Municipals close flat to firm; market awaits $6.9 billion supply; PRASA eyes $750 million deal

By Sheri Kasprzak

New York, Aug. 17 – Municipals rounded out Monday unchanged to slightly firmer with yields lower by 1 basis point to 2 bps in spots, traders reported.

Top-rated munis underperformed rallying Treasuries, which saw yields drop 1 bp to 4 bps as weaker commodities fueled a flight to quality.

Looking to the week, supply will be a bit more subdued with around $6.9 billion of new offerings poised to price.

PRASA leads pack

Investors will be eyeing the Puerto Rico Aqueduct and Sewer Authority’s planned $750 million senior-lien revenue bond offering, which is expected to price Tuesday.

News of the offering sprung up quickly. The deal was announced last week on the heels of the Commonwealth of Puerto Rico’s first-ever debt default. The commonwealth’s Government Development Bank has announced that the authority will not likely restructure its debt.

“PRASA’s debt, specifically 6% of 2038, traded in several large blocks (more than $5 million) of customer sales at 72.50 (8.81% yield to maturity) and customer purchases at 72.75 (8.78% yield to maturity), but we suspect (and have heard price talk) that new issue pricing of the 30-year term bond will be in the 10% area,” said Alan Schankel, managing director with Janney Montgomery Scott LLC, Monday morning.

Bonds rated distressed

On Monday, Fitch Ratings gave the PRASA deal a CC and Moody’s Investors Service gave it a Caa3.

Fitch noted in its rating report that the authority is particularly sensitive to a ratings downgrade from the commonwealth, and if it does, in fact, restructure its debt, it would most likely lead to a default all the way down to D.

“Ratings on the Puerto Rico Aqueduct and Sewer Authority’s revenue bonds will continue to be influenced by movement of the Commonwealth of Puerto Rico’s G.O. rating for the foreseeable future given the commonwealth’s historical actions and ability to expose PRASA to potential fiscal and operational challenges,” the Fitch report said.

Even so, the authority enacted a 60% rate hike for fiscal year 2014, which has allowed it to become self-sufficient without assistance from the commonwealth and the Government Development Bank.

“For fiscal 2015, operations generally remained favorable, but cash flows were severely and negatively affected by delays in the current financing,” said Fitch.

“Self-sufficient operations are forecasted going forward.”

BofA, JPMorgan lead

The syndicate of underwriters for Tuesday’s deal is led by BofA Merrill Lynch and J.P. Morgan Securities LLC.

The authority plans to use the proceeds from the senior-lien debt to finance capital projects under its five-year capital improvement plan.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.