Large issuers in California, New York, Texas, and Maryland will test the choppy waters of the primary market this week as part of an estimated $8.2 billion in new-issue volume expected to debut as the market continues to grapple with ongoing turmoil in the auction-rate and credit sectors.
Two of this week's deals - including a $1.025 billion sale of power supply revenue bonds from the California Department of Water Resources - represent issuers' efforts to restructure their short-term, auction-rate debt as fixed rate as a means seeking recovery from failed auctions that triggered widespread market dislocation and corresponding volatility nearly a month ago.
Heightening the market's already growing fears and uncertainty about the bond insurance market, meanwhile, Moody's Investors Service and Fitch Ratings late last week downgraded the financial strength rating of CIFG Guaranty to A1 from Aaa and AA-minus from triple-A, respectively. A Moody's report said the downgrade reflected its view on the insurer's exposure to sub-prime mortgage-related risk, weakened capital position, impaired business prospects, and a strategic direction, and remains unclear.
The tumultuous market conditions have caused the yields on generic, 30-year, triple-A general obligation bonds to rise noticeably in recent weeks at the same time that Treasury yields were falling. The 30-year, generic triple-A GO went from 4.28% on Feb. 11, to as high as 5.14% on Feb. 29, and then slowly began regaining some strength in recent trading sessions, ending at a 4.83% at the close of trading last Friday, according to Municipal Market Data.
Like other affected issuers around the country, California's DWR is hoping for a warm reception from investors for its sale, which will largely refund outstanding auction-rate bonds insured by Ambac Assurance Corp. and XL Capital Assurance Inc.
The power bonds are scheduled for negotiated pricing by Bear, Stearns & Co., but a banker did not return calls about the sale date or the structure. The deal is the largest of a trio of California deals heading to market this week.
Recent auctions for the short-term power bonds have failed, causing interest rates to reset at maximum rates of up to 6.22%, according to a rating report from Moody's, which affirmed its underlying Aa3 rating and stable outlook on the DWR power bonds.
They were originally issued to pay for emergency power purchases during the California power crisis of 2000 and 2001.
Fitch last week upgraded its ratings of the power bonds to A-plus from A and confirmed its positive outlook, while Standard & Poor's assigns an A rating to the bonds with a positive outlook.
In the shadow of the mammoth power bond sale, the California Statewide Communities Development Authority and the California State Public Works Board will also issue debt this week.
The authority will sell $650 million of revenue debt to finance a project at St. Joseph Hospital in a deal being priced and senior-managed on Friday by Morgan Stanley. The Public Works Board, meanwhile, plans to issue $269 million of lease revenue bonds for various hospital projects in a deal that is being priced by Bear Stearns. A banker did not return phone calls seeking comment on the structure and other details of the financing.
In the Empire State, the largest deal will be a $366 million sale of fixed-rate general obligation bonds from New York City - which like many other municipalities, suffered failed auctions on some of its auction-rate securities in recent weeks.
A portion of the fixed-rate refunding will be used - along with uninsured, variable-rate GO bonds to be sold later this month - in a planned conversion of $1.3 billion of the city's $2 billion auction-rate GO debt to fixed-rate and variable-rate mode, according to a press release from the city.
Merrill, Lynch & Co. will price the deal for institutions tomorrow, after concluding a three-day retail order period that began last Thursday during which the city received $240 million in net retail orders, according to Raymond J. Orlando, director of media and investor relations.
During the first day of the retail order period, bonds due in 2023 with a 43/4 coupon started off at a 4.95% yield, but on the second day of the order period were lowered to 4.80% yield, according to a preliminary sale wire.
Early last week, city officials said they were still hammering out the details of the restructuring and refunding, and because of market sensitivity would not specify which auction-rate securities would be refunded. However, Alan Anders, deputy director for finance, said the city would refund ARS maturities generally inside of 10 years with the new fixed-rate bonds.
The city's fixed-rate GO debt is rated Aa3 by Moody's, AA by Standard & Poor's, and AA-minus by Fitch.
Also this week, the city expects to sell $82 million of taxable fixed-rate GO bonds in a competitive sale tomorrow.
Elsewhere, the Port Authority of New York and New Jersey is expected to issue $700 million of revenue bonds on Wednesday in the competitive market.
The 150th series will be issued as two separate deals each totaling $350 million, with one taxable that matures from 2013 to 2027 and one that is subject to the alternative minimum tax and matures from 2019 to 2035.
The authority's debt is rated A1 by Moody's and AA-minus by Standard & Poor's and by Fitch
In addition, New York State itself will sell $257.7 million of tax-exempt GO bonds for transportation, clean water projects, environmental purposes, and parks and highway projects that mature from 2009 to 2038, and $11.2 million of taxable GO bonds for clean water, solid waste, and environmental improvements that mature from 2009 to 2018.
The state's GOs are rated Aa3 by Moody's, AA by Standard & Poor's, and A-plus by Fitch.
In addition, the New York State Environmental Facilities Corp. is scheduled to sell two series of revenue bonds competitively tomorrow. The larger series, $125 million of tax-exempts, is structured to mature from 2013 to 2027, while the $38.7 million taxable series is structure to mature from 2008 to 2012. The bonds are rated AAA by Standard & Poor's, AA-minus by Fitch, and A1 by Moody's.
Elsewhere in the Northeast, a $685 million sale of revenue bonds is expected to be sold competitively on Wednesday by the Maryland Transportation Authority. The bonds, which are slated to mature from 2012 to 2041, are rated Aa3 by Moody's and AA-minus by Standard & Poor's and Fitch.
The collapse of the auction-rate securities market and the continued downgrading of bond insurers is creating too much volatility for some municipalities to proceed with a trip to the new-issue market as is the case with one large Texas issuer.
The Houston Independent School District, which originally planned to enter the market today with a $385.4 million limited tax sale of Series 2008 schoolhouse bonds, decided last week to postpone the sale due to market uncertainty. However, late Friday, Melinda Garrett, chief financial officer of the district, said a conference call is scheduled for this morning to discuss the sale of the bonds.
"The market has turned around and looks more advantageous to our goals," she said in an e-mail.