Municipals improve by as much as 5 bps; supply lightens, but large Kaiser offering looms

By Sheri Kasprzak

New York, March 27 - Municipals improved on Tuesday as reduced supply and greater demand helped remove the pressure from yields, market insiders reported.

"Around 10 years, we're seeing yields down by as much as 5 basis points, and the overall market is firmer," said one trader reached in the afternoon.

"There has been a surge in demand again, and without much going on in primary, secondary is seeking some activity. Good bids are coming in. That seems to be pushing things along today."

Despite the low volume, the week's biggest deal is coming up on Wednesday, said Alan Schankel, managing director with Janney Montgomery Scott LLC.

The City of Rochester, Minn., is gearing up to sell $200 million of series 2012 health care facilities revenue bonds for the Mayo Clinic. The expectations for the offering are good, according to one sellsider.

"There are a lot of factors going for it," said the market source.

"First of all, supply is fairly light, so there's less competition, and it's a decent name as well."

The bonds (Aa2/AA/) will be sold through Wells Fargo Securities LLC and Bank of America Merrill Lynch. The authority intends to use the proceeds to finance the construction, acquisition and equipment of a proton beam radiation therapy center at the Mayo Clinic-Methodist Hospital, as well as to renovate and construct other properties operated by the clinic.

Kaiser to pump up volume

Although this week's volume is fairly light, the week ahead will bring a major deal, said Schankel.

The California Statewide Communities Development Authority plans to offer $1.5 billion of series 2012A revenue bonds for Kaiser Permanente.

Those bonds (/A+/A+) will be sold through lead managers Citigroup Global Markets Inc., Goldman, Sachs & Co. and J.P. Morgan Securities LLC.

The system, according to Schankel, operates 37 hospitals and employs 16,000 physicians.

Defaults to stay infrequent

Despite a lot of news surrounding defaults in the municipals market, Jay Abrams, chief municipal credit analyst with FMS Bonds Inc., said on Tuesday that he has proof that defaults will remain infrequent.

"In its report, which examined municipal bond defaults and recoveries from 1970 to 2011, Moody's noted, 'We expect municipal debt defaults will remain infrequent and isolated events, rather than systemic events, despite unprecedented credit pressure,' " Abrams wrote in a report released Tuesday.

Downgrades have been on the rise, however, but Abrams noted that the Moody's study showed that 90% of the ratings agency's ratings went unchanged over any yearlong period.

"Of the bonds that did default, the major case, according to Moody's, was enterprise risk," Abrams wrote.

"This risk results from a failure of a bond-financed project to achieve its projected results due to faulty planning or economic downturn, rendering a project unfeasible."

Compared to corporate bonds, Abrams wrote that the Moody's study proved that munis are a safer alternative to corporate debt.

"Over the 30-year time period analyzed, almost all municipal issuers were investment-grade quality, with 94% earning an A or higher rating, compared with 34% in the corporate debt market," he wrote.

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