Illinois, New York Lead Week as Debt Sales Leap 53% From 2009: Muni Credit
Illinois and New York issuers will offer $4.7 billion of this week’s municipal debt with scheduled sales 53 percent higher than the same week last year, as local governments seek to place deals before the end of 2010.
States and municipalities plan to borrow about $13.3 billion this week, compared with $8.7 billion sold the week after the U.S. Thanksgiving holiday in 2009, according to data compiled by Bloomberg. The alternative-minimum-tax exemption and the Build America Bond program are set to expire on Dec. 31 unless Congress extends them.
Issuers who were rushing to sell Build Americas and other federally supported debt before year-end spurred supply to record highs this month, sending yields on 10-year AAA tax- exempts 30 basis points higher since the end of October, according to a Bloomberg Valuation index. A basis point is 0.01 percentage point.
“We’ve taken our hit already, so I don’t see a big directional change,” said Matt Dalton, chief executive officer of Belle Haven Investments Inc. in White Plains, New York, arguing that yields are unlikely to rise again even amid a glut. “We may push off a few basis points,” said Dalton, who oversees $450 million in assets.
Mutual-fund investors disposed of more than $5 billion of municipal assets in the last two weeks, with almost $2.27 billion in the week ended Nov. 24, according to Lipper FMI, a research company. It was the second-straight outflow and followed a week in which investors withdrew more than $3.1 billion, the most since January 1992, according to Tom Roseen, senior analyst at Lipper in Denver.
Funds will see outflows as investors raise cash to position for possible price declines as scheduled issuance increases at the end of the year, Dalton said. Bond prices have plummeted as yields soared this month.
“The outflows are coming from individuals who don’t want to take any more hits,” he said.
Illinois, which shares the worst state credit rating with California from Moody’s Investors Service, leads this week’s issuers with $1.46 billion in revenue bonds through the Railsplitter Tobacco Settlement Authority. Illinois is rated A1 by Moody’s and A+ by Standard & Poor’s, both fifth-highest.
Bonds maturing in June 2027, about $317 million of the issue, are being offered to individual investors today at a 6.25 percent yield, according to a person with direct knowledge of the sale. That’s about 250 basis points above top-rated debt, according to a 17-year BVAL benchmark index.
A $329 million portion, the largest of the deal, isn’t being offered during the so-called retail period, which will continue tomorrow.
The debt, rated A- by S&P and BBB+ by Fitch Ratings, fourth- and third-lowest investment grades, is backed by payments from a 1998 settlement of a lawsuit against tobacco companies. Proceeds will help pay leftover fiscal 2010 bills by Dec. 31. The state has been the recipient of $3.3 billion of tobacco settlement payments, preliminary offering documents show.
Comptroller Dan Hynes warned in an October report that failure to sell the bonds and collect funds from other borrowing and one-time sources may make it hard to meet the deadline to eliminate $2 billion of 2010 debt. The 2011 fiscal year began July 1 and Illinois has a “lapse” period to settle outstanding liability.
“The Railsplitter deal is something Illinois needs to do to plug the hole in their budget,” said Howard Cure, director of municipal research for Evercore Wealth Management LLC in New York. “States don’t usually leverage their tobacco settlement monies but they need to plug holes.”
Chicago, the third most-populous U.S. city, is selling about $804 million this week, including about $214 million in Build America Bonds. The city postponed the sale in mid-November in the hope of obtaining more favorable borrowing costs. Chicago’s offering will only go this week if rates are low enough and the market will accept it amid the Illinois issue, Cure said.
“Chicago gets penalized for being in a state that’s having such enormous problems,” he said. “Illinois is going to have to issue debt, and I’m sure the city isn’t going to want to be dragged down by the state.”
Port Authority of New York and New Jersey, which owns the World Trade Center site and runs the three biggest New York-area airports, is selling a postponed $840 million tax-exempt offering in the week’s second-largest deal. This postponement, unlike Chicago, was not market-related, according to a spokesman, Steve Coleman. The sale was delayed amid issues regarding bond insurance from MBIA Inc., he said.
The issue will fund expansion of JFK’s international terminal, according to a Fitch Ratings report. The debt is backed by rental payments from retail concessions and airlines, including the anchor tenant, Delta Air Lines, according to the Fitch report. Delta will account for more than 52 percent of future passenger traffic compared with no more than 10 percent from any single carrier previously, Fitch said, citing greater risk of dependency.
Moody’s ranks the borrowings Baa3 and S&P rates them BBB-, both one level above junk, while Fitch gives the bonds BB, the second-highest speculative grade.
The authority’s last tax-exempt bond sale, a $400 million issue in July, offered 29-year debt priced to yield 4.25 percent, or 25 basis points above a comparable maturity BVAL benchmark index. The securities traded Nov. 26 at a so-called spread of 41 basis points above the index.