Municipals get boost from Treasuries; new issue volume sluggish again with $2.5 billion ahead

By Sheri Kasprzak

New York, Feb. 18 - Municipals closed out Tuesday on a firmer note, especially 10 years and out, insiders said. Treasuries improved as well, but municipal secondary action remained relatively light in what may pan out to be another slow week for the market.

"We seem to be following Treasuries," a trader said late in the day.

"There's not a lot of trading volume, and we're just kind of waiting to see what's coming up this week, but new issues are expected to be light. It's going to be a pretty quiet week from what I understand. A pretty standard short week."

New issuance last week was just $3.8 billion, and the light primary action will continue into this week with only $2.5 billion of new deals expected.

"The light primary left last week's total MSRB volume at $28.8 billion, well below the average $46 billion of the two prior weeks - almost certainly we are in for another week of tepid volume," said Alan Schankel, managing director with Janney Montgomery Scott LLC.

More Puerto Rico downgrades

Moving to ratings actions, Fitch Ratings cut more Puerto Rico ratings.

The agency downgraded the rating on $8.7 billion of Puerto Rico Electric Power Authority power revenue bonds to BB+ from BBB-. It also lowered Puerto Rico Aqueduct & Sewer Authority's $3.4 billion of series 2012A-B senior revenue bonds to BB+ from BBB-.

"The rating downgrade and outlook revision [to negative from stable] reflect concerns prompted by Fitch's recent downgrade of the debt ratings of the Commonwealth of Puerto Rico (to BB from BBB- with a negative outlook) as a result of continuing challenges related to a weak economy, increasingly strained liquidity and deteriorating capital market access," wrote analysts Dennis Pidherny, Lina Santoro and Richard Raphael.

"While PREPA's debt is not supported by the commonwealth, Fitch believes that these same challenges warrant a downgrade to below investment grade."

Although PRASA's debt was also cut because of Fitch's G.O. downgrade, the authority enacted a 67% average rate increase for the current fiscal year, allowing it to become self-sufficient without assistance from the commonwealth and the Government Development Bank.

"...PRASA's improving financial and debt profiles currently keep the authority's rating from falling further," the Fitch analysts said.

"The negative outlook on the authority's bonds includes possible additional capital and service area pressures that could adversely affect the authority's financial profile over the long term, particularly in the event further deterioration of the commonwealth's G.O.s occurs."

Stockton USD deal set

Just on the heels of an upgrade from Standard & Poor's, the Stockton Unified School District of California is on board to price $65 million of G.O. bonds on Thursday.

"It is unexpected to see the words 'Stockton' and 'upgrade' in the same sentence, but indeed Stockton Unified School District was upgraded by S&P to A+ from A," Schankel said Tuesday.

S&P noted in its report that the district's tax base partially overlaps the bankrupt City of Stockton's, but G.O. bonds from the school district are secured by property taxes levied and collected by San Joaquin County. The city's actions do not impact the district.

The offering will be conducted on a negotiated basis through De La Rosa & Co. Inc., and proceeds from the sale will be used to finance capital improvement projects within the district.

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