Municipals weaker as primary calendar stacks up; downgraded Illinois preps two offerings

By Sheri Kasprzak

New York, June 14 - Municipal yields kicked off the week on a sour note, traders reported.

"Overall, yields are up by maybe 2 or 3 basis points across the curve," said one trader. "We're probably following Treasuries. Treasuries are off today, so that's most likely why we're feeling a little off."

Meanwhile, trading volume was decent, the trader reported Monday.

"It's not bad for a Monday," he said.

"We're seeing some activity. There doesn't really seem to be a pattern or trends as to what's trading. It's all over the map, but really, to be trading anything at all is an improvement."

Amid the action, the Louisiana State University and Agricultural and Mechanical College's series 2010 auxiliary revenue and refunding bonds were moving. The 4.75% 2040 bonds were seen at a 4.661% yield in afternoon trading. The bonds priced Friday to yield 4.93%.

Illinois plans deals

The State of Illinois is a major headliner for the week's primary action, featuring two large offerings during the week. The offerings were planned before both Fitch Ratings and Moody's Investors Service downgraded the state. Fitch dropped the state to A from A+, and Moody's downgraded the state to A1 from Aa3.

Tom Kozlik, municipal credit analyst with Janney Montgomery Scott LLC, said the downgrade makes Illinois the second-to-lowest rated U.S. state, just above California.

Even so, the budget crisis that has incited the downgrades is also forcing the state to come to market to close the gap.

"Fitch cited the magnitude and persistent nature of Illinois's fiscal problems, including operating deficit, accumulated liabilities and reliance on deficit borrowing to close budget gaps as key factors for the downgrade," Kozlik said.

The downgrades could have a negative impact on the state's upcoming sales, said one sellsider.

"Retail is already backing away [from the muni market]," he said.

"This could push them away even more. Institutional might have an interest. There's still some appetite for risk in institutional, but it will be interesting to see how much of these go to retail."

The state is gearing up to price $492 million in series of June 2010 junior obligation sales tax revenue bonds (//AA+) through Cabrera Capital Markets LLC on Wednesday.

Proceeds from the offering will be used to construct, reconstruct, modernize and extend various state infrastructure projects; to develop and improve educational, scientific, technical and vocational programs and facilities, as well as to expand health and human services; to protect, preserve, restore and conserve the state's natural resources; and to provide incentives for the expansion of businesses into the state.

Additionally, the state plans to price $300 million in series 2010-4 taxable general obligation Build America Bonds (A1) competitively on Thursday.

The bonds are due 2011 to 2035, and proceeds will be used to fund transportation projects and other capital projects.

Wisconsin sale Tuesday

Looking to Tuesday's headlining deal, the State of Wisconsin is set to price $800 million in series 2010 operating notes on a competitive basis.

The offering is not unusual for the state, said one sellsider connected to the sale.

"These notes are pretty routine for the state," said the sellsider.

"Short-term debt issuance is a strategy that has worked well for the state. Timing was chosen because the state always makes significant cash disbursements over the course of the fiscal year."

The state, the sellsider said, makes local aid payments throughout the fiscal year, and this requires a substantial amount of funding.

The notes are due June 15, 2011.

Massachusetts preps sale

Looking out on the horizon, the Commonwealth of Massachusetts plans to price $250 million in series 2010B consolidated G.O. bonds, according to a preliminary official statement.

The bonds will be sold through lead manager Bank of America Merrill Lynch.

The bonds are due 2011 to 2020.

Proceeds will be used to finance capital projects.

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