Municipals climb to round out week; Golden State Tobacco to headline with $1.7 billion bonds

By Sheri Kasprzak

New York, March 20 – Municipals ended the week on a high note, with yields sliding another 2 to 3 basis points across the curve, traders said.

On the week, yields have fallen about 15 basis points in the middle of the curve, said a trader in the afternoon.

Meanwhile, Treasuries were also stronger and outperformed municipals with yields falling by 5 to 6 bps.

The week ahead will offer about $9.5 billion of new issues, up a bit from the week just finished, said a market insider.

Golden State tops calendar

Golden State Tobacco Securitization Corp. of California is slated to price $1,704,990,000 of series 2015A tobacco settlement asset-backed refunding bonds on Wednesday, said a preliminary official statement.

The bonds (A1/A/A) will be sold through joint bookrunners Barclays and Citigroup Global Markets Inc. with Jefferies & Co. as the co-senior manager.

The bonds are due 2016 to 2035 with term bonds due in 2040 and 2045.

Proceeds from the deal will be used to refund the corporation’s series 2005A asset-backed bonds.

“In addition to security from a pledged revenue stream consisting of 43% of California’s payments under the MSA [Master Security Agreement] tobacco settlement agreement, unlike some other Golden State Tobacco issues, this issue will have additional security of the state’s promise to seek budget appropriations if needed,” Alan Schankel, chief fixed income strategist with Janney Montgomery Scott LLC, said on Friday.

Puerto Rico munis hurting

Elsewhere, the S&P Municipal Bond Puerto Rico Bond index has barely squeaked by with a positive return so far in 2015, said J.R. Rieger, global head of fixed income at S&P Dow Jones Indices, in a report released Friday.

Bond prices in the index, he said, are averaging 50 cents on the dollar. The low point for the average Puerto Rico bond price came on July 8, 2014 at 47.27 cents on the dollar, Rieger noted.

By comparison, the average price of bonds in the S&P Municipal Bond High Yield index is more than 57 cents, including bonds from Puerto Rico.

“So how much more pain is there? ... Uncertainty continues to hang over the market. The possible restructuring of the debt of the larger revenue bond issuers in Puerto Rico makes for a trying time for the Puerto Rico Senate. Needed tax reform is hotly debated and probably harder to implement,” Rieger said.

“Another question weighing on the market is this: how much more underperformance will state funds that own Puerto Rico bonds and the hedge funds that bought Puerto Rico bonds in the downturn tolerate before flooding the market with bonds? While the market may have already adjusted for this, with the S&P Municipal Bond Puerto Rico index tracking over $73 billion of bonds by par value, it is after all a significant portion of the bond market.”

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