The New Jersey Turnpike Authority came to market yesterday with over $1 billion of Build America Bonds, the largest offering of this type of security so far.
Morgan Stanley priced $1.375 billion of turnpike revenue BABs for the Turnpike Authority. The bonds, which mature in 2040, are priced at par to yield 7.41%. At the same time, $375 million of tax-exempt bonds were priced for the authority, also by Morgan Stanley. They mature in 2028 and 2040, yielding 5.03% with a 5% coupon and 5.35% with a 5.25% coupon in 2040, respectively. The bonds are callable at par in 2014 and 2019, respectively.
"The deal was very well received in both marketplaces, and well oversubscribed," said Dennis Enright, a principal at NW Financial, the issuer's financial adviser. "This is the first BAB deal of a billion dollar in size, which is sort of a benchmark level for trading in the taxable market, so I think it will provide a lot of liquidity to holders. We were able to price at 370 basis points over the 30-year Treasury, which is better than Verizon Communications priced a couple of weeks ago - they were 387 over - so we're pretty pleased with the pricing."
"The 30-year Treasury was a 3.71% at the time that we priced, so the net cost after the payment from the federal government is about a 4.8% rate on the tax-exempt, and the all-in costs, even including the tax-exempts, were under 5%," Enright said. "So we think it's a very successful sale. It proved the marketability of the bonds, and it validated the trading value of the turnpike as a credit, even in both marketplaces."
The deal also contains a make whole call of the 30-year Treasury value plus 50 basis points. The bonds are rated A3 by Moody's Investors Service, A-plus by Standard & Poor's, and A by Fitch Ratings.
In addition to pricing 370 basis points over the 30-year Treasury, the BABs also priced 297 basis points higher than the Municipal Market Data 30-year triple-A general obligation scale which was 4.44% yesterday and 197 basis points higher than the MMD single A scale which was 5.44%.
Last week, the University of Virginia sold one of the first BAB deals, worth $250 million, the largest such deal prior to yesterday. That deal priced 255 basis points higher than that day's 30-year Treasury scale, and 154 basis points higher than that day's MMD triple-A GO yield curve.
Also in the market this week is a $4 billion taxable general obligation deal from California that could include billions of BABs. The sale - which is expected to be the largest BAB offering to date that will serve as a benchmark for future transactions - will be priced by a syndicate led by co-senior managers Goldman, Sachs & Co., JPMorgan, Barclays Capital, and Morgan Stanley with bullet maturities in 2034 and 2039.
The state is not singling out retail investors for the transaction, but instead is conducting an Internet road show and one-on-one calls with the taxable bond buyers that don't usually buy California bonds, such as pension funds and foreign banks. The state is rated A2 by Moody's and A by Standard & Poor's and Fitch.
Meantime, yields in the secondary market were lower by about three to five basis points overall.
"We're definitely feeling a bit better today," a trader in New York said. "Particularly on the long end, we're seeing pretty nice gains. Even on the shorter maturities, you're still seeing gains of two or three basis points. Out long, it might be five or six. There's a lot of interest in these Build America Bonds, and I think that's probably a big factor."
The Treasury market showed gains yesterday. The yield on the benchmark 10-year note, which opened at 2.94%, finished at 2.85%. The yield on the two-year note was quoted near the end of the session at 0.92% after opening at 0.96%. The yield on the 30-year bond, which opened at 3.80%, was quoted near the end of the session at 3.70%.
As of Friday's close, the triple-A muni scale in 10 years was at exactly 100.0% of comparable Treasuries, according to MMD. Additionally, 30-year munis were 119.6% of comparable Treasuries. Also, as of the close Friday, 30-year tax-exempt AAA-rated general obligation bonds were at 131.45% of the comparable London Interbank Offered Rate.
In economic data released yesterday, the composite index of Leading Economic Indicators fell 0.3% in March. LEI decreased a revised 0.2% in February. Economists polled by Thomson Reuters predicted LEI would be down 0.2% in the month.