Montgomery County Sells $532 Million Facing U.S. Spending Cut: Muni Credit
Montgomery County, where 68,000 people work for the federal government, is selling $532 million of bonds a day after President Barack Obama signed a law raising the U.S. debt limit and cutting spending to avoid a default.
The Maryland county, which borders the nation’s capital, is vulnerable to changes in U.S. credit quality, Moody’s Investors Service said July 28 as Congress wrangled over the borrowing limit. It gave the U.S. a negative outlook yesterday and said it may be downgraded, and it also put Montgomery County's top grade of Aaa on review.
Montgomery should get “a heck of a reception” for its bonds, said John Mousseau, a Vineland, New Jersey-based portfolio manager at Cumberland Advisors, which oversees $1.1 billion in municipal securities.
“If they were downgraded to AA+ from AAA, does it really change their pecking order?” Mousseau said in a telephone interview. “No. They’re still among the best of the best.”
The law enacted yesterday raises the $14.3 trillion U.S. debt ceiling enough to fund the government until 2013 and calls for $2.4 trillion of spending cuts over the next decade.
Finance Director Joe Beach said Montgomery is studying the new legislation to see how it affects the county, home to 23 U.S. agencies including the National Institutes of Health and the Food and Drug Administration, according to Moody’s.
The federal presence “really benefited us in terms of our economic development,” said Beach, who’s in his first week as finance director. “In circumstances like this, it may not be so good.”
State Reception
Beach said the deal should be well-received based on Maryland’s $418.2 million sale last week. The state, also on review pending U.S. spending cuts, was able to lower yields on 10-year bonds amid demand from individuals.
The winners and losers in the debt-ceiling deal will be determined in the next few months, said R.J. Gallo, a senior vice president at Pittsburgh-based Federated Investors who manages about $900 million.
“It creates opportunities to try to adjust the muni portfolio pursuant to who is hit by these cuts,” Gallo said. “We are going to be paying close attention.”
Yields on 10-year top-rated general-obligation tax-exempts fell below 2.6 percent yesterday for the first time since June 15. Ten-year Treasury yields fell to the lowest since November as a report showed personal spending unexpectedly fell in June, reinforcing speculation the economy is slowing.
Yield Difference
A general-obligation Montgomery County bond maturing in August 2021 yielded 2.77 percent on Aug. 1, 10 basis points more than an index of top-rated tax-exempts with the same maturity and up from seven basis points on Feb. 16, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.
“When you get an opportunity like Montgomery County, Maryland, you might get a lot of people overpaying,” said Tony Shields, who covers Maryland as a senior trader at Charles Schwab & Co. in Jersey City, New Jersey. “There’s going to be a lot of people falling all over themselves to try and buy this, particularly with the tone of the market.”
Montgomery County’s deal is the second-largest this week. The New York City Transitional Finance Authority yesterday began a $900 million sale of bonds backed by personal-income and sales taxes.
The transaction includes $300 million of federal and state tax-exempt debt to refund existing top-rated subordinate bonds. That portion was offered yesterday to individual investors at a yield of 2.98 percent for debt maturing in 2021, according to a person involved with the sale who spoke on condition of anonymity because they weren’t authorized to comment.
Following are descriptions of pending sales of municipal debt:
SOUTHEASTERN PENNSYLVANIA TRANSPORTATION AUTHORITY, which transports 242 million passengers yearly in Philadelphia and surrounding counties, will issue $214.8 million of tax-exempt bonds backed by federal grants as soon as tomorrow. The transaction will help finance new commuter-rail cars and capital projects. The debt is rated A1, the fifth-highest grade from Moody’s. (Added Aug. 3)
VIRGINIA COLLEGE BUILDING AUTHORITY, which sells debt for infrastructure at Virginia at state universities, plans to issue $274.9 million of bonds as soon as tomorrow through competitive bid. The state-appropriation-backed credit is rated Aa1, the second-highest grade from Moody’s, and one grade below Virginia’s AAA rating. The authority is on review for potential downgrade as Moody’s placed the state on review July 19. (Added Aug. 1)
To contact the reporters on this story: Sarah Frier in New York at sfrier1@bloomberg.net; Michelle Kaske in New York at mkaske@bloomberg.net
To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net
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