Municipals little changed; Pennsylvania Economic Development Finance preps $2.9 billion sale

By Sheri Kasprzak

New York, Oct. 1 - Municipals kicked off October on a quiet note. There was little trading action on Monday, and yields moved very slightly, market insiders said.

"There's this sense that maybe demand is starting to fall off a bit," one trader said.

"The timing is kind of unfortunate because we see quite a bit of supply going forward, and that could mean some pressure on yields going down the road. This week, I don't think it will make that much of a difference. So far, the new issues have been well-absorbed."

Tom Kozlik, municipal credit analyst with Janney Montgomery Scott LLC, said Monday that he has also seen a slight pullback in demand.

"Municipal market volume is anticipated about $8.4 billion, while the demand side, as gauged by Investment Company Institute data, is still positive but has fallen substantially to $446 million as of the week ending Aug. 19 from $1.3 billion the week before," Kozlik wrote.

"Supply is being led by a $2.5 billion Pennsylvania unemployment compensation revenue bond series that is taking retail orders today [Monday] and will price for institutions tomorrow [Tuesday]."

Pennsylvania deal ahead

The week's leading deal will be the Pennsylvania Economic Development Finance Authority's $2,896,870,000 of series 2012 unemployment compensation revenue bonds (Aaa/AA+/AA+).

The bonds will be sold through Citigroup Global Markets and Bank of America Merrill Lynch.

The offering includes $1,408,175,000 of series 2012A bonds, $1,186,695,000 of series 2012B bonds and $302 million of series 2012C variable-rate bonds.

Proceeds from the offering will be used to repay federal loans related to the commonwealth's unemployment compensation system.

Janney cautious about Pennsylvania issuers

Despite a report from Moody's Investors Service expressing concern over Pennsylvania's local governments facing credit pressure, Janney's Kozlik said Pennsylvania's local government and school district sectors are largely high-quality.

Late last week, Moody's published a report titled "Pennsylvania Local Governments Face Credit Pressure in Weak Recovery."

"The title is misleading as the text of the report goes on to anticipate that 'While most Pennsylvania municipalities will continue to maintain stable financial operations ... we expect rating downgrades to continue to outpace upgrades over the next year,'" Kozlik wrote.

"Moody's also notes that school districts are most at-risk due to property tax cap restrictions. The median rating for Moody's [Pennsylvania] local governments is Aa3, the same as the nationwide median. Janney has a 'cautious' credit outlook on the local government and school district sectors but still believe that the issuers are largely high-quality."

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