A muni treat, as issuance increases to end October

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The municipal bond market is in line for Halloween treats in the last week of October as issuance is projected to rise.

Ipreo forecasts weekly bond volume will increase to at least $6.5 billion from a revised total of $5.7 billion in the prior week, according to updated data from Thomson Reuters. Ipreo’s estimates were calculated before the Chicago deal was approved for sale. The calendar is composed of $5.8 billion of negotiated deals and $703.3 million of competitive sales.

Chicago’s Sales Tax Securitization Corp.’s $1.31 billion deal headlines the new issue calendar. The Securitization Corp. was established last year to leverage city sales tax revenue to refund outstanding debt. Loop Capital Markets will be the lead manager on the deal, which is expected to price on Wednesday in the third sale since its inception.

The sale “should see strong demand,” said Alan Schankel, managing director and municipal strategist at Janney. “Despite the recent S&P downgrade based on criteria change, the deal will attract yield hunters, since yields are likely to be 100 or more basis points over AAA benchmarks.”

S&P lowered the rating Tuesday one notch in a move driven by its revised Priority Lien criteria published Monday.

“The downgrade reflects our application of our 'Priority Lien' criteria, which factors in both the strength and stability of the pledged revenues, as well as the general credit quality of the municipality where taxes are distributed and/or collected (the obligor's creditworthiness)," said S&P analyst Carol Spain. “The priority-lien rating on these bonds is limited by our view of Chicago's creditworthiness (BBB+/Stable) and is constrained from going higher unless there is an improvement in the OC.” The criteria caps the rating at four notches above the obligor’s rating and Chicago’s GOs are rated BBB-plus.
The offering is comprised of $917.64 million of Series 2018C sales tax securitization bonds and $388.56 million of Series 2018D taxables sales tax securitization bonds and carries expected ratings of AA-minus by S&P Global Ratings and AAA by Fitch Ratings and Kroll Bond Rating Agency.

The corp. was authorized to refund outstanding sales tax and general obligation debt and the fund can go up to $3 billion. This upcoming third tranche, was original scheduled for $665 million but by upsizing it, they might not need the fourth tranche that has been planned for 2019.

There will also be a bevy of deals coming from California issuers next week as JPMorgan Securities gets set to price the Los Angeles Department of Airports’ $714 million of subordinate revenue bonds, Siebert Cisneros Shank & Co. gets ready to price Los Angeles’ $362 million of wastewater subordinate revenue bonds, Morgan Stanley gets set to price the San Mateo Community College District’s $318 million of general obligation bonds and Barclays Capital gets set to price the San Mateo County Joint Powers Financing Authority’s $260 million of lease revenue bonds.

The Department of Airports for Los Angeles – recently off an upgrade of its subordinate revenue bonds to Aa3 from A1, will be landing in the market also on Wednesday.

“Airport bonds in general are having a strong run with US enplanements continuing on a post-recession growth track including a 2.7% increase in 2017 vs 2016 at the 30 largest US airports,” said Schankel. “LAX, which had enplanement growth of 4.0% in the same period, should see strong demand for next week’s sale, benefitting from solid in-state demand due to California’s high marginal income tax rate and the 2017 tax law’s limits on deductibility of state income taxes on federal returns.”

Secondary market
Municipal bonds were stronger on Friday, according to a late read of the MBIS benchmark scale. Benchmark muni yields fell as much as one basis point in the one- to 30-year maturities. High-grade munis were stronger, with yields calculated on MBIS' AAA scale falling as much as a basis point across the curve.

Munis were stronger on Municipal Market Data’s AAA benchmark scale, which showed the yield on both the 10-year muni general obligation and the yield on 30-year muni maturity falling two basis points.

On Friday, the 10-year muni-to-Treasury ratio was calculated at 87.3 while the 30-year muni-to-Treasury ratio stood at 100.3%, 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.

Week's actively traded issues
Some of the most actively traded munis in the week ended Oct. 26 were from Puerto Rico and Ohio issuers, according to Markit.

In the GO bond sector, the Puerto Rico 8s of 2035 traded 66 times. In the revenue bond sector, the Lucas County, Ohio, 4.125s of 2042 traded 49 times. And in the taxable bond sector, the Puerto Rico Sales Tax Financing Corp. 6.35s of 2029 traded nine times.

Week's actively quoted issues
Illinois, Kentucky and New Jersey names were among the most actively quoted bonds in the week ended Oct. 26, according to Markit.

On the bid side, the Illinois taxable 6.63s of 2035 were quoted by 89 unique dealers. On the ask side, the Paducah Independent School District Finance Corp. revenue 3.5s of 2035 were quoted by 296 dealers. And among two-sided quotes, the South Jersey Port Corp. taxable 7.365s of 2040 were quoted by 32 dealers.

Lipper: Muni bond funds saw outflows
Investors in municipal bond funds remained cautious and again pulled cash out of the funds during the latest reporting week, according to Lipper data released on Thursday.

The weekly reporters saw $494.914 million of outflows in the week ended Oct. 17 after outflows of $642.032 million in the previous week.
Exchange traded funds reported outflows of $25.091 million, after inflows of $155.595 million in the previous week. Ex-ETFs, muni funds saw $469.823 million of outflows, after outflows of $797.628 million in the previous week.

The four-week moving average remained negative at -$505.107 million, after being in the red at -$479.578 million in the previous week. A moving average is an analytical tool used to smooth out price changes by filtering out fluctuations.

Long-term muni bond funds had outflows of $368.134 million in the latest week after outflows of $659.499 million in the previous week. Intermediate-term funds had outflows of $143.005 million after outflows of $80.325 million in the prior week.

National funds had outflows of $370.522 million after outflows of $487.127 million in the previous week. High-yield muni funds reported outflows of $230.226 million in the latest week, after outflows of $604.919 million the previous week.

Yvette Shields contributed to the 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.

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Primary bond market Sell side Secondary bond market Chicago Sales Tax Securitization Corp Los Angeles Department of Airports City of Los Angeles, CA