Rhode Island, whose poorest city filed for Chapter 9 bankruptcy protection Aug. 1, began a $169 million general-obligation bond sale yesterday with yields priced below an AA+ index of tax-exempt debt, one step higher.
The state was able to shake off Central Falls’s insolvency and offer individuals $6.75 million of AA rated bonds maturing in 2021 with a yield of 2.6 percent, according to pricing information from Janney Montgomery Scott LLC, a member of the deal’s syndicate. That’s 0.04 percentage point below an AA+ index of 10-year tax-exempt debt. About $11 million of the bonds maturing in 2031 priced at par with a 4 percent yield, or 0.15 point below an AA+ index of 20-year tax exempts.
Rhode Island isn’t a frequent issuer, which may have enabled it to offer lower yields than otherwise, said Michael Pietronico, chief executive officer of Miller Tabak Asset Management in New York, who manages $585 million of munis.
“Given the issues on the local basis, it seems like fairly aggressive pricing,” Pietronico said. “But the other side of the coin is that there just hasn’t been a lot of debt at the state level coming out of Rhode Island, so there could be some investors who have interest in diversifying.”
The deal generated more than $15 million of bids from individual investors as of 1 p.m. yesterday, Dara Chadwick, a spokeswoman for Rhode Island Treasurer Gina Raimondo, said in a telephone interview.
Yields on Offer
The transaction includes $4.8 million of bonds maturing August 2014 with a yield of 0.63 percent, or 31 basis points below an Aug. 12 trade of Rhode Island general obligations sold in 2010 and due October 2014. A basis point is 0.01 percentage point.
A tranche of five-year bonds sold yesterday yielded 1.2 percent, or 47 basis points below an Aug. 22 trade of Rhode Island debt sold in 2007 and maturing in August 2016.
Treasury yields have fallen faster than those on municipal debt. Tax-exempt yields represented about 100.93 percent of Treasuries yesterday, compared with an average of 91.75 percent in 2011, Bloomberg data show. Municipals and Treasuries became more expensive as investors sold equities after Standard & Poor’s downgraded the U.S. to AA+ and reports of a slower economic recovery.
Proceeds from Rhode Island’s sale will finance capital projects for transportation, education and open-space initiatives as well as to refinance debt, Chadwick said.
Weekly municipal issuance is set for $4.2 billion, according to data compiled by Bloomberg, which is down from last week’s $6.4 billion of sales.
The light calendar helped Rhode Island attract individual buyers and even with Central Falls’s Chapter 9 filing, the state doesn’t face major risks, said Dan Solender, who manages about $14 billion as head of municipal bonds at Lord Abbett & Co. in Jersey City, New Jersey.
“Rhode Island is still well into the AA range so the only risk would be a minor downgrade, but nothing more significant than that,” he said.
While Rhode Island pursues its offering at competitive rates, local Alabama issuers in and around Jefferson County face higher borrowing costs because they are located in the same state as the county, which is debating whether to file for bankruptcy.
In December, statements by Meredith Whitney, the banking analyst, about a potential “spate” of defaults began to rattle the $2.93 trillion muni market.
Along with the headline risk related to Central Falls, Rhode Island’s Treasury Department has been working with the Securities and Exchange Commission since early February regarding the state’s bond documents after the SEC contacted Raimondo’s department.
Offering documents now include additional information about the state’s pension system, Chadwick said. The Treasury department also created an investor website that provides financial documents and the state has begun training programs for employees regarding bond disclosure practices, Chadwick said.
Investors probably won’t ask for more yield because of the SEC’s request, Miller Tabak’s Pietronico said.
“I don’t think that it’s an issue that should affect this deal,” he said. “As far as tax-free bond investors go, better disclosure is needed from all issuers on an ongoing basis and I wouldn’t say Rhode Island is a particular problem at this point.”
Following is a description of a pending sale of municipal debt:
COLORADO SPRINGS, Colorado’s second-most populous city with 416,427 residents, will sell $167 million of utility revenue bonds as soon as today to refinance debt. The sale is rated AA, Standard & Poor’s third-highest grade. JPMorgan Chase & Co. is the senior manager of the bond sale. (Added Aug. 24)
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