Municipals close weaker as Treasuries feel pinch from auction; Charlotte brings $462.8 million

By Sheri Kasprzak

New York, Aug. 13 – Municipals rounded out Thursday on a weak note as Treasuries were pressured by a lackluster 30-year bond auction, market insiders said.

Yields on top-rated munis were higher by 1 to 2 basis points.

Munis were weaker but outperformed Treasuries, which were troubled by a weak 30-year bond auction and strong July retail sales. The 10-year benchmark Treasury note yield climbed by 5 bps to close the session at 2.19%, the 30-year bond yield rose by 2 bps to end at 2.86%, the five-year note yield rose by 6 bps to 1.58%, and the two-year yield rose by 5 bps to 0.72%.

Charlotte offers debt

Leading Thursday’s primary action, the City of Charlotte, N.C., hit the market with $462.8 million of series 2015 water and sewer revenue refunding bonds.

The bonds (Aaa/AAA/AAA) were sold through Wells Fargo Securities LLC.

The bonds are due 2016 to 2036 with term bonds due in 2040 and 2045. The serial coupons range from 1% to 5%. The 2040 bonds have a 5% coupon and priced at 116.471, and the 2045 bonds have a 4% coupon and priced at 103.203.

Proceeds will be used to refund the city’s series 2002B-C variable-rate bonds, its series 2005A bonds and its series 2006A bonds, as well as terminate a related interest rate swap agreement.

Kansas deal may not help

During the week, the Kansas Development Finance Authority sold $1,005,230,000 of series 2015H taxable State of Kansas – Public Employees Retirement System revenue bonds. That deal might not be effective in addressing the state’s underfunded pensions.

“Pension obligation bonds will not correct unsustainable benefit and contribution practices and are not a form of pension reform,” said a statement from Fitch Ratings.

“Issuing POBs is neutral from some governments’ credit quality and negative for others. In our view, credit quality is tied to whether governments implement reforms to make their underlying pension obligations sustainable over time.”

The bonds (Aa3/AA-/) priced Wednesday through BofA Merrill Lynch and Wells Fargo Securities LLC.

The bonds are due 2017 to 2030 with term bonds due in 2037 and 2045. The serial coupons range from 1.435% to 4.391% and all priced at par. The 2037 bonds have a 4.727% coupon, and the 2045 bonds have a 4.927% coupon. Both priced at par.

POBs could be negative

Shorter maturities priced tighter than initial talk, and longer maturities priced wider, said a source familiar with the deal.

“In the optimal scenario, POBs put cash into a troubled pension system, increasing its potential investment returns (at the assumed discount rate) and decreasing the size of annual contributions,” the Fitch report said. “However, this is typically neutral for credit quality because the decline in pension contributions is generally offset by higher debt service and the unfunded pension liability is replaced by bonded debt. At worst, governments using POB proceeds to cover annual contributions that normally would be paid by annual budgetary resources are engaging in deficit financing and creating a higher annual fixed-cost burden and higher liabilities. This is typically negative for credit quality.”

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