Municipals end Friday flat amid light action; airports, toll facilities receive cautious view

By Sheri Kasprzak

New York, June 22 - Municipals rounded out the week largely unchanged, market insiders reported, with little trading activity and new-issue supply drying up ahead of the coming week.

"It's been a pretty quiet day," said one trader reached in the afternoon.

Yields were seen mostly flat and secondary action was very light, the trader said.

Meanwhile, some market sources are taking a cautious approach not only to the airports sector, but also the toll facilities sector, said Tom Kozlik, municipal credit analyst with Janney Montgomery Scott LLC.

Several factors are providing credit stress to the U.S. municipal market related to airport and toll facility revenue bonds that could influence ratings and rating outlooks, including the fact that airport and toll facility sector performance has trended up, but has not returned to the levels seen in 2007 to 2008.

"Both enplanements and vehicle miles traveled are only near 2004 to 2005 levels and have contributed to stagnant revenues," Kozlik wrote Friday.

Outlook could improve

Although some factors, including the acquisition of US Airways, could be a slight credit negative for the airport sector, some actions could increase ratings and outlooks in the sector.

Those would include, according to Kozlik, the containment in both the short and long term of the European debt crisis, a consistently positive trend of U.S. economic growth, consistent enplanement growth above the Federal Aviation Administration's 2.5% forecast, and consistent growth in indicators such as vehicle miles traveled.

Even so, Kozlik said Janney still considers the U.S. municipal transportation sector to be one that includes mostly high-quality revenue bond issues.

"By high-quality, we mean a sector which will not be prone to experience a high level of payment defaults under rising, pressured or severe economic conditions," Kozlik wrote.

California bonds outperform

Looking to California bonds, the state's muni bonds have outperformed the broader municipals market by 12.7% year to date, said J.R. Rieger, vice president of fixed income indices with Standard & Poor's, on Friday.

The return on the S&P National AMT-Free Municipal Bond Index was 10.04% year to date, and the returns on the S&P Municipal High-Yield Index year to date was 15.39%.

"The most prominent municipal bond issuer with a huge budget gap is taking action," said Rieger.

"Governor Brown submitted his budget and the legislators vote on it next week, another example of states and local municipalities making tough decisions to get their expenses in line with revenue expectations. Municipal bonds from the State of California have actually outperformed other states in 2011 and continue that trend in 2012.

"Simply put, the higher yields seen on California bonds as compared to other municipal bonds have simply eroded away as demand remains solid for municipal bonds and even stronger for municipals with more yield."

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