Tax reform pressure persists on muni market, as myriad deals price

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The market was buzzing with activity on Tuesday, as issuers rushed to sell bonds that may no longer be allowed next year, creating an opportunity for buyers.

“December borrowing is on track to grow as bankers and issuers push to beat the year-end deadline potentially imposed by Congressional tax reform proposals,” said Alan Schankel, managing director and municipal strategist at Janney. “Eclipsing the monthly volume record of $54.7 billion set in December 1985 (when issuers were rushing to beat a deadline ahead of the Tax Reform Act of 1986) is a reach, but given the current pace, a $45 billion month in December, which would be the busiest of 2017, is possible.”

Elevated new issuance has put pressure on yields, he continued. As the forward calendar has grown, municipal-to-Treasury ratios, a key relative value measure, moved higher.

“If Congressional tax reform (particularly the House version) is successful and future tax-exempt supply is diminished, supply/demand dynamics will likely push tax free yields lower relative to taxable yields in the new year, as tax free bonds outperform taxable alternatives,” Schankel said. “If tax reform fizzles or is substantially delayed, next year’s anticipated supply will be as expected before tax reform proposals placed the tax exemption of certain classes of municipal bond in play. In either case, demand for tax exempt bonds should remain solid since current tax proposals retain the top bracket rate (39.6% House) or reduce it only marginally (38.6% Senate).”

Bank of America Merrill Lynch brought to market the Pennsylvania Higher Educational Facilities Authority’s $400 million of Series 2017A health system revenue bonds for the University of Pennsylvania Health System. The bonds were priced to yield from 2.60% with a 5% coupon in 2027 to 3.21% with a 5% coupon in 2037. The bonds were also priced to yield 3.68% with a 4% coupon and 3.29% with a 5% coupon in a split 2042 maturity and 3.34% with a 5% coupon in 2047.

BAML also priced the Trustees of the University of Pennsylvania’s $200 million of taxable health system bonds for the Pennsylvania Health System. The taxable bonds were priced at par to yield 4% in a 2047 bullet maturity, about 125 basis points above the comparable Treasury. The deal is rated Aa3 by Moody’s Investors Service and AA-minus by S&P Global Ratings.

“The U of Penn deal was on the cheaper end,” said one Mid-Atlantic trader. “In general, the muni market is in full retreat with supply both priced and imminent. After seeing 11 months of limited supply, we are now flooded with it. If the proposed tax bill gets signed, muni issuance could be curtailed in 2018 and this bulge will turn out to be a great buying opportunity.”

RBC Capital Markets priced Wisconsin’s $368.595 million of Series 2017 2 transportation revenue refunding bonds. The bonds were priced to yield from 1.66% with a 5% coupon in 2021 to 2.69% with a 5% coupon in 2032. The advance refunding deal is rated Aa2 by Moody’s and AA-plus by S&P and Fitch and AAA by Kroll Bond Rating Agency.

Since 2007, the Badger State has issued over $20 billion of bonds. Prior to this year, the most issuance occurred in 2009 when Wisconsin sold $2.39 billion of bonds. The state issued the least amount of debt in 2007 when it sold $1.14 billion.

BAML priced the Iowa Finance Authority’s $346.26 million of state revolving fund revenue green bonds, one day earlier than scheduled. The bonds were priced to yield from 1.27% with a 5% coupon in 2018 to 2.87% with a 5% coupon in 2037. A term bond in 2042 was priced to yield 2.92% with a 5% coupon and a term bond in 2047 was priced to yield 2.96% with a 5% coupon. The deal is rated triple-A by Moody’s, S&P and Fitch.

RBC priced for retail on Tuesday the New York State Environmental Facilities Corp.’s $323.55 million of Series 2017E state clean water and drinking water revolving funds revenue bonds for New York City Municipal Water Finance Authority projects. The bonds were priced for retail to yield from 1.22% with a 3% coupon in 2018 to 2.84% with a 5% coupon in 2038. A term bond in 2047 was priced to yield 2.94% with a 5% coupon. No retail was available in the 2033 through 2035 or 2042 maturities. The subordinated SRF bonds will be priced for institutions on Wednesday and are rated triple-A by Moody’s, S&P and Fitch.

Barclays Capital priced the Board of Regents of the University of Texas System’s $258.76 million of Series 2017C revenue financing system refunding bonds. The deal was priced to yield from 1.30% with a 3% coupon in 2018 to 3.28% with a 3% coupon in 2035. The deal is rated triple-A by Moody’s, S&P and Fitch.

One deal that was planned for Wednesday will no longer be coming. BAML was scheduled to price Maryland Stadium Authority’s $426.44 million of construction and revitalization program revenue bonds for the Baltimore City Public Schools has been delayed. According to a notice that was sent around, the issuer decided to delay the transaction due to market conditions.

“This is a new-money transaction and does not need to be rushed, especially when market conditions are not pristine” said one market source. “In all likelihood, this transaction will now take place in 2018.”

MBIS 10-year muni at 2.405%, 30-year at 2.897%
The MBIS municipal non-callable 5% GO benchmark scale was weaker at Tuesday’s market close.

The 10-year muni benchmark yield rose to 2.405% on Tuesday from the final read of 2.380% on Monday, according to Municipal Bond Information Services, a national consortium of municipal interdealer brokers. The MBIS 30-year benchmark muni yield increased to 2.897% from 2.877% on Monday.

The MBIS benchmark index is a yield curve built on market data aggregated from MBIS member firms and is updated hourly on the Bond Buyer Data Workstation.

Top-rated municipals ended weaker on Tuesday. The yield on the 10-year benchmark muni general obligation was four basis points higher to 2.16% from 2.12% on Monday, while the 30-year GO yield increased three basis points from to 2.82% from 2.79%, according to a final read of Municipal Market Data’s triple-A scale.

U.S. Treasuries were mostly weaker at the market close on Tuesday. The yield on the two-year Treasury nudged up to 1.75% from 1.74%, the 10-year Treasury yield rose to 2.34% from 2.32% and the yield on the 30-year Treasury was flat at 2.77%.

On Tuesday, the 10-year muni-to-Treasury ratio was calculated at 92.4% compared with 91.1% on Monday, while the 30-year muni-to-Treasury ratio stood at 101.9% versus 101.0%, according to MMD.

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 Vanessa Kim at 212-803-8474 for more information.

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Primary bond market Tax reform Secondary bond market Pennsylvania Higher Educational Facilities Authority Trustees of the University of Pennsylvania State of Wisconsin Iowa Finance Authority New York State Environmental Facilities Corporation The University of Texas Board of Regents Maryland Stadium Authority