A $2.6 billion California general obligation bond financing will thunder into the municipal market to help boost volume over $8 billion in what is one of the largest one-week supply scenarios so far this year.
All the extra supply may force underwriters to bump yields in order to get investors’ attention on the heels of last Thursday and Friday’s weakness, according to one market expert.
“I think because there’s a concern that the market might continue to deteriorate, investors are going to look for a little more incentive to take on risk in the face of a declining market,” said Howard Mackey, president of trading and underwriting at Rice Financial in New York City.
On the heels of noticeable weakness last Thursday and Friday sparked by a risk-on trade that pushed the Dow to record levels and saw municipals follow Treasuries higher, Mackey said this week’s new deals may have to be adjusted to reflect the current weakness in the market.
In just a week’s time, he pointed out, the benchmark, 10-year triple-A GO bond tracked by Municipal Market Data moved 13 basis points to 1.94% last Friday from a 1.81% the previous week. The benchmark 30-year triple-A GO was at 3.02% on Friday morning — 12 basis points higher than the prior week, according to MMD.
“Spreads are going to have to widen in addition to the absolute increases you are seeing in yields,” he said. “There has been a fair amount of deterioration in the muni area, and that follows the fact that we are seeing deterioration of the Treasury market as well, so more supply coming into the market is going to test our levels.”
Underwriters and investors will have their hands full with plenty of paper to choose from as issuers in New York, Indiana and North Carolina will add sizable offerings to the new-issue mix.
The California deal is expected to be priced in four series and will debut with positive ratings movement from two of the three major rating agencies. Fitch Ratings revised California’s outlook to positive from stable on March 4, citing fiscal management improvements in recent years and two years of structural budget progress. Both factors enabled the state to reduce budgetary borrowing. S&P upgraded California’s GO rating to A from A-minus in January, while Moody’s Investors Service rates the GO debt A1.
Mackey said the credit improvements on California’s GO pledge will help get investors off the sidelines, but the size of the deal may factor into the final scale being a bit cheaper, nonetheless.
“Because of the size of the financing, attention is going to have to be paid to what the real spreads have to be to attract the amount of demand necessary to get the entire deal done,” he said.
The larger tax-exempt portion totals $2.1 billion and is expected to consist of $1.081 billion various-purpose GOs and $1.071 billion of various-purpose GO refunding bonds, both priced by JPMorgan on Thursday, following a two-day retail order period on Tuesday and Wednesday. The structure of the offering had not yet been finalized by press time.
The other two taxable California series total around $540 million consisting of $310.5 million of various-purpose GO debt and $228 million in a GO remarketing of taxable Build America Bonds. Both are slated to be priced by Goldman, Sachs & Co. on Wednesday.
New York issuers will also play a prominent and active role in this week’s market as two significantly sized deals are expected to be priced in the path of other recent sizable New York issues.
The Empire State Development Corp. is slated to issue $625.67 million of tax-exempt state personal-income tax revenue bonds in a negotiated deal senior-managed by Wells Fargo Securities and expected to be priced on Wednesday, following a retail order period on Tuesday. The bonds will be structured as serials maturing from 2019 to 2043. The ESDC will also ofer $201.88 million of taxable general-purpose state PIT bonds in the competitive market on Wednesday.
For the second time in as many weeks, the New York City Water Finance Authority will return to market — this time to issue $509 million of second resolution, fixed-rate, tax-exempt bonds water and sewer revenue refunding bonds as Series 2013 DD. The negotiated deal will be led by book-runner Ramirez & Co. and is slated for pricing on Tuesday following a retail order period on Monday. The bonds are expected to be rated Aa2 by Moody’s and AA-plus by Standard & Poor’s.
The authority sold $456 million of fixed-rate, tax-exempt new money on Feb. 20, when retail investors pre-purchased $56 million. Yields to maturity varied by coupon and ranged from 3.86% to 4.28% in the 2047 bullet maturity.
A $641.3 million sale from the Indiana Finance Authority will round out the week’s activity when it is priced by Bank of America Merrill Lynch on Tuesday. The private activity bonds will mark the first major financing for a $2.6 billion bi-state Ohio bridge project spanning the Ohio River in Indiana and Kentucky that will address transportation needs, alleviate congestion and promote economic development.
The Series A bonds consist of $445.4 million of revenue debt in an all-term structure that runs between 2035 and 2051, while the $196 million Series B consists of a bullet maturity in 2019, which is subject to a 2017 call. Both series are expected to be rated BBB by Standard & Poor’s and Fitch.
Series A is backed by a pledge of availability, while Series B is backed by milestone payments, both of which are considered appropriation payments made by the state, which is rated triple-A.