Portland Beats Philadelphia’s Cost on $408 Million Sewer Bonds

Portland, Oregon, sold about $408 million in sewer-system revenue debt, garnering lower borrowing costs than comparably rated securities from Philadelphia, with utility bond yields at the lowest level on record.

Yields on 10-year, AA rated tax-exempts backed by utility revenue were unchanged at 3.02 percent yesterday, according to Bloomberg Fair Market Value data. That’s the lowest since the index began in November 1993.

The week’s second-largest tax-exempt deal lured investors in part because of the lack of issuance this week, said Anthony Greco, a trader at Boston-based Breckinridge Capital Advisors, which manages about $12.5 billion in municipal debt. Scheduled issuance is at a six-week low, according to data compiled by Bloomberg.

“With not much on the books for this week, and $400 million of AA selling, the focus was all on that,” Greco said.

The city improved its borrowing costs by more than a percentage point on several maturities in its previous sale of sewer bonds, a $528.7 million issue in April 2008. Debt in yesterday’s sale was rated third-highest at AA by Standard & Poor’s and fourth-highest at Aa3 by Moody’s Investors Service.

The securities included 10-year bonds priced to yield 2.69 percent, or 33 basis points below a comparably rated index of utility bonds, according to Bloomberg Fair Market Value data. The city sold sewer bonds in 2008 yielding 3.96 percent, 13 basis points above the index at the time. A basis point is 0.01 percentage point.

Philadelphia Bond

Philadelphia’s sewer bond sale two weeks ago, a $185 million issue rated AAA by S&P and Aa3 by Moody’s after insurance was applied, priced its 10-year bonds to yield 3.42 percent, 35 basis points above the benchmark index, Bloomberg data show.

The largest maturity of Portland’s competitive deal was a segment of about $27 million due in 2035 priced to yield 4 percent, 72 basis points below the Bloomberg index for 25-year utilities. That maturity yielded 4.89 percent in 2008.

“The size probably helped the deal, too,” said Evan Rourke, a portfolio manager with Boston-based Eaton Vance Corp., which has about $9 billion under management. “The ability to get $20 million-bond blocks of a decent credit in this market is somewhat limited at the moment.”

Bank of America Merrill Lynch won the bidding with an all-in cost of 3.863 percent, Bloomberg data show. Other bids included Morgan Stanley at 3.864 percent, Citigroup at 3.874 percent, Wells Fargo at 3.874 percent and JPMorgan at 3.876 percent.

“We’re pleased with the tightness of the bidding,” said Eric Johansen, Portland’s debt manager. “It did come in better than we had expected, so we’re very pleased with that.”

Anemic Recovery

The sale took place the same day the Federal Reserve said it would reinvest principal payments on its mortgage holdings into long-term U.S. debt securities, suggesting the central bank believes the pace of the economic recovery will be more modest than earlier expected.

The decision helped push yields on 10-year Treasuries below 2.75 percent for the first time since April 2009. Before the Fed’s statement, the government auctioned $34 billion of three-year notes at the lowest yield ever.

The extra yield demanded by investors for AA rated utility-revenue bonds over AAA rated general obligations was 21 basis points yesterday, according to data from Municipal Market Advisors, an independent research firm in Concord, Massachusetts. The so-called spread, which reached a 2010 low of 16 basis points in June, was as much as 51 basis points in January, MMA data show.

Yields on 10-year AAA tax-exempts fell 2 basis points to 2.81 percent yesterday, the lowest in at least nine-and-a-half-years, according to MMA data. Yields on top-rated general obligations have not risen since June 15.

Following are descriptions of pending sales of municipal debt in the U.S.:

PHILADELPHIA GAS WORKS, the nation’s largest municipally owned gas utility, plans to sell about $150 million in revenue bonds tomorrow to fund capital projects and refinance debt. The securities are rated third-lowest, at BBB+, by S&P, and second-lowest, at Baa2, by Moody’s, and will be marketed by a group led by Morgan Stanley. (Updated Aug. 11)

NORTH CAROLINA, the 10th most-populous state, plans to sell about $495 million in tax-exempt municipal bonds through a competitive sale next week to refinance existing debt. The state’s general obligations are top-rated by Moody’s and S&P. (Added Aug. 11)

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