Minnesota will lead a modest slate of new state and local government debt issuance this week as it comes to market with a competitive $865 million general obligation deal.
Municipalities in the U.S. are scheduled to float $5.45 billion of debt this week, according to data from The Bond Buyer and Ipreo. The calendar includes $4 billion in negotiated deals and $1.45 billion in competitive deals.
The market digested $7.59 billion of new municipal bonds last week.
Municipalities have found a receptive audience for their debt in 2010. Based on the Municipal Market Data scale, the yield on triple-A rated 10-year muni paper has held at 2.57% — tied for the record low — for eight straight days.
State and local government debt has appreciated more than 2% this year, according to the S&P National AMT-Free Municipal Index.
Ron Schwartz, who manages two mutual funds with $1.2 billion in assets for RidgeWorth Investments, said the market has had no trouble absorbing new debt this year.
The municipal bond market continues to be buoyed by an imbalance of supply and demand, Schwartz said, with demand rampant thanks to low Treasury yields and expectations for higher taxes, and tax-exempt supply squeezed by the Build America Bonds program.
Though municipalities are on pace to issue nearly $400 billion of new bonds this year, the story continues to be municipalities’ migration into the taxable market.
Supply of tax-exempt paper is down 20% so far in 2010, according to Thomson Reuters.
While municipalities have sold an average of $7.5 billion of debt a week this year, according to Bloomberg LP, an average of $2.5 billion of that has been taxable.
With the exception of last week, tax-exempt supply has been particularly light lately, with just $3.3 billion in the week ended July 16, $2.3 billion in the week ended July 9, and $3.3 billion in the week ended July 2, based on Bloomberg data.
The average weekly tax-exempt supply of about $5 billion in 2010 is roughly $1 billion less than it was at this point in 2009 and 2008, and more than $2 billion less than it was at this point in 2007.
“There’s strong demand and limited supply,” Schwartz said. “The supply-demand imbalance is there in the market.”
Schwartz does not foresee any deals on this week’s slate having enough impact to dent the tax-exempt market.
The Minnesota offering is broken into three pieces. A $635 million tax-exempt component will raise proceeds to finance programs and projects for a variety of purposes, including educational facilities, parks, and pollution-control facilities.
A second tax-exempt piece, with $225 million in par value, will raise money for improvements and projects on the state’s trunk highway system.
A $5 million taxable portion of the deal will be used to finance programs for the state’s Rural Finance Authority.
Both tax-exempt portions will spread maturities evenly from 2011 to 2030. The taxable portion will mature in 2015.
Minnesota will have $5.6 billion of outstanding GO debt after this deal. The state is rated AAA by Fitch Ratings and Aa1 by Moody’s Investors Service.
Also on the calendar is an $850 million New York City Transitional Finance Authority deal, which is scheduled to price Wednesday.
New York City is expected to finance about half its capital projects through the TFA, whose debt is backed by the city’s income and sales taxes.
Moody’s rates the issue Aa1.
The deal, led by Citi, will have four components, three of which are taxable and one of which is tax-exempt.
The taxable portions include $470 million of BABs, $125 million of qualified school construction bonds, and $100 million of adjustable-rate taxable paper.
The tax-exempt portion has a $155 million face value.
The personal income tax revenues that secure bonds issued by the TFA totaled $6.7 billion in fiscal 2009 and are projected to increase to $8.7 billion by fiscal 2014. The 4.5% sales tax led to $4.7 billion in tax receipts in fiscal 2009, and is projected to rise to $6 billion by 2014.
The income and sales taxes were sufficient to cover the TFA’s debt-service costs more than 10 times over last year.
“It is a good credit,” said Fred Yosca, manager of underwriting and trading at BNY Mellon. “It is a solid double-A.”
Yosca also cited the siphoning of tax-exempt supply into the taxable market as enforcing a strong tone for municipals.
The 10-year Treasury yield being under 3% helps keep municipal yields palatable, Yosca said. The 10-year triple-A muni yields about 86% of the 10-year Treasury, according to Municipal Market Data.
“We haven’t had any downdrafts, really,” Yosca said.
He pointed out that the front end of the yield curve has been particularly strong. The two-year triple-A muni yield has fallen nearly 20 basis points in 2010.
At 0.37%, the two-year municipal yield is at 62.7% of the two-year Treasury — meaning even an investor in the 35% tax bracket earns a higher after-tax yield on a two-year Treasury than a two-year muni.
The Michigan Finance Authority plans to sell $745.9 million of state aid revenue notes in a deal lead by Siebert Brandford Shank & Co.
The proceeds will be used to lend money to school districts in the state to help cover cash shortfalls expected to occur in the next year.
The notes will mature in August 2011, and are secured by letters of credit from either Scotia Bank or JPMorgan.
The state aid revenue notes are not obligations of Michigan. The bonds are collateralized by the school districts’ loan repayments, which in turn are secured mainly by local property taxes.
The Miami-Dade County Expressway Authority is selling $350 million of bonds backed by revenues from tolls charged on the five highways the agency operates.
Citi is running the deal.
The authority is rated A by Standard & Poor’s and A-minus by Fitch.
The expressway collected $113 million in tolls last year, while its debt service was $54.5 million.
On Wednesday, Snohomish County, Wash., plans the competitive sale of $122.2 million of bonds to refinance existing debt.
The bonds will begin maturing in 2011, with the final maturity in 2030. Proceeds will be used to advance refund some or all of about $117 million of outstanding debt issued in 2001.
The weighted average interest cost on the debt to be refinanced is 5.3%.
The county, which has a population of 704,300, pledged to collect property taxes sufficient to repay these bonds, subject to limitations on how high the tax rate can go.
Snohomish’s taxable property value totals $94.1 billion, with Boeing Co. the biggest taxpayer.