Municipals close mixed as market digests supply; Detroit brings $501 million of water bonds

By Sheri Kasprzak

New York, Dec. 14 - Municipals closed out another session mixed as investors took on some of the recent supply in the secondary market, traders reached during the session said.

The brightest spot of the market was for the 15-years, where yields were down about 3.5 basis points, said one trader. Ten-year yields ended down almost 2 bps, and 20-year yields were up more than a basis point.

Meanwhile, Alan Schankel, managing director with Janney Montgomery Scott LLC, said on Wednesday that so far only one municipal issuer has been impacted by the recent bankruptcy filing of American Airlines.

"Moody's lowered its outlook on the A1 rating for $3.8 billion of Dallas-Fort Worth Airport bonds to negative in the wake of American Airlines' bankruptcy filing," wrote Schankel in a report released on Wednesday.

"DFW is AA's largest hub, with the airline responsible for 84% of enplanements in FY2011, and Moody's estimates that reorganization will result in capacity declines of less than 10%," the report said.

In a report released in late November, J.R. Rieger, vice president of fixed-income indices with Standard & Poor's, said that the filing could impact 29 American Airlines-backed municipal bonds totaling over $3 billion par value.

"The American Airlines-backed municipal bonds represent 0.232% of the total par value of the [S&P Municipal Bond] index," Rieger said at the time.

"The bankruptcy and uncertainty it brings for the unsecured bonds in particular could have a significant negative impact on the market value of these bonds."

Detroit brings $501.9 million

Heading up the day's primary activity, the City of Detroit priced $501,915,000 of series 2011 senior-lien water supply system revenue bonds in three tranches, said a pricing sheet.

The offering, said one market insider close to the deal, was significantly oversubscribed, a surprising fact considering that the city is currently under review by Moody's for a possible downgrade. The city had intended to sell $493,375,000 of the bonds.

"We have been, for the most part, in a risk-averse environment, but that doesn't mean there's no appetite for risk," said the market source.

"I think it's important to point out that it is a major issuer, and for those with the risk appetite, this was probably one of the few options out there. It is a troubled credit, so it's not for everyone. But clearly there was healthy interest in it."

The deal included $382,425,000 of series 2011A tax-exempt bonds, $17.23 million of series 2011B taxable bonds and $102.26 million of series 2011C refunding bonds.

Siebert led the syndicate

The bonds were sold on a negotiated basis with Siebert Brandford Shank & Co. LLC and J.P. Morgan Securities LLC as the senior managers.

The 2011A bonds (A1/A+/) are due 2012 to 2027 with term bonds due in 2031, 2036, 2037 and 2041. The serial coupons range from 3% to 5.25%. The 2031 bonds have a 5% coupon priced at 99.015, and the 2036 bonds have a 5% coupon priced at 96.84. The 2037 bonds have a 5.75% coupon priced at 105.626, and the 2041 bonds have a 5.25% coupon priced at 98.522.

The 2011B bonds (A2/A/) are due 2013, 2016, 2021 and 2033. The 2013 bonds have a 2.496% coupon priced at par, and the 2016 bonds have a 3.607% coupon priced at par. The 2021 bonds have a 5% coupon priced at 99.474, and the 2033 bonds have a 6% coupon priced at 98.104.

The 2011C bonds are due 2012 and 2021 to 2027 with term bonds due in 2012 and 2041. The serial coupons range from 4.5% to 5.25%. The 2012 bonds have a 3% coupon priced at 101.134, and the 2041 bonds have a 5% coupon priced at 95.689.

Proceeds will be used to fund capital improvements to the city's water supply system and terminate the entire existing interest rate swap portfolio of the water system.

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