Indiana Sewer Bond Leads Utility Debt Sales as Yields Plummet: Muni Credit

The Indiana Finance Authority is leading five utility issuers selling about $2.5 billion this week as yields on such bonds backed by customer payments are at their lowest in almost a year.

Ten-year top-rated utility bonds yielded 2.63 percent yesterday, the least since Sept. 10, following a decline in yields in both the Treasury and municipal markets, according to data compiled by Bloomberg. Yields on 10-year top-rated tax- exempt municipal bonds plummeted to a new low for the year.

The issue is to facilitate the sale of Indianapolis’s sewer system, which has been in the works since 2009, and officials are eager to take advantage of current low borrowing costs, said Aaron Johnson, vice president of integration at Citizens Energy Group, a charitable trust that oversees the city’s gas and heating-oil supply.

“Given the indications that we’re seeing, it’s a much stronger market than the scenarios we were looking at,” Johnson said in a telephone interview in New York. “So I think we’re in great shape. We couldn’t ask for better timing here.”

The finance authority, which issues debt for business development in the state, is pricing $1.06 billion of tax-exempt revenue bonds today on behalf of CWA Authority Inc., a nonprofit public benefit corporation created by Citizens Energy last year. The transaction will finance the CWA Authority’s acquisition of Indianapolis’s sewer and water systems.

Officials are still considering whether to enhance a portion of the deal with bond insurance, Johnson said. The Series 2011A first-lien revenue bonds are rated AA, Standard & Poor’s third-highest rating. The Series 2011B and Series 2011C second-lien revenue bonds are rated AA-, S&P’s fourth-highest rating.

Yields Plummet

Yields on 10-year top-rated tax-exempts were 2.27 percent yesterday, compared with 3.48 percent on Jan. 18, the highest this year, according to data compiled by Bloomberg.

Treasury yields have fallen faster than muni yields. Muni yields represented 102.16 percent of Treasuries, compared with an average of 91.4 percent in 2011, Bloomberg data show. Munis and Treasuries became more expensive as investors dropped stocks after a U.S. credit-rating downgrade and economic data showing a slow recovery.

The CWA Authority bonds are backed by sewer and water payments, which provide an essential service to 820,445 Indianapolis residents, according to the city’s website. Since the CWA Authority is borrowing in the municipal market for the first time, the transaction will require additional yield to help attract investors, Tom Boylen, a trader at Performance Trust Capital Partners in Chicago, said in a telephone interview.

Extra Yield

“It’s an essential-service revenue and that should carry it through the market in terms of clearing the deal,” Boylen said. “And right now it’s tough to find yield. So if you can go down the credit spectrum a little bit and pick up some yield with an essential-service revenue, I think people are going to look at it.”

The deal is concentrated in longer maturities, with about $497 million offered in 2041 bonds, according to sale documents. Yields on top-rated 30-year tax-exempts were at 3.89 percent yesterday, down from the year’s high of 5.09 percent Jan. 17.

Dedicated revenue streams such as electricity, water and sewerage payments are less prone to contractions in the economy compared with property, sales and income-tax revenue.

‘Great Reception’

“Last week, investors changed their appetite for risk on a dime,” said John Mousseau, a Vineland, New Jersey-based portfolio manager at Cumberland Advisors, which oversees $1.1 billion in municipal securities. “This deal will get a great reception. It’s the right deal at the right time.”

The California State Department of Water Resources sold $970.5 million of electric power debt yesterday. The deal priced with $213.7 million of 10-year debt yielding 2.66 percent, three basis points more than an index of top-rated 10-year utility debt. A basis point is 0.01 percentage point. The bonds are rated AA-, or fourth-highest by S&P.

A similar bond issued by the water department last year and maturing in May 2021 traded with an average yield of 2.5 percent Aug. 15, the last trade, 13 basis points below an index of top- rated 10-year utility revenue bonds. That compares with 65 basis points above the index in a trade on Jan. 18, according to data compiled by Bloomberg.

Louisville and Jefferson County Metropolitan Sewer District in Kentucky is set to issue $266.9 million of sewer bonds as soon as today. The bonds are rated AA-, the fourth-highest rating by Fitch Ratings.

Top-rated tax-exempt municipal bonds have outperformed corporates and Treasuries this year, returning 7.5 percent through yesterday, Bank of America Merrill Lynch masters indexes show. That compares with corporate bond returns of 5.8 percent and Treasury returns of 6.5 percent.

Following is a description of a pending sale of municipal debt:

THE UNIVERSITY OF CALIFORNIA REGENTS, which borrows for the University of California system’s 10 campuses, is selling at least $400 million of taxable and tax-exempt revenue bonds as soon as tomorrow. Proceeds will help finance capital projects and refund debt, according to sale documents. The bonds are rated AA, the third-highest, by S&P and Aa1, the second highest, by Moody’s Investors Service. Barclays Capital Inc. will lead underwriters in the sale. (Added Aug. 17)

To contact the reporters on this story: Michelle Kaske in New York at mkaske@bloomberg.net; Sarah Frier in New York at sfrier1@bloomberg.net;

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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