Municipals closes out week firmer; S&P removes Puerto Rico G.O.s from CreditWatch negative

By Sheri Kasprzak

New York, March 14 - Municipals ended one of the busiest primary weeks in recent history on a firmer note, with yields seen lower by about a basis point, market insiders reported.

"Overall, we've had a staggering number of deals this week, and we've absorbed the bulk of it, so it's been a really successful week," a said trader in the afternoon.

Volume for the week ahead will be decidedly more subdued, with about $3 billion on the calendar so far.

S&P affirms Puerto Rico

Elsewhere during the session, Standard & Poor's announced that it affirmed the Commonwealth of Puerto Rico's BB+ general obligation debt rating and also removed the ratings from CreditWatch with negative implications. The move follows the commonwealth's successful offering of $3.5 billion of upsized G.O. bonds.

"The removal of the ratings from CreditWatch reflects Puerto Rico's successful sale this week of $3.5 billion of G.O. term bonds with an 8% coupon and an effective yield of 8.73%," said S&P credit analyst David Hitchcock.

"In our opinion, the sale will relieve near-term liquidity pressure on the commonwealth."

Even though the agency removed the CreditWatch designation, the debt still retains a negative rating outlook, reflecting "long-term economic and financial trends we see over the next two years," said the analysts. These trends include the potential for a larger deficit in fiscal 2014 than the $650 million that Puerto Rico now projects after the passage of $170 million of mid-fiscal 2014 budget adjustments and the potential for general fund operating deficits in fiscal year 2015 even though the administration announced its intention to introduce a balanced budget for fiscal 2015.

Puerto Rico index up 13.69%

In other news out of Puerto Rico, the S&P Municipal Bond Puerto Rico General Obligation Bond index has returned 13.69% for the year to date, said J.R. Rieger, global head of fixed income at S&P Dow Jones Indices. During the year to date, bonds in the index have fallen by 127 bps to end at a 7.07% yield to worst.

Meanwhile, the muni market absorbed more than $9 billion of new-issue supply, said Rieger.

"Demand for tax-free bonds of all quality is supporting the market as mutual funds see cash inflows," Rieger said Friday.

"The broad municipal bond market tracked by the S&P Municipal Bond index has returned 3.46% year-to-date, rebounding off last year's negative 2.55% return."

Change could increase costs

In other news, Fitch Ratings said Friday that recently proposed changes to the tax code regarding municipal debt could increase the cost of capital for issuers and limit their financial flexibility.

President Barrack Obama recently called for a 28% cap on the value of the tax exemption for municipal bond interest for high earners.

"The proposal could delay some projects, inhibiting economic growth as transportation and other public infrastructure costs mount," wrote Fitch managing director Dan Champeau and senior director Rob Rowan.

"According to the Department of Transportation, maintaining roads and transit systems at their current conditions will cost up to $105 billion, while improvements will bring total costs to $146 [billion] to $171 billion annually through 2030."

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