixed as stocks traded higher. The Treasury three-month was yielding 1.989%, the two-year was yielding 1.547%, the five-year was yielding 1.432%, the 10-year was yielding 1.538% and the 30-year was yielding 2.033%.
Previous session's activity
The MSRB reported 24,280 trades Friday on volume of $9.30 billion. The 30-day average trade summary showed on a par amount basis of $11.14 million that customers bought $5.84 million, customers sold $3.25 million and interdealer trades totaled $2.06 million.
Texas, California and New York were most traded, with the Lone Star State taking 20.007% of the market, the Golden State taking 13.934% and the Empire State taking 10.061%.
The most actively traded security was the Texas 2019 TRANs 4s of 2020, which traded 36 times on volume of $44.44 million. On Friday, the TRANS, originally priced at 102.843 to yield 1.063%, were trading at a high price of 102.8 cents on the dollar, a low yield of 1.106%.
Last week's actively traded issues
Revenue bonds made up 51.81% of total new issuance in the week ended Aug. 23, up from 51.35% in the prior week, according to IHS Markit. General obligation bonds were 43.27%, up from 43.10%, while taxable bonds accounted for 4.92%, down from 5.55%.
Some of the most actively traded munis by type in the week were from Texas issuers.
In the GO bond sector, the Port Arthur Independent School District 4s of 2044 traded 18 times. In the revenue bond sector, the Texas TRANs 4s of 2020 traded 333 times. In the taxable bond sector, the Houston 2.984s of 2042 traded 34 times.
Treasury auctions discount rate bills
Tender rates for the Treasury Department's latest 92-day and 182-day discount bills were mixed, as the $45 billion of three-months incurred a 1.950% high rate, up from 1.900% the prior week, and the $42 billion of six-months incurred a 1.840% high rate, unchanged from 1.840% the week before.
Coupon equivalents were 1.992% and 1.888%, respectively. The price for the 92s was 99.501667 and that for the 182s was 99.069778.
The median bid on the 92s was 1.920%. The low bid was 1.890%. Tenders at the high rate were allotted 95.19%. The bid-to-cover ratio was 2.74.
The median bid for the 182s was 1.825%. The low bid was 1.790%. Tenders at the high rate were allotted 87.09%. The bid-to-cover ratio was 3.05.
Gary E. Siegel contributed to this report.
Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation. Click here for a brief tour of the Workstation.