SAN FRANCISCO - The San Jose Redevelopment Agency plans to test the market's appetite for competitive deals today with $100 million of tax-allocation bonds.
The agency is bucking a trend toward negotiated deals that has dominated the market - even more than usual - since Lehman Brothers Holdings Inc.'s bankruptcy and the onset of the most recent phase of the credit crisis. Issuers have shied away from competitive deals, saying they cannot set a date certain for a sale and need the freedom to reschedule or delay sales in today's volatile market.
Negotiated deals have made up 93% of the volume in the municipal bond market since Sept. 15, according to data from Thomson Reuters. That's up from 85% in the first nine months of this year. The biggest competitive deal since the Lehman bankruptcy was a $64.3 million offering from the Kansas Development Finance Authority that sold Sept. 18.
"The agency believes the municipal market is finally to a point of recovery where new issues can be done again," said Gary Kitahata, a principal at Kitahata & Co. in San Francisco and the financial adviser to the San Jose agency.
He discounted the notion that a competitive sale would force the agency to sell into an unwelcoming market. He said San Jose could pull the deal as late as 4 p.m. yesterday, when he would be able to get a good read on the market's ability to absorb the deal.
"We have the discretion to decline all bids," he said. "If we get no bids, we have the option of either rescheduling it or taking it off the market and negotiating it."
The San Jose deal, which includes $30.2 million of taxable bonds and $70.4 million of tax-exempt bonds, wouldn't usually have much trouble finding buyers or warrant much notice.
It's backed by incremental growth in tax revenues in a merged redevelopment area that includes much of downtown San Jose, the biggest city in Silicon Valley. Assessed values have continued to rise the past three years, even as the housing market collapsed.
The bonds are rated A3 by Moody's Investors Service and A-minus by Standard & Poor's and Fitch Ratings.
San Jose delayed the deal earlier this month, but Kitahata said the market has strengthened enough to test it to see if the deal can get done now. The Bond Buyer's 40-bond index posted its strongest gains since 1984 last week, with the yield-to-par call plunging 158 basis points to 6.27%.
Several other issuers are planning to follow San Jose to the competitive market with sizeable deals this week, including the New Jersey Environmental Infrastructure Trust, which is scheduled to sell $134.6 million of bonds tomorrow.
Kitahata says he sees no harm in testing the market and sees some benefit of testing it with a competitive deal.
"Even in volatile markets, perhaps especially in volatile markets, competitive bid can still be the best method of sale for establishing the best market pricing," Kitahata said. "If the market is undecided as to where the value is and people have differing views of where value is, that's actually the perfect time to get different bids."