While tax-exempt yields declined for a 10th consecutive session Tuesday, Chicago’s O’Hare International Airport accelerated pricing on the largest tax-exempt issuance thus far this year, a deal that was snapped up by supply-hungry investors.
Citi opened Tuesday’s session with a retail order period on a portion of the $1 billion third-lien revenue offering, which will finance projects under an ongoing $8 billion runway-expansion program. The institutional offering was originally set for Wednesday, but an appetite for supply forced underwriters’ hands and pricing was moved up a day.
“The O’Hare deal looked attractive,” a trader in Chicago said. “You look at a 4% coupon on Jan. 1, 2017. It seems like there was some demand.”
The deal was broken into three series — Series A, worth $423 million, Series B, worth $297 million, and Series C, worth $280 million.
Series A matures in 2035 and 2039, yielding 5.92% with a 5.625% coupon and 6.00% with a 5.75% coupon, respectively.
Series B matures from 2014 through 2022, with term bonds in 2031 and 2041. Yields range from 2.10% with a 3% coupon in 2014 to 6.00% priced at par in 2041. These bonds were offered to retail investors earlier Tuesday. Yields from 2014 through 2016 were lowered five basis points at repricing.
Series C matures in 2031 and 2041, yielding 5.70% with a 5.5% coupon and 5.75% with a 6.5% coupon, respectively.
The bonds were rated A1 by Moody’s Investors Service and A-minus by both Standard & Poor’s and Fitch Ratings.
O’Hare surpassed a January refunding by the New Jersey Economic Development Authority. Of the $1.116 billion offered in that deal, $993 million was tax-exempt.
The O’Hare deal “is in pretty good hands,” another Chicago trader said, adding that it’s a good sign that the “deal was even put in place today when there hasn’t been enough supply for really big buyers recently.”
The issuance followed on the heels of a lackluster, holiday-shortened week. Volume is expected to rise 48% to $3.05 billion for the week, according to Ipreo LLC. Last week, just $2.06 billion came to market. That falls in line with the $3 billion average in the first quarter, but still falls well short of the $8 billion floated weekly in 2010.
Yields for munis and Treasuries both plummeted Tuesday after building momentum throughout the afternoon. Muni yields made a late move, firming for a 10th day, according to Municipal Market Data’s triple-A scale.
Intermediate yields inched two basis points lower. Long-term maturities dropped five to six basis points. Short-term yields held steady.
The benchmark 10-year muni yield ended Monday at 2.92%. That represents a 35 basis point drop from April 11, when the 10-year yield was 3.27%. The rally, though, continued to make up for earlier losses as the benchmark yield was as low as 2.90% on March 16.
The two-year muni yield held at 0.60% for the fifth consecutive day. The 30-year yield ended five basis points lower at 4.63%.
Treasury yields, too, firmed throughout the afternoon. The two-year yield dropped three basis points on the day to 0.62%. The 10-year yield slipped five basis points to 3.31% and the 30-year yield firmed six basis points to 4.39%.
“In Treasuries, today’s rally was based on too many short positions that expected a less accommodative Fed could cause rates to trend higher,” Randy Smolik wrote in his daily commentary for MMD. “There was also the argument that winding down quantitative purchases could undermine the weakness in the dollar and the bubble in commodity prices. From that standpoint, perhaps it made sense that the Treasury curve flattened today as well as saw gains.”
Buyers are very grudging these days, a trader in California said. They’ve been watching yields run up for a long time, and have waited patiently to see how new issues do, he added.
Their positions are difficult. Though they don’t see much more supply coming on the horizon, they realize that they cannot just sit on their money, the California trader said, adding that the day’s interest in the O’Hare deal reflects their position.
“The amount of supply that’s in the secondary has been slender,” he said. “So, people are reaching over the top to grab new issues that they think are attractive. Buyers are feeling squeezed, and like they’re not as much in control.”
But the O’Hare deal was set to meet a favorable environment in some respects, Janney Capital Markets wrote in its daily commentary.
A light new-issue calendar, with few issues competing for investor attention, was advantageous, the report said.
“But airport issuers have to deal with the impact of rising fuel costs on airlines,” it said. “According to Moody’s, the second busiest airport in the U.S. is dependent on airline revenues for 65% of total operating revenues, compared to a Moody’s median of 30%.”
Elsewhere in the new-issue market, Morgan Stanley priced for retail a $269 million sale of Series A revenue bonds from the Massachusetts Development Finance Agency on behalf of the Broad Institute. The deal will price for institutions on Wednesday.
The bonds are rated A1 by Moody’s and AA-minus by Standard & Poor’s. Yields range from 3.58% in 2020 to 5.02% in 2031. Bonds maturing from 2036 through 2041 were not offered during the retail period.
Also, JPMorgan priced $91.92 million of Anaheim, Calif., Public Financing Authority revenue bonds.
The bonds are rated A1 by Moody’s, and AA-minus by both Standard & Poor’s and Fitch. Yields range from 2.45% in 2016 to 5.40% in 2036.