Muni supply surges in as Puerto Rico bonds rally on PREPA news
Puerto Rico issues rallied on Tuesday after reports that the island’s electric company struck a preliminary agreement with bondholders to restructure its debts in an effort to emerge from bankruptcy.
In the primary, municipal bond buyers saw some new supply head their way, led by issuers in Texas, Florida, and West Virginia.
In active trading late Tuesday, the Puerto Rico Electric Power Authority’s Series 2010 EEE 6.05% revenue Build America Bonds of 2032 were trading at a high price of 62 cents on the dollar compared with a high of 40.87 cents on Monday, according to the Municipal Securities Rulemaking Board’s EMMA website. Trading was active with volume totaling $14.675 million in 42 trades, compared with $100,000 in four trades on Monday.
The PREPA Series 2010XX 5.25% revenue bonds of 2040 were trading at a high price of 61.75 cents on the dollar compared with a high of 44.25 cents on Monday, according to EMMA. Trading was active with volume totaling $40.18 million in 40 trades, up from $270,000 in five trades on Monday.
In comparison, the benchmark Commonwealth Series 2014A 8% general obligation bonds of 2035 were trading at a high of 40.021 cents on Monday compared to 38.5 cents on Monday, according to EMMA. Trading volume totaled $24.2 million in 10 trades compared to $4 million in two trades on Monday.
PREPA’s settlement with some of its bondholders “affects roughly $3 billion, or 1/3, for PREPA’s $9 billion in debt outstanding,” ICE Data Services said in a market comment Tuesday afternoon. “Talks continue on restructuring the balance of the debt. The participating bondholder group, including Franklin Advisers. BlueMountain Capital, and Knighthead Capital, will exchange their bonds for two new long maturity issues, 5 1/4% 40 year Tranche A and 45 year 7% PIK Tranche B, payable with excess cash flows after Tranche A is paid. The deal needs the approval of the court overseeing Puerto Rico’s restructuring process. If PREPA is restructured, it could pave the way for a privatization of the utility.”
JPMorgan Securities priced San Antonio’s $324.235 million of Series 2018 general improvement bonds, combination tax and revenue certificates of obligation, tax notes, and taxable combination tax and revenue certificates of obligation.
The deal is rated triple-A by Moody’s, S&P and Fitch.
Bank of America Merrill Lynch priced the Louisiana Public Facilities Authority’s $305.24 million of Series 2015 A1, A2 A3 and Series 2017 hospital revenue bonds as a remarketing for the Louisiana Children’s Medical Center.
The deal is rated A-plus by S&P.
Wells Fargo Securities prices the West Virginia Parkways Authority’s $167.14 million of Series 2018 senior lien turnpike toll revenue bonds on Tuesday. The deal is rated AA-minus by S&P and Fitch.
BAML priced two West Virginia healthcare bond deals on Tuesday. The offerings consist of the West Virginia University Health System Obligated Group’s $210.85 million of Series 2018B taxable corporate CUSIP taxable bonds and the West Virginia Hospital Finance Authority’s $57.91 million of Series 2018E R-Float taxable variable-rate refunding revenue bonds for the West Virginia University Health System Obligated Group.
The deals are rated A2 by Moody’s and A by S&P.
In the competitive arena, the Florida Board of Education sold $148.65 million of Series 2018C public education capital outlay refunding bonds.
JPMorgan won the bonds.
The deal is rated triple-A by Moody’s, S&P and Fitch.
In the short-term competitive sector, the Miami-Dade County School District sold $335 million of Series 2018 tax anticipation notes.
Bank of America Merrill Lynch won the TANs. The notes are rated MIG1 by Moody’s.
Since 2008, the state Board of Education has issued about $14.6 billion of bonds, with the most issuance occurring in 2010 when it sold $2.2 billion and the least occurring in 2014 when it sold $787.3 million. Since 2008, the Miami-Dade County Board of Ed has issued about $14.6 billion of debt, with the most issuance occurring in 2008 when it sold $829.5 million; it didn’t come to market in 2017.
On Wednesday, Citigroup is set to price the Washington State Convention Center Public Facilities District’s $974 million of Series 2018 lodging tax bonds and subordinate lodging tax bonds. The bonds will finance part of the construction associated with building an addition.
Also on Wednesday, Maryland is selling two deals totaling over $500 million on Wednesday. The deals consist of $275.3 million of Bidding Group 1 state and local facilities loan of 2018 second series tax-exempt bonds and $234.71 million of Bidding Group 2 state and local facilities loan of 2018 second series tax-exempt bonds.
Tuesday’s bond sales
Click here for the parkway deal
Click here for the PFA deal
Bond Buyer 30-day visible supply at $8.87B
The Bond Buyer's 30-day visible supply calendar decreased $1.15 billion to $8.87 billion for Wednesday. The total is comprised of $3.30 billion of competitive sales and $5.57 billion of negotiated deals.
Lipton sees continued muni demand
As the dog days of summer continue and trading activity reflects a largely muted tone, municipal experts say the asset class is poised for continued strong demand. “The case for munis keeps getting stronger,” Jeffrey Lipton, head of municipal research and strategy and fixed income research at Oppenheimer & Co. Inc., wrote in a report this week.
Summer is putting its usual damper on activity, he noted. “In the municipal space, we are not only operating with thinly staffed trading desks, but we are also trying to maintain market efficiency against a backdrop of lower new issue supply and strong demand,” he wrote in Monday’s report.
“With limited trading activity, there is a tendency to compromise price discovery, but we view this as a largely transient market condition,” he added.
Lipton expects issuance and trading patterns to return to more liquid levels as the market enters the last four months of the year.
Political and legislative factors are also challenging the municipal market, yet Lipton believes the asset class can withstand any potential pressure. “Whenever there is active discussion of reducing taxes and devising offsetting revenue adjustments, munis logically believe that they are under attack,” he wrote. “While this may attempt to undermine market conviction, we do not think that there will be a meaningful impairment to demand and municipal bond fund flows will likely end the year in a net-positive position.”
Private-activity bonds may find themselves “in the line of fire,” according to Lipton, who pointed to the attempted termination of tax-exempt PAB authorization by the House Ways and Means Committee last year. He said the municipal industry must “remain diligent and stand ready to lobby against further Congressional diminution of the asset class.”
Municipal bonds were mixed on Tuesday, according to a late read of the MBIS benchmark scale. Benchmark muni yields fell less than one basis point in the one- to 12-year and 17- to 27-year maturities, rose less than a basis point in the 13- to 15-year and 29- and 30-year maturities and remained unchanged in the 16-year and 28-year maturities.
High-grade munis were also mixed, with yields calculated on MBIS’ AAA scale falling less than one basis point in the one- to nine-year and 17- to 25-year maturities and rising less than a basis point in the 10- to 16-year and 26- to 30-year maturities.
Investors selling bonds on bid wanted lists are in high demand — as new issuance continue as to be skimpy, according to a New York municipal portfolio manager.
“We sold a few bonds for specific client needs and the dealer response was like dogs looking at a steak bone,” the portfolio manager said.
Municipals were steady on Municipal Market Data’s AAA benchmark scale, which showed both the 10-year muni general obligation yield and the yield on the 30-year muni maturity remaining unchanged.
Treasury bonds were stronger as stocks traded higher.
On Tuesday, the 10-year muni-to-Treasury ratio was calculated at 82.7% while the 30-year muni-to-Treasury ratio stood at 97.6%, according to MMD. The muni-to-Treasury ratio compares the yield of tax-exempt municipal bonds with the yield of taxable U.S. Treasury with comparable maturities. If the muni/Treasury ratio is above 100%, munis are yielding more than Treasury; if it is below 100%, munis are yielding less.
Previous session's activity
The Municipal Securities Rulemaking Board reported 35,727 trades on Monday on volume of $10.67 billion.
New York, California and Texas were the states with the most trades, with the Empire State taking 15.669% of the market, the Golden State taking 15.559% and the Lone Star State taking 12.428%.
Treasury sells $65B 4-week bills
The Treasury Department Tuesday auctioned $65 billion of four-week bills at a 1.910% high yield, a price of 99.851444.
The coupon equivalent was 1.939%. The bid-to-cover ratio was 2.70.
Tenders at the high rate were allotted 20.69%. The median rate was 1.880%. The low rate was 1.850%.
Gary 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, or contact Ziad Saba at 212-803-6079 for more information.