In the last full trading week before the municipal market slows for its usual holiday pause, uncertainty continues due to the status of Illinois' $1.4 billion general obligation certificates sale - with few other new deals on tap to fill the void amid overall market weakness and volatility.
According to Thomson Reuters, there is an estimated $1.53 billion of total volume on the horizon this week, compared with a revised $5.57 billion last week. If the Illinois certificates sale does not end up pricing, there will be slim pickings of other new issuance in the primary market.
The Illinois sale was originally scheduled in the competitive market last Thursday, but state officials on Wednesday postponed the deal due to fallout from Gov. Rod Blagojevich's corruption scandal, and as of late last week the deal was still awaiting final approval of transaction documents from some state officials, including the Illinois attorney general.
Standard & Poor's put the state's AA rating on negative CreditWatch based on concern its ability to handle its budgetary shortfall - a projected $2 billion for the current fiscal year - considering the legal charges facing the governor and his chief of staff.
Blagojevich was arrested Tuesday on charges of mail and wire fraud, and solicitation of bribery involving, among other things, his intent to sell to the highest bidder President-elect Barack Obama's vacant Senate seat.
In an addendum to the deal's preliminary official statement, the state's budget director, Ginger Ostro, told investors that the governor's arrest and pending legal action posed no threat to Illinois' ability to repay the one-year notes, and does not affect its cash position, or the need for short-term financing.
The deal is expected to have three tranches maturing in 2009 - $400 million due April 24, $600 million due May 25, and $400 million due June 24, according to the POS. Proceeds are expected to be used to pay down a record backlog of $4 billion of unpaid bills.
Moody's Investors Service rates Illinois' GOs Aa3 and Fitch Ratings gives them a AA. Short-term ratings from Moody's and Standard & Poor's were still pending as of late last week, and Fitch was not asked to rate the note transaction.
Meanwhile, a $201.1 million revenue bond sale from the Florida Water Pollution Control Financing Corp. has been postponed until January due to market conditions and the holidays, according to an underwriter at Citi, which was to price the natural triple-A-rated deal on Wednesday.
With the Florida deal on hold for now, that puts the spotlight on Philadelphia and its planned $100 million of GOs, which are expected to be priced for institutions tomorrow by Morgan Stanley after a retail-order period today.
The bonds are structured to mature serially from 2009 to 2018 with term bonds expected in 2023, 2028, and 2038. They have outstanding ratings of Baa1 from Moody's, BBB from Standard & Poor's, and BBB-plus from Fitch, but the city plans to insure the bonds, Philadelphia's finance director Rob Dubow said on Friday. The details on the insurer, however, were still being decided at press time on Friday, he said.
Generic triple-A GO bonds due in 2038 ended at 5.81% Friday, and the triple-B GO scale in 2038 ended at 7.91% on Friday, according to Municipal Market Data. The generic, insured GO due in 2038 ended at 6.21% on Friday.
A Philadelphia trader on Friday said even though being near the end of the year is making it harder for some issuers to sell deals, there should be enough retail demand to absorb the city's offering.
"It's a tough time of the year with a lot of people closing their books, the holidays, the market volatility, but retail is the best demand out there," he said.
Most of the demand from individuals has been focused inside of 10 years where yields on generic, triple-A GO paper have been yielding upward of 4% in recent trading, he added. For instance, triple-A GOs due in 2018 yielded 4.21% Friday, according to MMD. The generic, insured GO due in 2018 yielded 4.72% on Friday.
The trader said the deal will be even more attractive for yield-hungry investors, should it come insured as planned, because those investors are chasing the recent attractive absolute yields.
"The percentage of Treasuries doesn't even matter anymore; they are just looking at the absolute levels," he said. "Retail is going to be more responsive to insured paper - not because of the insurance, but because of the higher rates."
The competitive market is also scarce this week, with the largest deal expected to be a $110 million sale of GOs from New Castle County, Del., on Thursday. Proceeds from the sale will refunding certain county GO bonds and finance various sewer and general capital projects. The bonds are rated triple-A by Moody's, Standard & Poor's, and Fitch.