Pa. tobacco bond deal raised to $1.5B at pricing

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An upsized Pennsylvania tobacco deal priced on Tuesday into a market environment where buyers are looking for both higher yield and security. Buyside investors said the offering should fare well based on factors including its pledge, timing, and partial insurance.

Jefferies priced the Pennsylvania Commonwealth Financing Authority’s $1.5 billion of tobacco master settlement payment revenue bonds. The deal was originally sized at $1.39 billion.

The issue was priced as 5s to yield from 2.34% in 2020 to 4.03% in 2035. A 2039 term bond was priced at 98.50 as 4s to yield approximately 4.106%.

The deal is rated A1 by Moody’s Investors Service A by S&P Global Ratings and A-plus by Fitch Ratings except for the $427.54 million 2039 maturity which is insured by Assured Guaranty Municipal and rated AA by S&P.

John Mousseau, managing director at Cumberland Advisors said part of the tobacco deal’s appeal is that it has a pledge for appropriation from the state.

“It’s clearly a superior pledge than the old type of tobacco issues,” he said on Tuesday. He also said it will benefit from its timing, with the market starved for product since the first of the year.

Meanwhile, Mousseau added, one of the tranches with AGM insurance adds an element of value to the deal.

“This is important even for investors in the non-insured bonds in the deal because you know that if there was an issue, AGM would be working to remedy things and that helps all bondholders,” he added.

Some said the tobacco bonds are attractively priced. “Investors are being fairly compensated at these levels, especially considering the additional security beyond the MSA credit itself,” said a New York muni manager.

“Liquidity in the muni market is currently stressed, which may necessitate some additional spread to encourage the involvement of anxious investors during a volatile period in the market with a bias toward higher rates,” the manager said.

Some portfolio managers were divided on their opinions and potential interest in the deal, with some saying they will consider it while others snubbed their noses at the sector altogether.

"It's a sector we look at," said Ronald Schwartz, senior portfolio manager at Seix Investment Advisors, in an interview last week.

While he hasn't purchased any tobacco credits recently and doesn't own any of the authority's tobacco bonds in the $1.4 billion of tax-exempt mutual funds and separately managed accounts he oversees for high net worth individuals, he is interested.

"Obviously, the yield is going to be the attractive part," Schwartz said. "We will do the credit work and see if there's enough yield on a relative basis to buy it."

Meanwhile, Jonathan Law, portfolio manager with Advisors Asset Management, said he typically avoids tobacco bonds since they don't fit the investment-grade objective he maintains for the $325 million in tax-exempt separately managed account assets he oversees.

"Most of them are below investment grade and we’re not a fan of the sector overall," he said of the bonds in an interview last week. "We know it plays a big part in high-yield, but we have some clients that want socially responsible investments, and there's also broad trends that obviously indicate people are smoking less and there's less taxes available, so it's not a deal we'd consider at this point," Law added.

Also on Tuesday a taxable corporate CUSIP deal came from Community Health Network Inc. in Indiana.

Wells Fargo Securities priced the $202 million of Series 2018 bonds at par to yield about 165 basis points over the comparable Treasury security in 2053 and to yield about 180 basis points over the comparable Treasury security in 2058.

The deal is rated A2 by Moody’s and A by S&P.

In the competitive arena on Tuesday, the Mounds View Independent School District No. 621, Minn., sold $153.58 million of Series 2018A general obligation school building bonds.
Morgan Stanley won the bonds with a true interest cost of 3.449%. Pricing information was not immediately available.

The bonds are insured by the Minnesota School District Credit Enhancement Program. The deal is rated AA-plus by S&P.

Secondary market
Municipal bond yields have been on the rise since the beginning of the year.

On Jan. 1, the MBIS municipal non-callable 5% GO benchmark 10-year yield stood at 2.278%, rising to 2.525% by the end of the month and 2.662% at Monday's close.
Bond Buyer 30-day visible supply at $5.66B
The Bond Buyer's 30-day visible supply calendar increased $186.7 million to $5.66 billion on Tuesday. The total is comprised of $1.67 billion of competitive sales and $3.99 billion of negotiated deals.

Previous session's activity
On Monday, the 10-year muni-to-Treasury ratio was calculated at 85.1% compared with 85.6% on Friday, while the 30-year muni-to-Treasury ratio stood at 94.7% versus 94.7%, according to MMD.

The Municipal Securities Rulemaking Board reported 40,625 trades on Monday on volume of $7.63 billion. California, Texas and New York were the three states with the most trades, with the Golden State taking 16.786% of the market, the Empire State taking 12.584% and the Lone Star State taking 10.271%.

Treasury auctions 4-week bills
The Treasury Department Tuesday auctioned $50 billion of four-week bills at a 1.360% high yield, a price of 99.894222.

The coupon equivalent was 1.380%. The bid-to-cover ratio was 3.27. Tenders at the high rate were allotted 88.13%. The median rate was 1.330%. The low rate was 1.290%.

Treasury also sold $50 billion 55-day cash management bills, dated Feb. 16, due April 12, at a 1.560% high tender rate.

The bid to cover ratio was 2.54. Tenders at the high rate were allotted 69.64%. The median rate was 1.510%. The low rate was 1.450%. The coupon equivalent was 1.585%. The price was 99.761667.

Gary Siegel contributed to this report.

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 Secondary bond market Pennsylvania Commonwealth Financing Authority Mounds View Independent School District No. 621, MN Community Health Network, IN