New Jersey Leads Muni Borrowers Return to Market: Muni Credit
New Jersey and New York City, two of the municipal bond market’s largest borrowers, lead the biggest week of state and local government sales in a month as issuers test demand after investors pulled $12.5 billion from muni mutual funds in December.
U.S. states and local governments plan to issue $6 billion of bonds this week, the most since the week of Dec. 10, according to data compiled by Bloomberg. January is typically one of the four biggest months for investors to receive interest and principal payments on their municipal securities and money managers are waiting to see how much will be reinvested.
“The big wild-card is cash flow,” said Matt Dalton, chief executive officer of Belle Haven Investments Inc. in White Plains, New York, who oversees about $600 million in municipal assets. “If cash flow continues to bleed out of these funds at the rate that it has been over the last four weeks, it’s going to erase the January effect.”
Yields on top-rated tax-exempt debt due in 10 years rose to 3.29 percent yesterday from 3.2 percent a week ago, while debt maturing in 20 years rose to 4.49 percent from 4.37 percent, according to Municipal Market Advisors of Concord, Massachusetts.
With expectations for economic growth and inflation picking up, investors are taking money out of municipal funds and putting them in riskier asset classes such as stocks, said Paul Brennan, a senior vice president and portfolio manager at Nuveen Asset Management in Chicago, in an interview.
“The market doesn’t seem to have any legs right now,” said Brennan, who oversees $12 billion of municipal bonds.
In the largest deal this week, New Jersey plans to offer almost $1.9 billion of mostly fixed-rate bonds backed by state appropriations to restructure floating-rate debt issued for school construction.
The snow warning today forced the state to postpone the pricing for the institutional round of sales to Thursday, said Andrew Pratt, a spokesman for Treasurer Andrew Sidamon-Eristoff.
Pricing for the portion being sold to individuals will continue today, he said.
“The New York area forecast is for heavy snow, calling into question whether normal communications between banks and investors will be possible,” Pratt said.
As part of the deal, the state is borrowing about $245 million through taxable bonds to help pay $295 million in termination costs related to interest-rate swaps on the variable-rate bonds, Pratt said. The balance of the termination payment will come from a premium investors will pay on the bonds.
The deal will enable New Jersey to cut its swap portfolio and lower borrowing costs on a portion of school construction debt to about 4.1 percent from 6.3 percent, Pratt said. It will also remove the risk that the state would have to pay more for expiring bank credit lines supporting the floating-rate bonds.
“These letters of credit are coming up,” Pratt said in an interview. “They’re expensive. They’re increasing our cost of borrowing. It’s not a buyers’ market for letters of credit any more.”
The cost of unwinding swaps will be compensated by restructuring the bonds with lower fixed-interest rates, Pratt said.
Bank of America Merrill Lynch will manage New Jersey’s sale. The deal includes $1.5 billion of fixed-rate tax-exempt bonds and $244.7 million of taxable debt. It also includes $200 million of tax-exempt floating-rate securities.
The bonds are rated Aa3 by Moody’s Investors Service and AA- by Standard & Poor’s, one level lower than the state’s general-obligation debt, which is ranked third-highest by both firms.
Governor Chris Christie today will give his first State of the State address as New Jersey faces a budget gap in the fiscal year beginning July 1 ranging from $4 billion to as much as $10.5 billion, according to Moody’s.
Christie, the first Republican to win New Jersey since 1997, said in an interview last week he may propose reducing Medicaid outlays.
The governor, 48, said he’ll also seek to begin debate on his proposals to undo a 9 percent pension increase enacted in 2001 and freeze cost-of-living increases for future retirees to right a plan that is currently 62 percent funded. The system, providing benefits to almost 800,000 present and former workers, has a deficit that grew to $53.9 billion as of June 30 from $45.8 billion a year earlier.
Christie helped close a $10.7 billion deficit this fiscal year by skipping a $3 billion pension payment.
“He’s certainly shining a brighter light on the problem,” said Nuveen’s Brennan. “In that respect, it’s a positive. In terms of actual progress? There hasn’t been much yet. The pension problem is not going to fix itself overnight.”
When New Jersey priced its last series of school construction bonds, a $716.3 million deal last April, the so- called spread of tax-exempt bonds maturing in nine years was 0.75 percentage point more than top-rated tax-exempts of the same maturity.
The state will have to offer wider spreads to attract investors to a larger deal this time, Brennan said.
Investors are demanding a 0.46 percentage point premium to hold New Jersey general-obligation debt maturing in 10 years rather than top-rated bonds of the same maturity, according to data compiled by Bloomberg. When Christie took office last January, investors demanded a risk premium of 0.35 percentage point.
Last year, Barclays New Jersey bond index returned 1.62 percent, the seventh-worst performance among U.S. states. The Illinois index was the worst, losing 0.16 percent.
Also this week, New York City will borrow $875 million through its Transitional Finance Authority to help fund capital projects. The agency was set up by state lawmakers in 1997 to help the city avoid exceeding its constitutional debt limit.
The bonds, which carry Standard & Poor’s top rating, two levels higher than the city’s general-obligation investment grade, are backed by sales and income-tax revenue.
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