California brings $4.14 billion in G.O. bonds; high yields don't surprise market insiders

By Sheri Kasprzak

New York, Oct. 8 - The State of California led municipals news Thursday, bringing to market a slightly downsized $4.138 billion sale of series 2009 tax-exempt general obligation bonds and taxable Build America Bonds.

Yields on the bonds were high, but market insiders barely batted an eye. Given the state's low rating and the added risk that entails, market sources said yields were bound to be high and some institutional investors may have stayed away because of the risk.

Retail investors bought up just 33% of the tax-exempt bonds and just 31% of the taxable bonds offered to them. In a market that has seen some deals where retail investors purchase 70%, 80% or even 100% of the bonds, this is of note, said Tom Kozlik, municipal credit analyst at Janney Montgomery Scott LLC.

"Retail interest there was about $400 million [of $1 billion]," Kozlik said.

"People lose the fact that there have been so many issues over the past few months driven by retail, where 70, 80, 90, if not 100 percent of the subscription is retail. Yields have been lowered [in previous deals] because of the huge amount of retail interest. That didn't happen, but people talk about it like that was what was supposed to happen."

High yields were expected, Kozlik said, given that the state has the lowest rating in the nation.

"Do I want California paper at that level?" Kozlik asked. "Yeah, I do. The rating is the lowest in the country, but they're in a financial crisis."

The market has been buzzing about the California offering for some time now.

A trader noted Wednesday ahead of the institutional order period that there was a lot of interest in the California bonds because they provide access for people who couldn't previously buy municipals.

"There's a little bit of focus going on with that [California's sale] because people who couldn't buy munis, [now] taxable funds are buying Build America Bonds [which are taxable]," the trader said.

The trader said there has been so much scarcity in the municipals market and people are looking for yield, even on a troubled credit like California.

"There's still demand," the trader noted.

Yields range from 2.95% to 7.23%

The state sold just $4.138 billion of the planned $4.5 billion.

The bonds (Baa1//BBB) were sold through lead manager Goldman, Sachs & Co.

The sale included $2.82 billion in taxable bonds, including $1.75 billion in Build America Bonds, and $1.31 billion in tax-exempt bonds, said Joe DeAnda, spokesman for the state treasurer's office.

Yields on the taxable bonds range from 3.75% to 7.23%, and yields for the tax-exempt bonds range from 2.95% to 5%. The net cost on the Build America Bonds was 4.7% after factoring in the 35% federal subsidy.

Retail investors bought $505.2 million of the bonds, including $427.7 million in tax-exempt bonds and $77.5 million in taxable bonds. Institutional bought the rest.

"We were able to get a $4 billion-plus deal in a cold and inhospitable market," state treasurer spokesman Tom Dresslar said.

"We believe that is a significant accomplishment. And we completed the transaction at a good price to taxpayers given the market conditions we faced and relative to the rates we've paid over the past two years."

Proceeds from the deal will fund capital expenditures.

Dasny sells $377.63 million

Elsewhere, the Dormitory Authority of the State of New York sold Thursday $377.625 million in series 2009 state personal income tax revenue bonds, said a pricing sheet.

The offering included $91.1 million in series 2009G tax-exempt bonds and $286.525 million in series 2009H taxable Build America Bonds.

The bonds were sold through senior manager Goldman Sachs. The co-managers for the 2009G bonds were Citigroup Global Markets Inc., Merrill Lynch & Co. Inc. and M.R. Beal & Co.

The 2009G bonds are due 2010 to 2020 with coupons from 1.5% to 5%. The 2009H bonds are due 2024 and 2039. The 2024 bonds have a 4.723% coupon, priced at par, and the 2039 bonds have a 5.427% coupon, also priced at par.

Proceeds will be used to fund capital projects and improvements for the City University of New York's community and senior college campuses.

L.A.'s MTA brings $320.94 million

In other primary market action, the Los Angeles Metropolitan Transportation Authority priced $320.935 million in series 2009A sales tax revenue refunding bonds, said a pricing sheet.

The bonds (Aa3/AAA/) were sold through senior manager Merrill Lynch. The co-managers were J.P. Morgan Securities Inc., Prager, Sealy & Co. LLC and Stone & Youngberg.

The bonds are due 2010 to 2026 with coupons from 2% to 5%.

Proceeds will be used to refund debt and repay commercial notes.

North Texas Tollway drives $170.73 million

Also priced Thursday were $170.73 million in series 2009C system first-tier current interest revenue refunding bonds (A2/A-/) from the North Texas Tollway Authority, said a term sheet.

The bonds (A2/A-/) were sold through lead manager Siebert Brandford Shank & Co. LLC.

The bonds are due 2044 with a 5.25% coupon priced at 96.159.

Proceeds will be used to refund the authority's series 2008E-1 and 2008G bonds.

The authority is located in Dallas.

Mississippi to bring $622.82 million

Several offerings for the upcoming week were already lining up Thursday afternoon. The negotiated calendar will be led by Wednesday's sale of $622.82 million in series 2009 G.O. and G.O. refunding bonds from the State of Mississippi.

The deal includes $340.375 million in series 2009D taxable G.O. bonds, $120 million in series 2009E taxable G.O. bonds, $64.145 million in series 2009F tax-exempt G.O. bonds and $98.3 million in series 2009G G.O. Build America Bonds.

Morgan Keegan & Co. Inc., Morgan Stanley & Co. Inc. and Merrill Lynch are the lead managers.

The 2009D bonds are due 2010 to 2021 with term bonds due 2029, and the 2009E bonds are due 2032. The 2009F bonds are due 2020 to 2023. The 2009G bonds are due 2034.

Proceeds will be used to refinance the state's series 2008 bonds, fund highway improvements throughout the state, fund grant programs for local governments to expand businesses and refund existing variable-rate bonds.

Atlanta's water bonds to price

Coming up on Tuesday, the City of Atlanta plans to price $433.435 million in series 2009B water and wastewater revenue bonds, said a sales calendar.

The bonds (Aa2/AAA/AA+) will be sold through lead managers Goldman Sachs, SunTrust Robinson Humphrey Inc. and Terminus Securities.

The bonds are due 2010 to 2024 with term bonds due 2029, 2034 and 2039.

Proceeds will be used to refund the city's series 2001B and 2001C bonds.

- Paul Deckelman contributed to this report.

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