Municipals weak as supply pressures yields; New York City Transitional brings $1 billion

By Sheri Kasprzak

New York, June 6 - A day of rising Treasury yields and continued high supply took its toll on municipals on Wednesday, as yields climbed substantially, as much as 10 basis points in spots over the course of the day, said trader reached during the session.

"It was a tough day," said one trader.

"There are a lot of factors to contend with. Treasuries are slipping and primary is still extremely heavy."

Some of the week's largest offerings priced on Wednesday, including a $1 billion offering of bonds from the New York City Transitional Finance Authority and a $300 million deal from the Metropolitan Washington Airports Authority.

NYC bonds adjusted

Leading the pack of offerings was the New York City TFA deal, which priced through lead manager Goldman, Sachs & Co.

The bonds (Aa1//AAA) were sold in three tranches. The deal included $800 million of series 2012F-1 tax-exempt subordinate bonds, $100 million of series 2012F-2 taxable subordinate qualified school construction bonds and $100 million of series 2012F-3 taxable subordinate bonds.

The 2012F-1 bonds are due 2014 to 2035 with a term bond due in 2039. The serial coupons range from 1.5% to 5%. The 2039 bonds have a 5% coupon. The full details of the 2012F-1 bonds were unavailable by press time Wednesday.

The 2012F-2 bonds are due May 1, 2033, and bear interest at 4.2% priced at 102.807.

The 2012F-3 bonds are due 2017 to 2021 with coupons from 1.35% to 2.35%.

During a two-day retail order period, yields on the bonds were adjusted higher in spots, said Alan Schankel, managing director with Janney Montgomery Scott LLC.

"NYC TFA took its $800 million [tax-exempt] issue into the second day of a retail order period [Tuesday] with yields adjustments 1 to 6 basis points higher in some maturities," said Schankel.

Proceeds from the deal will be used to finance capital improvements to city facilities, school buildings and other city infrastructure.

Metro Washington airport prices

Elsewhere, the Metropolitan Washington Airports Authority priced $311,825,000 of series 2012 airport system revenue refunding bonds, said a pricing sheet.

The bonds (Aa3//AA-) were sold through senior managers Barclays Capital Inc. and Loop Capital Markets LLC. The co-managers were Bank of America Merrill Lynch, Citigroup Global Markets Inc., Davenport & Co. Inc., Raymond James/Morgan Keegan, Siebert Brandford Shank & Co. LLC, U.S. Bancorp Investments Inc. and Wells Fargo Securities LLC.

The deal includes $291,035,000 of series 2012A refunding bonds and $20.79 million of series 2012B refunding bonds.

The 2012A bonds are due 2016 to 2032 with 3% to 5% coupons. The 2012B bonds are due 2013 to 2019 with coupons from 3% to 5%.

"Pricing on $311 million Metropolitan Washington D.C. Airport finalized with AMT and non-AMT pieces carrying yields for 7-year bonds of 2.39% for the part subject to AMT and 1.79% for the non-AMT bonds, indicating a 40 basis point differential for bonds subject to Alternative Minimum Tax," Schankel wrote Wednesday.

Proceeds will be used to refund the authority's series 2001A, 2002A and 2002D revenue bonds.

Munis offer benefits over equities

Even though retail investors have been hesitant to touch the market with yields at record lows, there are benefits to getting into the market, said James Klotz, president of FMS Bonds Inc.

"Despite their modest yields, municipal bonds provide considerably less drama than equities," Klotz wrote Wednesday.

"Bleak news from Europe and recent stock market plunges highlight the staid virtues of munis. Importantly, the news on state budgets has brightened considerably. In a state budget update released by the National Conference of State Legislatures, more than half of states and the District of Columbia expect to show modest surpluses in their fiscal year revenues."

Even so, many states still face financial problems in the coming fiscal year.

"But for the first time since 2008, legislators from most states didn't kick off their legislative sessions dealing with budget woes," Klotz wrote.

Compared to other asset classes, Klotz said municipals make sense in tumultuous times.

"For AAA bonds, the 10-year cumulative rate for municipal bond defaults is zero compared with 0.48% for corporate bonds," Klotz wrote.

"For AA-rated bonds, it's 0.01% for munis versus 0.86% for corporates. The wide disparities continue as rating quality decreases."

Stockton bankruptcy looms

Speaking of municipal defaults and bankruptcies, Schankel reported Wednesday that the City of Stockton, Calif., could file for bankruptcy before the end of the month.

The city council voted to authorize bankruptcy after June 25 if current mediation efforts with 18 creditors, including Calpers, and bond insurers, fail to generate enough concessions, Schankel said.

"If it proceeds, Stockton will be the largest U.S. city to file under Chapter 9," he said.

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