"In general, the market is very expensive," said Michael Ginestro of Bel Air Investment Advisors.

LOS ANGELES — A recent Irvine, Calif. dirt bond deal highlights how investors' search for yield has had the effect of compressing them, even on unrated bonds.

Irvine was able to reprice the unrated $72.7 million special tax bond deal at five to 15 basis points below its anticipated price when they sold on Aug. 5, said Tom Johnsen, a principal at Irvine-based Fieldman & Rolapp & Associates and financial advisor on the deal.

The Irvine Community Facilities District No. 2013-3 special tax bonds will fund improvements, including streets, sidewalks and water and sewers, for The Great Park Improvement Area No. 1, a 947-unit housing development that includes 221 affordable, age-restricted units. So far 360 homes have been completed and 150 have been sold. Homes sales began in September 2013.

The entire Great Park development project includes 10 neighborhoods zoned for 9,500 residential units on the former Marine Corps Air Station El Toro near downtown Irvine. The Orange County city has an unemployment rate less than 4%.

The units are priced from $700,000 to $1.1 million, but a median-priced home in the city is selling for $600,000 said Craig Reem, Irvine's director of public affairs and communications.

Stifel, Nicolaus & Co. is underwriter of the bonds, set to close Aug. 28. Rutan & Tucker is bond counsel.

The bonds were five to eight times oversubscribed, said Ken Brown, Irvine's administrative services director.

The timing of the sale worked out better for Irvine then if the bonds had sold a year ago, Johnsen said.

In June 2013, the Federal Reserve chair made a "seemingly innocuous statement about the Fed buying and the market went into a tizzy," Johnsen said.

Interest rates jumped overnight and the Municipal Market Data scale jumped tremendously. Since then MMD and interest rates have come back nearly to the lower levels of 2013, which combined with the low supply in 2014 made it a particularly good time to sell the bonds, he said.

Spreads have tightened — and that includes the spreads for Irvine compared to other comparable deals, he said.

"We had the narrowest spreads," Johnsen said. "The project has been well-received. We were in a good market with good product and a good bond structure."

The land-secured sector in California still provides value relative to other high-yield sectors, said Michael Ginestro, head researcher with Beverly Hills-based Bel Air Investment Advisors.

Ginestro said his firm likes the way that such land-based deals are structured in California. Particularly, if as was the case with the Irvine deal, the bonds are secured by a special tax covered by a Teeter Plan, in which the county is responsible for delinquencies.

In general, the bond market is very expensive right now, Ginestro said, so Bel Air is buying credit in sectors it thinks will continue to improve. That is why land-secured bonds are on its radar.

"These deals are generally going to hold up," Ginestro said.

With 70% of Bel Air's clients in California, he said, they feel comfortable buying these types of credits across the state.

The firm is trying to snap up value when it sees it. Sectors it isn't feeling as warm about are healthcare and higher education, or lower-credit general obligation bonds that are out-of-state.

"The land-secured sector we like," he said.

The firm not only bought Irvine's bonds, but also looked at an unrated $36.4 million refunding on special tax bonds issued for San Francisco's Hunters Point Shipyard project and a $31.8 million refunding, with an A-minus rating from Standard & Poor's, for the Windermere Ranch Project in upscale Bay Area suburb San Ramon through conduit issuer ABAG Finance Authority.

As investors become more comfortable with the spreads, even the land-secured deals aren't offering the value they once were, though.

On the Windermere deal, the 2021 maturity yielded 2.07%, which is 50 basis points over triple-A on the preliminary Municipal Market Data scale. That is what Single A-minus land-secured paper is trading at, Ginestro said.

"A year ago, you could find 80 to 100 basis points over Triple A on the MMD scale on A-minus paper," he said. The unrated Irvine deal for the same maturity came in at 79 basis points over.

Irvine's bonds included $16.08 million in serial bonds that priced at coupons of 2% for the 2015 maturity and 5% for the 2019 to 2034 maturities with yields from .510% to 4.04%. The final maturity of 2044 in the serial bonds priced at a 4.25% coupon with a 4.34% yield.

Term bonds sold in three sets, the first tranche of $12.9 million priced with a 5% coupon at a yield of 4.1% with a maturity at 2039; the $17.5 million tranche priced with a 5% coupon at 4.19% yield; and the $26.1 million priced with a 5% coupon with a yield of 4.34%. The term bonds are callable at par on Sept. 1, 2024.

Another draw for Ginestro to the Irvine bonds is that California real estate — at least in coastal areas — has been improving since 2010.

"In general, the market is very expensive," Ginestro said. "We are buying credit in sectors that we think will continue to improve."

Bel Air also was a buyer of Hunters Point, a San Francisco project developed on former Navy property that priced in July. That project is three-fourths developed.

Hunter's Point, issued through the successor agency to San Francisco's redevelopment agency, priced at 88 basis points over the Municipal Market Data scale, which Ginestro said is quite expensive given that the deal would have sold at 150 to 200 basis points over MMD for the last year and half to two years.

"I think people are just trying to find yield," Ginestro said. "There is just a dearth of supply."

Bel Air also understands how the high-yield market unfolds, he said.

While comfortable with land-based deals in the pricey infill coastal markets of California, Bel Air isn't as likely to purchase land-based bonds in Maryland or Pennsylvania.

"We are trying to take advantage of certain deals the market doesn't appreciate as much as we do," Ginestro said. "With the caveat that the land-based market does feel a little bit toppy."

For now there continues to be value, but Ginestro said he doesn't know how long that will last.

"We have been positive on it since last September — so for almost a year," he said.

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