Top-shelf municipal bonds closed steady on Wednesday, traders said, as the city of Detroit returned to the market with its first post-bankruptcy bond sale.
Barclays Capital priced the Motor City's $245 million of local government loan program revenue bonds, which were being issued as a remarketing through the Michigan Finance Authority.
The $134.73 million tax-exempt Series 2014F-1 Detroit financial recovery income tax revenue and refunding local project bonds were priced at par to yield 3.40% in 2020, 3.60% in 2021, 3.80% in 2022, 3.875% in in 2023, 4.00% in 2024 and 4.50% in 2029. The $110.28 million of Series 2014F-2 taxable Detroit financial recovery income tax revenue and refunding local project bonds were priced at par to yield 4.60%, or about 300 basis points above the comparable Treasury security, in 2022.
Detroit paid a steep penalty on its transaction as sturdy bondholder protections and an A rating from Standard & Poor's only went so far in offsetting a market acceptance of a name tainted by its Chapter 9 case that resulted in deep bondholder haircuts.
The yield on the deal's longest tax-exempt maturity in 2029 landed 194 basis points over the Municipal Market Data's top-rated benchmark and 133 basis points over an A level credit.
"The structure is built to survive bankruptcy but it makes sense for bondholders to be careful," said Municipal Market Analytics partner Matt Fabian. "Detroit is still a terrible name in the market. I think the market is slowly appreciating the risk in credits like Detroit, where structure in important but it's not everything and even the best structural protections are at risk of dissolving."
The mix of strong security features and the city's recent Chapter 9 history make it hard to assess a fair market penalty, said several market participants.
"There's certainly is a difference between a bond that has been investment grade and then falls out of that realm, as opposed to a bond coming out of Chapter 9 and re-emerging with an investment grade rating and an A at that," said Van Eck Global's senior municipal strategist James Colby. "I think there will be reticence on the part of investors to assume that everything will now run smoothly and that reticence translates into more yield.
"If you put 10 investors in a room each might have a different view" as to what price Detroit should pay to access the market post its exit late last year from Chapter 9. "The real arbiter of what value is is the marketplace," said Colby. He didn't participate in the sale, but would have considered it given the "compelling" spreads offered, but he lacked available investment cash.
The issue is being converted from variable-rate bonds owned by Barclays to fixed-rate current interest bonds.
"Detroit and Stockton Bankruptcy outcomes showed that perceived legal protections may not be sufficient to overcome a weak local economy/tax base," said one buyside analyst. "So long as Detroit experiences the economic revival they are projecting, this deal will be fine. But if not, we could see this deal structure tested at some point in the future."
Since 1995, Detroit has issued roughly $10.65 billion of debt. The years of 2003 and 2006 saw the most issuance with $1.82 billion and $1.54 billion, respectively. The Motor City did not issue any debt in 2000, 2007, 2009, 2013 and 2014.
Barclays had a busy day as it also priced $558.74 million of tax-exempt and taxable bonds from the Illinois Finance Authority for the University of Chicago.
The $408.23 million of Series 2015A tax-exempt revenue bonds were priced at par with a 2.10% coupon in 2025 to 3.44% with a 5% coupon in 2036. A 2040 term bond was priced as 5s to yield 3.57% and a split 2046 term bond was priced as 4s and as 5s to yield 4.10% and 3.66%, respectively.
The $150.51 million of Series 2015B taxable fixed-rate bonds were priced at par with a 1.05% coupon in 2016; and priced to yield about 65 basis points above the comparable Treasury in 2017 to about 180 basis points above the comparable Treasury in 2030. A 2033 maturity was priced about 140 basis points above the comparable Treasury.
The issue was rated Aa2 by Moody's Investors Service, AA by S&P and AA-plus by Fitch Ratings.
Citigroup priced the New York Convention Center Development Corp.'s $581.13 million of Series 2015 hotel unit fee secured revenue refunding bonds.
The issue was priced to yield from 0.42% with a 4% coupon in 2016 maturity to 3.75% with a 3.625% coupon and 3.48% with a 5% coupon in a split 2035 maturity. A 2040 split term bond was priced at par to yield 4% and as 5s to yield 3.57%; a split 2045 term was priced as 4s to yield 4.03% and as 5s to yield 3.63%. The bonds were rated Aa3 by Moody's.
Goldman, Sachs priced the New York Metropolitan Transportation Authority's $294.19 million of Series 2015D transportation revenue refunding bonds for retail investors ahead of the institutional pricing on Thursday.
The $242.27 million of Subseries 2015D-1 fixed rated bonds were priced as 5s to yield 2.50% in 2024 and from 2.82% in 2026 to 3.39% in 2034; a 2035 split maturity was priced as 3 3/8s to yield 3.50% and as 5s to yield 3.43%. The $51.92 million of Subseries 2015D-2 mandatory tender bonds were priced as 4s to yield 1.44% in 2035 with a mandatory maturity date of 2019.
The issue is rated A1 by Moody's, AA-minus by S&P, A by Fitch and AA-plus by Kroll Bond Rating Agency.
Wells Fargo Securities priced the Kansas Department of Transportation's $190.97 million of Series 2015A highway revenue refunding bonds. The bonds were priced to yield from 1.75% with a 5% coupon in 2021 to 2.25% in a split 2024 maturity with a 5% coupon and 3% coupon. The deal is rated Aa2 by Moody's, triple-A by S&P and AA-plus by Fitch.
Roosevelt & Cross priced the city of Yonkers, N.Y.'s $144.77 million of general obligation utility and limited tax GO bonds in three series.
The $76.215 million of Series D GO utility bonds were priced to yield from 0.58% with a 2% coupon in 2016 to 3.79% with a 3.625% coupon and 3.71% with a 4% coupon in a split 2035 maturity. Assured Guaranty wrapped $50.63 million of the Series D bonds. The 2016-2018 maturities are not insured and rated A3 by Moody's and A by S&P. The rest of the maturities are rated A2 by Moody's and A by S&P.
The $50.19 million of Series E limited tax GO bonds were priced to yield from 1.090% with a 3.25% coupon in 2017 to 3.59% and 3.38% with a 3.25% coupon and 5% coupon in a split 2031 maturity. Assured Guaranty wrapped $45.365 million of the Series E Bonds. The 2017 and 2018 maturities are not insured and rated A3 by Moody's and A by S&P. The rest of the maturities are rated A2 by Moody's and A by S&P.
The $18.37 million of Series F limited tax GO bonds were priced to yield from 1.06% with a 2% coupon in 2017 to 3.10% and 3.05% with a 3% coupon and 5% coupon in a split 2027 maturity. Assured Guaranty wrapped $15.585 million of the Series F bonds, to bring the total amount insured in this deal to $111.58 million. The 2017 and 2018 maturities are not insured and rated A3 by Moody's and A by S&P. The rest of the maturities are rated A2 by Moody's and A by S&P.
Secondary Trading
The yield on the 10-year benchmark muni general obligation on Wednesday was steady from 2.21% on Tuesday, while the yield on the 30-year GO was unchanged at 3.08%, according to the final read of Municipal Market Data's triple-A scale.
Treasury prices were higher on Wednesday, with the yield on the two-year Treasury note falling to 0.67% from 0.71% on Tuesday, while the 10-year yield declined to 2.13% from 2.19% and the 30-year yield decreased to 2.83% from 2.86%.
The 10-year muni to Treasury ratio was calculated on Wednesday at 104.0% versus 100.6% on Tuesday, while the 30-year muni to Treasury ratio stood at 109.4% compared to 107.6%, according to MMD.
