Yields drop; Railsplitter Tobacco brings $1.5 billion of revenue bonds; L.A. water sells bonds

By Sheri Kasprzak

New York, Nov. 30 - Municipal yields were slightly firmer on Tuesday as the market got an unexpected offering when the Railsplitter Tobacco Settlement Authority of Illinois priced its $1.5 billion of series 2010 tobacco settlement revenue bonds a day early.

One trader said the shorter portions of the curve were mostly unchanged but that out long, yields were down about 1 to 2 basis points.

"There seems to be some interest [in secondary], and that's helping somewhat, but the improvement seems to be limited to long bonds," he said.

"Primary is still the king, and that's where the big focus in the market is."

The Railsplitter bonds, which received so much retail interest that the institutional pricing wrapped up a day early, forced some issuers to delay their pricings by a day or so.

The bonds (/A/A-/BBB+) were well received in the market for such a controversial issue, said one sellsider.

"It got a lot of retail attention, seemingly more than was expected," he said.

"I think it's a win for the state. Illinois typically does have a tough time given its financial situation."

Alan Schankel, managing director with Janney Montgomery Scott LLC, said Tuesday that the structure of the issue is tighter than previous tobacco bond issues. The longest maturity is 17 years, compared with 40 years and beyond for earlier tobacco issuers.

The offering comes, Schankel noted, as cigarette consumption is expected to decline by 10% each year before debt service coverage falls below 1 times.

Bonds yield 2.2%-6.2%

The bonds are due 2012 to 2021 with term bonds due 2024 and 2027. Coupons range from 3% to 6% with yields from 2.2% to 6.2%.

Barclays Capital Inc. and Citigroup Global Markets Inc. were the senior managers.

Proceeds will be used to fund Illinois general expenses once the state transfers all of its tobacco revenue rights to the authority, per a 1998 master settlement agreement between Illinois and the major tobacco companies.

Meanwhile, the decision to bump up the institutional pricing period forced another major issuer for the week to delay its pricing. The Port Authority of New York and New Jersey will now offer its $840 million of series 2010 debt securities on Wednesday.

The bonds (Baa3//BB) will be sold through Citigroup, and proceeds will be used to expand the Delta Airlines terminal at the John F. Kennedy International Airport.

L.A. water bonds price

In other primary news, the Department of Water and Power of the City of Los Angeles on Tuesday sold $492.71 million of series 2010 water system revenue bonds, said a pricing sheet.

The bonds were sold through J.P. Morgan Securities LLC and Siebert Brandford Shank & Co. LLC.

The bonds are due July 1, 2041 and July 1, 2050. The 2041 bonds have a 7.003% coupon priced at par, and the 2050 bonds have a 6.603% coupon, also priced at par.

The department will deposit the proceeds into its water revenue fund to operate and maintain the city's water system.

Montgomery County sells

Also during the session, Montgomery County, Pa., sold $60 million of series 2010 general obligation bonds, said a pricing sheet.

The sale included $49 million of series 2010C Build America Bonds and $11 million of series 2010D tax-exempt bonds.

The bonds (Aaa) were sold competitively with Robert W. Baird & Co. winning the bid. The true interest cost, including the 35% subsidy, came in at 3.020553%.

Proceeds will be used to fund equipment and vehicle purchases, road construction, upgrades to county information services and bridge reconstruction.

The county seat is Norristown.

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