Milwaukee faces choppier ride in pricing deal amid coronavirus headwinds
Milwaukee headed into the market Thursday with its eyes wide open but the limited interest and pricey bids drawn on some pieces of the competitive sale proved disappointing as COVID-19-driven worries vex the market.
The city received just two bids each on three tranches of borrowing. That compares to eight to 14 bids on its annual revenue anticipation note and general obligation note and bond sale last spring.
“Over the long term, the rates aren’t bad as absolute levels but it was disappointing,” said Richard Li, public debt specialist for Comptroller Martin Matson who manages city debt. “The whole market is locked up. My hope was if a large deal came into the market it would help with pricing stablity but I think liquidity is such a big issue right now. Hopefully it will stabilize when the Fed comes into the market and buys munis."
Li was referencing provisions in the $2 trillion COVID-19 emergency relief bill — the Coronavirus Aid, Relief and Economic Security Act — encouraging the Fed to start voluntary purchases of longer-maturity municipal securities through a new $454 billion Economic Stabilization Fund.
The city ended up rejecting the two bids — both from JPMorgan companies at 2.14% and 2.15% on its $120 million of nine-month revenue anticipation notes. The city directly placed the paper with US Bank at a 1.35%. The city had notified the market of that option in the offering statement.
The city viewed a yield between 1.65% and 1.80% as “reasonable,” Li said.
The comptroller made the decisions in consultation with its advisor PFM Financial Advisors LLC and bond counsel Katten Muchin Rosenman LLP and Hurtado Zimmerman SC.
In a sign of just how complicated deal pricings can be as banks move employees to alternative locations or keep them at home amid stay-at-home and shelter-in-place government directives aimed at slowing the spread of COVID-19, Li could not reach the JPMorgan desk. He left a message and posted the rejection on Parity system.
Matson also initially intended to reject the low bid from Citi with a true interest cost of 2.82% on its $160 million of general obligation notes and bonds. State statute requires that the city sell long-term bonds competitively but it can reject bids and then seek to negotiate.
Comptroller officials described a terse exchange with Citi during which Citi refused to negotiate pricing levels because it had already found buyers or to reduce its own spread of 2.50% — a level Li said he hasn’t seen since he started in the business in 1985. The city decided to accept the bid to maintain market relationships.
On the short end, Li said the prices landed along expected levels including a 1.65% on the earliest maturity, which the finance team viewed as confirmation that the RAN yield was just too high. But the longer end came in high, with 4% coupon bonds in 2035 priced to yield 3.08%.
JPMorgan submitted the cover bid with a 2.85% TIC.
The city was willing to pay a slightly cheaper price because it didn’t “want to play the market” after notifying it that it was moving forward with the sale but “but we also weren’t going to be taken for a ride," Li said.
A small $15 million taxable piece of the deal also received two bids. The winning bid came from Robert W. Baird with a TIC of 3.08% — a level the comptroller viewed as reasonable based on what PFM had expected. The cover came from Citi at 3.60%.
The city had timed the sale ahead of the April 7 election — in which voters will select a new comptroller to replace Matson who is retiring and other city offices — to avoid administrative complications before new officeholders were sworn in.
The finance team watched the market closely over the last month and considered a delay. After two weeks of tumult that saw massive liquidity-driven outflows and skyrocketing rates, some steadying occurred late last week and the week opened on a more measured note as the market digested recent Fed actions and passage of the CARES Act.
Several borrowers on the negotiated day-to-day calendar sent signals they might be ready to move forward. That was Monday. Li said the finance team was inclined to stick with the Thurdsay sale date along with the option to reject bids if the market froze up.
Another large wave of selling hit the market on Wednesday, with yields rising by more than a half percentage point on the long end. Yields Thursday rose by as much as 10 basis points as selling pressure emerged on the short end of the curve following Wednesday's 50-plus basis point sell-off.
“It fell apart by the time it came time for us to sell,” Li said.
The city came into the market with two new negative outlooks attached to its AA-minus GO ratings from Fitch Ratings and S&P Global Ratings. The city’s budget relies heavily on property tax and state revenue sharing funds so while not immune to tax fallout from COVID-19 driven business shutdowns, recessionary risks lessened.
The negative outlooks were driven by ongoing draws on reserves and weaker 2019 results. While buyers are increasingly scrutinizing credit, one trader said Milwaukee still carries strong ratings and its market results were driven by the now hour-by-hour market fluctuations.