While market ponders loss of PABs, one takes center stage

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Market participants reacted negatively to the proposal in the tax reform bill to eliminate advanced refundings and private activity bonds, saying it would crimp volume and the savings issuers can get when rates fall. Against that backdrop, strong demand met the Virginia Small Business Financing Authority's $737 million PAB offering in the primary.

In the biggest deal of the week, Bank of America Merrill Lynch priced the Virginia Small Business Financing Authority’s $737 million of senior lien private activity revenue bonds for the Transform 66 P-3 Project. The bonds yield 3.71% with a 5% coupon in 2047, 3.79% with a 5% coupon in 2049, 3.90% with a 5% coupon in 2052 and 4.00% with a 5% coupon in 2056. The deal is rated Baa3 by Moody’s Investors Service and BBB by Fitch Ratings.

At repricing yields were bumped eight basis points in the 2047 and 2049 maturities, seven basis points in 2052 and five points in 2056.

“This deal was very attractive and with the way it was bumped, the demand was very strong,” said a New York trader. “It also helped that there are lots of people out their looking for yield and this was a yieldier deal.”

Since 2007, the authority has issued about $2.7 billion of debt with the most issuance before this year occurring in 2012 when it sold $905 million. It did not come to market in 2013, 2015 or 2016.

Muni pros said a proposed House Republican tax bill would shrink the municipal market by halting advance refundings and private activity bonds after the end of this year.

“I put the likelihood of bill passage at somewhere below 50%, based primarily on the contentious D.C. environment and competing lobbying efforts by various interest groups,” said Alan Schankel, managing director and municipal strategist at Janney. “That being said, I suspect if a bill is eventually passed, the provision to eliminate advance refundings, by making interest taxable, will make the final cut.”

He said passage of this restriction on advance refundings will certainly have a negative impact on new municipal issue volume in future years, albeit with a uptick in volume through year-end 2017 as issuers and bankers advance refund before the door closes, even if savings are small.

Matt Fabian, partner at Municipal Market Analytics, said that MMA has been pessimistic that Republicans can pass a tax reform bill before year-end and the latest news coming out today increases the firm's conviction in that.

“Advance refundings are less important now, then they were 10 years ago, but state and local issuers still use them to lock in low interest rates,” he said. “The loss of advance refunding capability could lead issuers to dial back investors' call protection to allow earlier current refundings. This will push yields modestly higher in the primary market and would hurt crossover investor demand perhaps the worst.”

Tom Kozlik, managing director and municipal strategist at PNC Capital Markets said that while it is difficult to say how it plays out, comprehensive tax reform is difficult to pass even under optimal circumstances.

“It took lawmakers three-ish years to hammer out 1986 tax reform. Therefore, it seems like time could be working against the proposal. But, you never know,” he said. “State and local governments are currently dealing with the new fiscal reality, which includes rising pension obligations, rising healthcare costs, needed infrastructure upgrades, often negative demographic trends, etc. Restricting refundings could, at a time when some state and local governments are struggling, take a valuable financial tool out of the toolbox.”

Muni market participants had pushed hard for PABs to be expanded and used for infrastructure. Advance refundings have made up as much as a quarter of the new issuance market for munis. Under current tax law, all governmental bonds can be advance refunded once under current tax law. Refundings provide savings to issuers when interest rates fall.

The bill would also prohibit the use of tax-exempt bonds for stadiums as of Nov. 2 of this year, when the bill was introduced, and it would put a halt to all tax credit bonds.

“[I am] not surprised lawmakers would go after private activity bonds that fund non-traditional government enterprises- easy target without much opposition I would think,” said Kozlik. “Limiting or eliminating PAB for infrastructure related uses will increase financing costs for states, local governments and taxpayers.”

The trader said that he feels the market needs to pump the brakes as far as its reaction to the news.

“It has only been a few hours since this came out. Sure, the PABs and advanced refunding details were surprises but I think we have to wait and see how it gets dissected as the process plays out,” he said.

AP-MBIS 10-year muni at 2.313%, 30-year at 2.872%
The Associated Press-MBIS municipal non-callable 5% GO benchmark scale was slightly stronger at Thursday’s market close.
The 10-year muni benchmark yield fell 2.313% from 2.328% from the final read on Wednesday, according to Municipal Bond Information Services, a national consortium of municipal interdealer brokers. The AP-MBIS 30-year benchmark muni yield declined to 2.872% from 2.879%.

The AP-MBIS benchmark index is a yield curve built on market data aggregated from MBIS member firms and is updated hourly on the Bond Buyer Data Workstation.

Primary market
Santa Clara County, Calif., sold $294.105 million of general obligation refunding election of 2008 bonds competitively. The deal was won by Wells Fargo with a true interest cost of 3.03%. The bonds were priced to yield 0.95% with a 5% coupon in 2018 and from 1.12% with a 5% coupon in 2020 to 3.35% with a 3.25% coupon in 2039. The deal is rated AAA by S&P Global Ratings and AA-plus by Fitch.

BAML also priced Columbus, Ohio’s $185.69 million of various purpose unlimited tax refunding bonds. The bonds were priced to yield 0.99% with a 2% coupon in 2018, from 1.60% with a 4% coupon in 2023 to 1.72% with a 5% coupon and from 2.10% with a 4% coupon in 2027 to 2.82% with a 4% coupon in 2033.The deal carries top ratings of AAA by Moody’s, S&P and Fitch.

RBC Capital Markets priced the Connecticut Housing Finance Authority’s $121.165 million of mortgage finance program bonds. The $101.865 million of 2017 series F, subseries F-1 bonds were priced at par to yield 1.60% in 2021 and from 1.875% and 1.95% in a split 2023 maturity to 2.85% in a split 2029 maturity. A term bond in 2033 was priced at par to yield 3.20% and a term bond in 2047 was priced to yield approximately 2.080% with a 4% coupon.

The $19.3 million of 2017 series F, subseries F-2 alternative minimum tax bonds were priced at par to yield from 1.15% and 1.25% in a split 2018 maturity to 2.00% and 2.10% in a split 2022 maturity. The deal is rated triple-A by Moody’s and S&P.

Secondary market
Top-shelf municipal bonds were stronger to close out Thursday. The yield on the 10-year benchmark muni general obligation was two basis points lower to 2.00% from 2.02% on Wednesday, while the 30-year GO yield was also two basis points lower to 2.80% from 2.82%, according to a final read of Municipal Market Data`s triple-A scale.

U.S. Treasuries were stronger at the market close on Thursday. The yield on the two-year Treasury dipped to 1.61% from 1.62%, the 10-year Treasury yield fell to 2.35% from 2.37% and yield on the 30-year Treasury bond slipped to 2.83% from 2.86%.

On Thursday, the 10-year muni-to-Treasury ratio was calculated at 85.2% compared with 83.2% on Wednesday, while the 30-year muni-to-Treasury ratio stood at 98.9% versus 98.6%, according to MMD.

Tax-exempt money market funds see outflows
Tax-exempt money market funds experienced outflows of $133.1 million, lowering total net assets to $128.20 billion in the week ended Oct. 30, according to The Money Fund Report, a service of iMoneyNet.com.

This followed an inflow of $179.1 million to $128.33 billion in the previous week.

The average, seven-day simple yield for the 199 weekly reporting tax-exempt funds rose to 0.48% from 0.46% the previous week.

The total net assets of the 832 weekly reporting taxable money funds decreased $9.12 billion to $2.580 trillion in the week ended Oct. 31, after an inflow of $3.18 billion to $2.589 trillion the week before.

The average, seven-day simple yield for the taxable money funds increased to 0.70% from 0.69% the prior week.

Overall, the combined total net assets of the 1,031 weekly reporting money funds decreased $9.25 billion to $2.708 trillion in the week ended Oct. 31, after inflows of $3.36 million to $2.718 trillion in the prior week.

Data appearing in this article from Municipal Bond Information Services, including the AP-MBIS municipal bond index, is available on the Bond Buyer Data Workstation. Click here for a brief tour of the Workstation, or contact Vanessa Kim at 212-803-8474 for more information.

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Primary bond market Tax reform Secondary bond market Virginia Small Business Financing Authority County of Santa Clara, CA City of Columbus, OH Connecticut Housing Finance Authority