Munis close unchanged, weaker as market preps for new issues; L.A. County brings $790 million

By Sheri Kasprzak

New York, Nov. 8 - Municipals closed out Monday largely unchanged with some weakness spotted in the intermediate portions of the yield curve, market insiders reported.

"We're just a touch off, mostly in the middle [of the curve]," said one trader.

"I think the market is skittish because supply is still bogging us down. There's more supply than we can digest right now, and it looks like that's going to be a struggle for the rest of the year."

A shift in the market may occur in the near future following a Congressional power shift - and the potential death of Build America Bonds.

"Supply is strong, but if the BABs program ends, expect the tax-free/taxable balance to shift, with more tax-free issuance in the new year," said Alan Schankel, managing director at Janney Montgomery Scott LLC.

"Our favored proxy for tax-free demand is fund flows. Except for two weeks in April, flows to tax-free municipal funds have been positive all year, with $34.7 billion in new money through October. However, the pace seems to be slowing. Inflows may continue to diminish and even turn negative, as equity markets, propelled by an election tailwind, begin to attract attention. Tax-free flows may shift to equity funds as confidence builds and investors tire of low rates, seeking opportunities in equities."

California, Illinois sales dominate

Schankel said he views the chance of extension of the BABs program as being below 50%.

Another problem the market may face in the coming year is the erosion of municipal credit quality.

"Tax-free to Treasury ratios remain elevated compared to historical levels, reflecting this concern," he noted.

California and Illinois, two troubled credits, will make up the lion's share of this week's new issues.

"Three of these issues are taxable, but the overall heavy California supply will push rates higher for most California issues whether tax-free or taxable," Schankel said.

In Illinois, the woes just seem to be compounded, Schankel pointed out, adding that S&P's downgrade of Chicago's credit to A+ from AA- forced the city to postpone a major G.O. bond sale.

L.A. County plans deal

Amid those California offerings is a deal from the Los Angeles County Public Works Financing Authority, Calif., which is set to bring $790.76 million of series 2010 lease revenue bonds Wednesday, said a sales calendar.

Bank of America Merrill Lynch is the senior manager for the bonds (A1/A+/A+).

The sale includes $89.78 million of series 2010A tax-exempt bonds and $700.98 million of series 2010B Build America Bonds.

Proceeds from the offering will be used to construct an addition to the Harbor-UCLA Medical center and seismic retrofit for the facility, as well as rehabilitate the county's Hall of Justice.

University of California to price bonds

Also out of the Golden State, the Regents of the University of California Medical Center plans to bring $760 million of series 2010 revenue bonds Tuesday, said a sales calendar.

The bonds (Aa2/AA-/) will be sold on a negotiated basis with Barclays Capital Inc. as the senior manager.

Proceeds from the sale will be used to refund the medical center's outstanding series 2000 bonds, as well as construct and equip a medical building adjacent to the Santa Monica-UCLA Medical Center and Orthopedic Hospital.

L.A. Water and Power sale set

Looking ahead, the Department of Water and Power of the City of Los Angeles is expected to sell $760.2 million of series 2010 power system revenue bonds, said a preliminary official statement.

The offering comprises two tranches - a series 2010D Build America Bond tranche and a series 2010E tax-exempt tranche - but the exact breakdown was not available Monday.

The bonds will be sold on a negotiated basis with Goldman, Sachs & Co. and De La Rosa & Co. as the senior managers.

Proceeds will be used to make improvements to the city's power supply system.

Santa Clara deal planned

In other California offerings, the Santa Clara Valley Transportation Authority is gearing up to bring $700 million of series 2010 sales tax revenue bonds on Tuesday, said a sales calendar.

The bonds (Aa2/AA+/) will be sold through Barclays Capital Inc.

The offering includes $515 million of series 2010A Build America Bonds and $185 million of series 2010B tax-exempt bonds.

Proceeds from the sale will be used to finance capital improvements to the county's commuter projects.

Based in San Jose, the authority operates bus and light rail services throughout the county and provides capital funding for regional commuter rail lines in the county.

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