WASHINGTON — The Metropolitan Washington Airports Authority has temporarily suspended a $650 million deal for its Metrorail extension project, citing market volatility. However, the delay will not affect construction, authority officials said.
The MWAA and its underwriters will decide on a week-to-week basis when to proceed with pricing,. They said the delay stems in part from volatility in the corporate bond market and reveals a new level of complexity for issuers hoping to price Build America Bonds.
The transaction includes four series of tax-exempt and taxable bonds. The $205.5 million of Series A and B tax-exempt bonds are rated Baa1 by Moody’s Investors Service and BBB-plus by Standard & Poor’s.
The MWAA will offer the remaining $444.5 million of Series C and D bonds as either tax-exempt bonds or taxable BABs. Both series are rated Baa2 by Moody’s and BBB by Standard & Poor’s.
The Airports Authority could sell all of the $444.5 million of the two series of bonds as BABs, according to chief financial officer Andrew Rountree.
The underwriters for the transaction, which included Citi and Morgan Stanley as co-lead managers, had expected to price the bonds for retail investors on Monday, but delayed the pricing late Friday after Europe’s debt problem led to volatile market swings. Treasury yields dropped because of a “flight to quality” as the VIX, a benchmark for stock market volatility, jumped to its highest level since April 2009.
The 10-year Treasury note yielded 3.38% last Thursday, the lowest yield since December, according to Municipal Market Data. A 10-year triple-A general obligation bond yielded 2.93% on Thursday.
On Tuesday, MWAA officials postponed the sale again because of continued concerns about market volatility. The delay will not affect an insurance commitment the agency received from Assured Guaranty Corp. for a portion of the bonds, according to Rountree.
Assured has committed to insuring up to $100 million of BABs and almost all of the authority’s Series A and B bonds, he said.
The MWAA will watch for a return to a “sense of normalcy” in Treasury and corporate bond markets, according to Rountree.
Limited activity in the corporate bond market contributed to the delay. The corporate market is “more in tune with the BABs taxable buyers,” he said.
Trends in the corporate bond market mean traditional tax-exempt issuers face a “more complicated” marketplace with BABs, said Justin Hoogendoorn, managing director at BMO Capital Markets in Chicago. BAB issuers must compete with Treasury, corporate, and agency debt for taxable investors, he noted.
But volatility also provides opportunities for issuers because the taxable market is more liquid, he said. The tax-exempt market can “quickly get illiquid,” which happened last week, Hoogendoorn said.
He noted that the dangers of illiquidity were apparent in the auction-rate securities market. ARS issuers did not default on their obligations — it was illiquidity that killed the market, he said.
BABs “give issuers deeper liquidity,” and that leads to a healthier market, Hoogendoorn said, adding that the MWAA was right to suspend its sale temporarily as markets settle.