Munis weaken again despite stronger Treasuries; California brings $1 billion short-term notes

By Sheri Kasprzak

New York, Feb. 22 - Municipals sustained losses yet again on Wednesday, said market insiders, despite the fact that new issues were well received and Treasuries were actually stronger.

Bids, according to one trader, were still scarce as investors turned their focus toward the primary market.

"Everyone's looking at new issues," he said.

"It's one of the busiest pricing days. We've had a hard time getting bids for most of the week, but I suspect primary is really getting most of the attention today."

Meanwhile, despite negative rating trends and other pressures, state and local government default rates are very low, according to Municipal Market Advisors managing director Matt Fabian.

Defaults remain low

"Two weeks ago, MMA released our first-ever municipal default rates by sector, showing that, for example, only 0.047% of the total number of municipal bond Cusips tagged with Bloomberg's BVAL code for GO are associated with an issuer that has an uncured payment default or is currently drawing on emergency support (reserves, bond insurance, etc.) to cover its debt service payments," Fabian wrote Wednesday.

"If all GO-type BVAL sectors are included (adding in school districts and GO hospitals), the Cusips-level default/support rate falls to just 0.028%. Considering that nearly $1 trillion of outstanding municipal bonds carry general obligation BVAL codes, the low incidence of disclosed problems is surprising even to strong municipal credit proponents like MMA."

Looking to Thursday's pricing action, the City of New York is slated to price $800 million of G.O. bonds after a two-day retail order period. Alan Schankel, managing director with Janney Montgomery Scott LLC, said the bonds had a 3.19% yield for its longest maturity.

California brings $1 billion

Heading up Wednesday's primary activity, the State of California brought to market $1 billion of series 2012 revenue anticipation notes, said Tom Dresslar, spokesman for the state treasurer's office.

The deal included $500 million of series 2012B-1 notes and $500 million of series 2012B-2 notes.

The 2012B-1 notes are due June 28, 2012, bear interest at 1% and priced at 100.279 to yield 0.2%.

The 2012B-2 notes are due June 28, 2012, bear interest at 2% and priced to yield 0.2%.

Barclays Capital Inc. was the lead manager for $500 million of the offering, and J.P. Morgan Securities LLC was the senior manager for $500 million of the offering.

Proceeds from the sale will be used to help the state meet unanticipated cash flow needs through the 2011-2012 fiscal year.

"The $1 billion supplemental RAN sale is part of a three-pronged plan to help the state avoid a $3.3 billion cash deficit," said Dresslar.

"The state controller on Jan. 31 warned the shortfall would likely hit at the end of February and last through mid-April. To fill the liquidity gap, the plan developed by [treasurer Bill] Lockyer, the state controller and the department of finance also calls for payment deferrals and increased lending of special fund monies to the general fund."

University of California sells

Also out of the Golden State, the University of California priced $860 million of series AD taxable general revenue bonds, said a pricing sheet. The deal was upsized from $500 million to the maximum authorized amount.

The bonds (Aa1) were sold through Goldman Sachs & Co.

The bonds are due May 15, 2112, bear interest at 4.858% and priced at par. The bonds were priced at 165 basis points over the 30-year Treasury rate of 3.208%, said Dresslar.

"The proceeds will be used to finance or refinance capital projects at the San Diego, Los Angeles and Berkeley campuses, and for other purposes authorized by the UC Board of Regents," said Dresslar.

"This deal was extremely well received by the market. We like the outcome."

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