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In The News - 2013

  News from 2014
December 26, 2013 Concerns of a Fresno Bankruptcy Remain - The Bond Buyer
December 12, 2013 Thruway Bonds for Tappan Zee Bridge Hit Sweet Spot: Muni Credit - Bloomberg
November 27, 2013 Muni Bond Issuance Drops 31% in November - The Bond Buyer
November 3, 2013 Primary Market Awaits $5.77 Billion in New Volume - The Bond Buyer
October 28, 2013 Alaska Bank to Bond for Energy and Education Projects - The Bond Buyer
October 21, 2013 Banks Accumulate Record Muni Holdings, as Growth Slows - The Bond Buyer
October 13, 2013 Muni Market Faces $4.19 Billion Amid Concerns - The Bond Buyer
September 12, 2013 Washington State Preps Garvees for Seattle Bridge Project - The Bond Buyer
September 8, 2013 Volume Inches Up to $5.86B - The Bond Buyer
September 4, 2013 Muni Bond Fund Carnage Continues; August Was 4th Down Month - Investor's Business Daily
August 19, 2013 N.J. and N.Y. Deals Headline Primary Market - The Bond Buyer
August 1, 2013 Now Stable Across the Board, Washington Preps $864M Deal - The Bond Buyer
June 28, 2013 Shell-Shocked Strategists Weigh Yield, Risk - The Bond Buyer
May 28, 2013 Post-Holiday Market Spotlights $500MM MTA Deal - The Bond Buyer
April 29, 2013 Iowa Deal Tests Market Amid $5.8B Slate - The Bond Buyer
April 26, 2013 Rutgers Coaching Abuse Scandal Fails to Deter Rally: Muni Credit - Bloomberg
March 28, 2013 Puerto Rico Investors on High Alert After PRASA Downgrade - The Bond Buyer
March 15, 2013 Hefty Slate Will Again Test the Market's New Levels - The Bond Buyer
February 25, 2013 Munis Face Another Heavy Slog Led by $1.3B California High Ed Sale - The Bond Buyer
February 22, 2013 Buying Opportunity Seen as History Shows March Loss: Muni Credit - Bloomberg
February 9, 2013 Will Illinois flunk its next bond test? - Crain's Chicago Business
February 4, 2013 Issuers Trim Down Offerings After Eventful Week - The Bond Buyer
January 23, 2013 New Jersey Agency Completes $2 Billion Muni Deal, Largest of Week - Dow Jones Newswires
January 23, 2013 Washington State Selling $1.2B of GOs - The Bond Buyer
January 23, 2013 Illinois Fiscal Woes Front and Center as it Readies Bond Sale - The Bond Buyer
  News from 2012
  News from 2011
  News from 2010
  News from 2009
  News from 2008

Top Of Page 

Concerns of a Fresno Bankruptcy Remain

Thursday, December 26, 2013
By Tonya Chin

LOS ANGELES - With falling bond ratings, a weak economy, dwindling reserves, and high labor costs, Fresno seems like a probable candidate to become California's next Stockton or San Bernardino.

At the beginning of 2013, Fresno's lease-supported obligations were downgraded to junk, and recently its issuer rating was dropped to the lowest investment grade rung by Standard & Poor's.

In recent years the Central Valley city has implemented many cuts in expenditures and attempts at finding new revenues, but it continues to "weather severe financial distress," as put by auditors in the city's most recent comprehensive annual financial report.

The CAFR covers fiscal year 2012, ending in June 2012, and was released in March 2013.

"They're trying very hard to do the right thing, but I'm not quite sure they're going to do enough to really get them out of the problems they're in," said Roberto Roffo, senior vice president and portfolio manager at Advisors Asset Management in New York. "And they're really not getting any help from the local economy."

Unemployment is still high at 15.6% in 2011, per capita income levels are below average, and the housing market has still not recovered, keeping property tax revenues low.

As of June 30, 2012, the city had depleted nearly all of its emergency reserve, to the extent that it is "dangerously low and plainly imprudent," according to auditors. Fresno's emergency reserve was at $1.48 million with no prospect of near term increases.

General fund reserves for fiscal 2012 were less than 1% of expenditures, or about $2.4 million, which includes its emergency reserve.

While the general fund results were unfavorable, the city's deficit of $3.5 million was an improvement over 2011 as a slight increase in general fund revenues and continued control on expenditures led to a smaller operating deficit.

"The majority of their expenditures are related to paying government workers," Roffo said. "They're locked in with a lot of different union contracts, where they haven't been able to make as many cuts as they want, and that leaves them in a pretty difficult bind."

The city's largest existing contracts — its closed police contracts — don't expire until June 30, 2015, and offer raises and job protection with no formal re-openers.

As Fresno continues to grapple with its financial challenges, one big question looms: could California's fifth largest city, one with half a million residents and almost a billion dollars of bond debt, be the next to file for Chapter 9 bankruptcy?

A Definite Risk

"I hate to say that it's imminent, because I don't think you can necessarily predict that, but I think they're in a very distressed situation, and it's something that investors have to realize is a distinct possibility," said Dan Genter, president and chief executive officer of RNC Genter Capital Management in Los Angeles.

Based on the most recent data available — the 2012 CAFR — Genter said he hasn't seen anything that's significantly improving.

"The trend we've seen with the data that's available is that since the top in 2007, the deterioration is still accelerating, so unless they've had a significant change in the very near term, they're in a lot of trouble," Genter said. "There is definitely a significant default risk here."

He added that Fresno is a credit his firm has actively avoided and that they haven't purchased any of their bonds for years.

Roffo, who views the city's situation as "provisional," said his firm has also avoided the credit.

"I'm not quite sure if it's going to make it into bankruptcy, but I'm not quite sure it's going to be able to make the cuts needed to avert all those problems," Roffo said. "Personally, for my clients, I don't see this as an appropriate investment. There are just too many questions right now."

Michael Ginestro, head of municipal research at Bel Air Investment Advisors in Los Angeles, also said it's unclear whether Fresno is the next Stockton and that there are a lot of things need to play out before a bankruptcy situation would occur.

"They've got to reduce their expenditures," he said. "The mayor's trying to do that, but you can only reduce them by so much each year. They have no liquidity; they're really strapped."

Ginestro said Fresno has more of a cash-flow and budgetary problem than a debt problem. Total government fund debt service is about 13% of total government fund expenditures, which he views as low-to-moderate.

The city has no outstanding general obligation debt, but has $934 million of outstanding lease revenue obligation bonds, pension obligation bonds, judgment obligation bonds, and other lease obligations, as of June 30, 2012.

Fresno's controller said in the financial report that the city has no intention of following the path of other cities in California in walking away from its debt commitments.

Other news reports, as recent as Dec. 9, have cited city officials, including city manager Bruce Rudd, stating they have no plans to file for bankruptcy.

City officials did not respond to requests for comments for this article.

Slow Recovery

Like most California cities, Fresno is limited in its ability to enhance existing revenue resources and create new ones. Its top three revenue generators — property tax, sales tax, and charges for services — were pummeled by the housing downturn and recession, and have been slow to recover.

A variety of additional factors have also caused the city's financial distress, including unsuccessful local investment decisions, an increase in indebtedness burdening the general fund, as well as other unaffordable future commitments, according to the city's auditors.

"Some cities in California are seeing some improvement in sales and some improvement in property tax revenues, but because Fresno isn't seeing it on the revenue side, and the expenditure side continues to go up, they're still in this situation," Ginestro said.

Starting in 2009, the city began budget reductions, city-wide layoffs and furloughs, and cuts to city services. The city has continued to trim costs in the years following, but with little improvement.

In an attempt to create a new source of revenue, the city council approved an ordinance to outsource its trash and recycling collection services.

However, the city solid waste department employees led a petition drive to force a special election on ordinance to the voters for approval. Measure G was rejected by voters in June 2013, leaving trash collection in public hands.

"If that passed, they would have gotten to raise about $14 million in garbage contracts or fees over the next several years and I think that would have helped mitigate the pain," Ginestro said.

In March 2012 Mayor Ashley Swearengin, and other city officials came up with a ten-year "Fiscal Sustainability Policy" to restore Fresno's financial health and credit ratings. The plan includes achieving spending and minimum financial reserve targets, adopting employee compensation policy changes to be negotiated as employee contracts are opened for negotiations, and immediate actions to match expenditures to revenues.

Narrowly Stabilizing

Michael Pietronico, CEO and senior portfolio manager at Miller Tabak Asset Management in New York, said he's concerned about the city's weak finances and limited flexibility to respond to shocks in the near-term, but that revenue gains and substantial expenditure cuts have helped move the budget closer to structural balance.

His firm gives Fresno an internal issuer rating of Baa3.

"The city's large and liquid balance sheet remains the main protection against economic uncertainty," Pietronico said. "The city no longer expects to draw its fund balance to below zero, which would have necessitated some inter-year borrowing from enterprise funds."

He added that the city's willingness to pay appears to be sound.

Standard & Poor's recently dropped Fresno's issuer credit rating to BBB-minus from BBB and its long-term rating on lease revenue bonds, POBs, and JOBs to BB-plus from BBB-minus. The outlook is stable.

The agency downgraded the ratings on Dec. 7, citing the auditor's comments in the 2012 CAFR that the city's fiscal conditions "raise substantial doubts about its ability to continue as a going concern."

Moody's Investors Service had already downgraded the ratings on the city's outstanding debt to junk at the beginning of this year. Most of the city's lease supported obligations were dropped to Ba1 from Baa2, and its POBs, JOBs, and convention center bonds were downgraded to Ba2 from Baa2. The agency assigned all of the ratings a negative outlook.

Moody's gives the city an issuer rating of A3.

Kevork Khrimian, lead analyst at Moody's, said Fresno's finances are stabilizing at a very narrow reserve level, but not much has changed since the agency's last credit report on Jan. 23.

"Finances are stable in that the general fund budget in 2013 was balanced and it looks like — based on monthly data and some brief conversations — 2013 revenues were more or less the same as expenditures," he said. "So materially, that's unchanged and that's more or less what we expected."

He said the next audit is expected sometime soon, which would present a good opportunity to review the ratings. The city has until the end of March to release the audit for fiscal year 2013.

As for bankruptcy, Khrimian said that's very hard to predict and that Moody's has not publicly anticipated such an action for the city.

Last month, Fitch Ratings affirmed Fresno's issuer rating at BBB-plus, and its various lease revenue bonds at BBB and BBB-minus. The outlook is negative.

Top Of Page 

Thruway Bonds for Tappan Zee Bridge Hit Sweet Spot: Muni Credit

Thursday, December 12, 2013
By Michelle Kaske and Freeman Klopott
of Bloomberg

Dec. 12 (Bloomberg) -- The New York State Thruway Authority sold $1.6 billion of bonds to replace the Tappan Zee Bridge, as the agency prepares to double its debt load to finance the biggest project in its 63-year history.

This week's borrowing for the $4 billion span across the Hudson River garnered enough demand that it priced a day earlier than planned, data compiled by Bloomberg show. The securities will be repaid in 2019 with a federal loan. The operator of 570 miles (917 kilometers) of toll roads is selling after Moody's Investors Service cut its rating to the sixth-highest level last month on concern that the agency may not raise tolls fast enough to cover costs.

Bond buyers want munis maturing within six years as bets mount that a strengthening economy will drive up yields on longer-dated debt, said Michael Pietronico, chief executive officer of Miller Tabak Asset Management.

"We couldn't think of a better part of the yield curve to do it if you're looking to generate some interest," said Pietronico, who helps manage $950 million of munis in New York. "We're fighting investors every day to get those same bonds."

Canal Comparison

New York Governor Andrew Cuomo, a 56-year-old Democrat, has made building the structure a priority, comparing it in scope with the 19th century construction of the Erie Canal. Situated about 20 miles north of Manhattan, it's among the nation's largest public-works projects.

Debt rated one step below the agency's A2 grade priced yesterday to yield 2.2 percent, according to three people familiar with the sale who requested anonymity before final levels are released.

That yield is about 0.29 percentage point above benchmark munis, data compiled by Bloomberg show. In comparison, the spread on an index of revenue debt with a similar rating and maturity was about 0.51 percentage point.

The 58-year-old, 3-mile-long Tappan Zee, which connects Rockland and Westchester counties, was designed to last 50 years. It carries 138,000 vehicles daily, 40 percent more than intended, at a cost of $5 cash for a regular passenger vehicle, collected in only one direction.

"It's way over capacity," said Howard Cure, director of municipal research in New York at Evercore Wealth Management LLC, which oversees $4.7 billion.

2019 Payoff

This week's bonds will be paid off in 2019, one year after the bridge's expected completion, using a federal Transportation Infrastructure Finance and Innovation Act Loan, according to bond documents. The $1.6 billion loan is a record for the program, which began in 1998.

State and local debt maturing in three to seven years has earned about 0.9 percent this year, compared with a 2.8 percent loss for the entire market, according to Bank of America Merrill Lynch data. That maturity range is set to beat the market for the first time since 2010.

Bond proceeds will finance construction and pay off about $700 million in private borrowing that's due this month. This week's offering is the first of about $4.5 billion of junior debt the authority plans to sell to finance construction, according to bond documents. A portion of the issue has insurance.

Even with increased demand for shorter maturities, the sale's size and its scheduling during the busiest week for New York issuance in at least 10 years means the authority faces higher yields, said Pietronico and Daniel Solender, director of munis at Lord Abbett & Co. in Jersey City, New Jersey.

State Wave

Already this week, New York City sold $800 million of general obligations and a separate agency issued about $2 billion of revenue bonds to refinance Long Island Power Authority debt.

The Thruway Authority's projected borrowing will more than double its $3.9 billion debt burden.

The $1.6 billion in junior revenue bonds were rated A- by Standard & Poor's, one step below the senior obligations. The ratings reflect the conclusion that the authority will rely on "frequent rate increases" to maintain debt-service coverage ratios above levels required by bond covenants, Joseph Pezzimenti, an S&P analyst, said in a Dec. 3 report.

The Thruway Authority plans to create a task force "to look at possible additional sources of revenue and consider overall toll rates as well as potential discounts for commuters and local residents," Tom Madison, executive director of the agency, said in an e-mail.

Toll Forecast

The authority will have to start raising tolls starting in 2015 to close a projected $67.2 million revenue gap, which will grow to $415 million by 2019 without them, according to a traffic and revenue report by New York-based Jacobs Civil Consultants Inc.

"It's a question of how fast they can raise tolls and if it hurts demand while they're doing it," Solender said.

In the municipal market this week, states and cities plan to sell about $13 billion of long-term debt, the biggest wave in three years, Bloomberg data show. The binge has pushed yields to a three-month high.

Benchmark 10-year munis yield 3.05 percent, the highest since Sept. 12, compared with 2.85 percent on similar-maturity Treasuries.

The ratio of the interest rates, a gauge of relative value, is about 107 percent, compared with a five-year average of 102 percent. The higher the figure, the cheaper munis are compared with federal securities.

--Editors: Mark Tannenbaum, Mark Schoifet

To contact the reporters on this story:
Michelle Kaske in New York at +1-212-617-2626 or or
Freeman Klopott in Albany at +1-518-426-9921 or

To contact the editor responsible for this story:
Stephen Merelman at +1-212-617-3762 or

Top Of Page 

Muni Bond Issuance Drops 31% in November

Wednesday, November 27, 2013
By Tonya Chin

Long-term municipal bond volume continued to trail last year's pace as issuers sold 31.3% less in November than they did during the same period last year.

Monthly Data

Municipalities brought 771 issues totaling $23.2 billion to market during the month, compared with 1,163 issues totaling $33.8 billion in 2012, according to Thomson Reuters data.

"It's pretty consistent with what we've been witnessing since May, which is simply a rate-driven collapse in refunding volume," said John Dillon, chief municipal bond strategist at Morgan Stanley Wealth Management. "In fact, unless U.S. economic data falters materially in the near term, we would expect significant year-over-year issuance declines right through April due to challenging comparisons."

Year-over-year issuance has declined every month this year since May, with the exception of July. The year started with a 54% increase in January, followed by slight declines in February and March, and a 9% increase in April.

Early year over year comparisons in the first few months of 2014 will be challenging due to the stronger issuance seen in early 2013.

For the year to date, issuance has fallen 14.7% to $301 billion in 10,401 deals. That compares to $352.9 billion in 12,118 deals last year.

"Miller Tabak Asset Management sees long-term municipal bond volume remaining on the low side as municipalities' ability to refinance their debt diminishes as interest rates have risen this past year," said Michael Pietronico, chief executive officer at Miller Tabak.

Refunding deals continued to tumble during November, dropping 77.1% from last year. Issuers floated 214 refunding deals, worth a total of $3.3 billion, compared to $14.5 billion last year.

For the year to date, refunding issuance has dropped 34.7% to $98.1 billion. Last year, refundings reached $150.2 billion.

"Municipalities also seem to be cautious in adding new debt as the economic recovery remains tepid and uneven," Pietronico said. "Also many of the largest borrowers such as Illinois and Puerto Rico have been on high alert for potential downgrades, which keeps the wraps on any issuance they may be considering that might seem proliferate in any way to the rating agencies."

New money issuance for November increased 25.9% from last year, with 502 issues totaling $16.2 billion. For the year to date, new money has gone up a slight 11.2% to $145.3 billion, from $130.7 billion last year.

Issuance dropped in every market sector in November, except for development, which saw an 897.6% increase to 33 issues totaling $983.6 million. Among the largest sectors, issuance dropped 45.3% in education, 10.5% in utilities, and 3% in transportation. General purpose issuance dropped 39.1%.

For the year to date, issuance in education, utilities, transportation, and general purpose dropped 2.9%, 27.5%, 3.6%, and 24.8%, respectively.

Tax-exempt volume fell 27.5% in November, to $20.3 billion from $28 billion last year. Taxable volume took a steeper decline of 63.6% to $1.3 billion.

Negotiated issuance declined 29.8% to $18.9 billion last month, and competitive deals dropped 27.6% to $4.3 billion.

Issuance of revenue bonds also took a decline of 37.5% to $14.8 billion, and general obligation bond issuance fell 16.5% to $8.4 billion.

The bond insurance industry was one of the few sectors that has benefited from a rise in interest rates. The par amount of insured issuances increased by 39.1% during the month to 88 deals totaling $1.5 billion, compared with 110 deals totaling $1 billion last year.

"I think it was possibly helped by the recent value-added perception from bond insurance regarding Puerto Rico exposures," Dillon said. "Granted, for the year to date they're still lower, but that number is consistent with the rest of the market."

For the year to date, bond insurance has declined by 14.4% from last year, which compares to the entire market decline of 14.7%.

Fixed rate volume dropped 34.7% in November. Variable-rate short-put issuance slowed 17.5%, while variable-rate long- or no-put soared 237.7% to $666.7 million.

State and local issuers alike scaled back on bond deals during the month. State government issuance dropped 7.5% to $3.4 billion and state agency issuance dropped 28.6% to $7.2 billion.

Cities and towns issued $2.4 billion of debt, compared to $3 billion last year. Issuance from districts dropped 44% to $3.4 billion, and local authorities dropped 42.6% to $3.2 billion.

Among the states, California is the top issuer of debt, with $44.9 billion issued so far this year. That amount is up 13.6% from last year's $39.5 billion of debt sold through November.

New York is in second place with $31 billion—a 31.8% decline from last year's $45.5 billion. Texas takes third place with $31 billion, followed by Florida with $12.595 billion and New Jersey with $12.585 billion.

Next year, issuance could turn negative at times, with more bonds maturing or getting called than being issued, according to Roberto Roffo, senior vice president and portfolio manager at Advisors Asset Management.

"With the general consensus that rates are going to go higher, and all the redemption in the muni world, it's all coming together to form a perfect storm," Roffo said. "It has really cut down on the strong demand we've seen in the prior years."

Top Of Page 

Primary Market Awaits $5.77 Billion in New Volume

Sunday, November 3, 2013
By Christine Albano

Deals from Hawaii and the New Jersey Economic Development Authority are expected to lead a brisk primary market as issuers are forecast to bring almost $5.8 billion this week. The figure doesn't include a $1.7 billion financing from bankrupt Jefferson County, Ala., that may price as early as this week.

The anticipated volume would help get November off to a good start on the heels of a 28% decline in long-term volume for October from the same period last year, as reported by Thomson Reuters.

"In the absence of major supply, the tone of the municipal market remains positive," said Dave Manges at BNY Mellon Capital Markets.

The new-issue market is facing an anticipated $5.77 billion in long-term deals this week, according to Ipreo LLC and The Bond Buyer. Last week municipalities sold a revised $5.05 billion, according to Thomson Reuters.

"It looks like investor flows into tax-exempt [mutual bond] funds have reached a neutral point – or close to that – which is good news," Manges said Friday. "The tone has been good for new issuance, and major deals this past week have been well received."

On Friday, the benchmark, triple-A GO scale in 2043 ended at a 4.06%, after ending at a 4.04% on Wednesday and Thursday, according to Municipal Market Data.

Michael Pietronico, chief executive officer at Miller Tabak Asset Management said his firm sees the municipal market "correcting from an over-bought condition, and as such we expect yields to turn higher as we await the next payrolls number."

Hawaii's $850 million general obligation deal will lead off the negotiated activity. It expects to issue a two-pronged financing scheduled for pricing by Bank of America Merrill Lynch & Co. on Tuesday, following a two-day retail order period that began Friday and concludes on Monday.

The deal consists of $806.91 million of tax-exempt bonds and $44.7 million of taxable GO debt-rated Aa2 by Moody's Investors Service and AA by Standard & Poor's.

The New Jersey Economic Development Authority will sell an estimated $437 million of revenue bonds on Tuesday as serial bonds that mature from 2020 to 2028, and term bonds maturing in 2031, 2034, 2039, 2043, and 2052.

The bonds, which will be subject to the alternative minimum tax, are rated BBB-minus by Standard & Poor's and Fitch and will finance the Goethals Bridge Replacement Project in New Jersey.

The Kentucky Higher Education Student Loan Corporation will issue $384 million of floating-rate notes linked to the London Interbank Offered Rate. Bank of America Merrill will price the bonds on Monday with a AA-plus from Standard & Poor's and AAA from Fitch.

Massachusetts will sell revenue bonds in two series totaling $648.9 million scheduled for pricing by Bank of America.

The $362.9 million offering of transportation fund revenue bonds is structured as serials from 2023 and 2037 and term bonds in 2040 and 2043 and will be priced on Tuesday, following a retail order period on Monday. The $286 million series of federal highway grant anticipation notes will mature serially from 2016 to 2027 and will be priced on Wednesday following a two-day retail order period.

Both series are rated triple-A by Moody's and Standard & Poor's.

The San Francisco Bay Area Rapid Transit District is planning to sell $240 million of GO bonds on Wednesday following a retail order period on Tuesday led by JPMorgan Securities, while the Los Angeles Department of Airports plans to sell $245.1 million of debt in a two-pronged deal that consists of $172.8 million of senior revenue bonds subject to the alternative minimum tax maturing serially from 2024 to 2033 with term bonds in 2038 and 2043.

These deals could be overshadowed by Jefferson County's planned $1.7 billion sale of sewer warrants, though these would price at distressed levels, municipal experts noted.

"Any issuer that has seen as much negative headlines as Jefferson County should expect to see yields dramatically higher than where the rest of the market is borrowing," Pietronico said. The county announced the sale of the refunding bonds this month as part of its bankruptcy exit plan to deal with $3.2 billion of sewer debt. It previously planned to issue $1.9 billion of sewer refunding warrants around Dec. 20.

A confirmation hearing on the bankruptcy exit plan is set for Nov. 12.

Top Of Page 

Alaska Bank to Bond for Energy and Education Projects

Monday, October 28, 2013
By Tonya Chin

LOS ANGELES -- The Alaska Municipal Bond Bank is planning to price $77 million of general obligation bonds on Thursday to help fund local school and water improvements.

A retail order period will be held on Wednesday, with the possibility of accelerating institutional orders on Wednesday if conditions warrant, according to Deven Mitchell, the bank's executive director and treasurer.

The bank is issuing the bonds to finance loans to five of Alaska's cities and boroughs, which will help save a combined total of over $9 million in estimated borrower present value savings, according to Mitchell.

Approximately $27 million will be loaned to the city and borough of Sitka to fund improvements to its hydroelectric system, $23 million to the Kenai Peninsula Borough for K-12 school capital projects, and $20 million to the Lake and Peninsula Borough, also to fund school capital projects.

Around $8.1 million will be loaned to the city and borough of Juneau for upgrades renovations at Auke Bay Elementary School and $800,000 will be loaned to the city of King Cove to go toward improvements to the city's hydroelectric system.

The deal will be structured with serial and term bonds, with the serial bonds maturing from 2014 through 2048.

The bonds are general obligations of the Alaska Municipal Bond Bank, a public corporation established to aid Alaska municipalities in funding capital improvement projects, and are backed by a moral obligation of the state.

Alaska maintains a standing appropriation of state general fund resources to replenish the bonds' reserve fund in the event of a borrower default.

Fitch Ratings assigns the bonds a AA-plus rating and stable outlook, based on the state's GO rating.

"The state of Alaska includes as part of its annual debt service appropriation in its operating budget an appropriation for reserve fund replenishment in the event of a draw related to default by a participating municipality, resulting in a rating one notch below the state's ‘AAA' GO rating," Fitch analyst Marcy Block said in a report.

The bonds are being issued under the bank's 2005 GO bond resolution, which is funded at approximately $40.5 million as of Oct. 1, according to Fitch. About $702.5 million of parity bonds issued under the bank's 2005 resolution are outstanding, in addition to about $65 million under other resolutions.

Moody's Investors Service assigned a slightly lower rating to the bank's bonds, and a stable outlook.

"The Aa2 rating on the bond bank securities incorporates bond bank program structural elements, such as a state-aid intercept mechanism and, to a lesser degree, the diversity of borrowers in the program," analysts said.

Moody's assigns the state a triple-A rating and stable outlook.

Michael Pietronico, chief executive officer at Miller Tabak Asset Management, said the bond bank's programs have a sound history of debt repayment, and the state has demonstrated a history of support for and involvement with the bank.

"The bond bank has consistently worked with the state to strengthen bondholder protections while achieving its programmatic goals," Pietronico said. "The state's own financial resources are substantial."

Miller Tabak, which owns this credit for some of its clients, has an internal rating of Aa3 on the bonds, Pietronico said.

RBC Capital Markets is the lead underwriter on the deal. Wohlforth, Brecht, Cartledge & Brooking is bond counsel and Western Financial Group, LLC is financial advisor.

The next sale of Alaska's bond bank debt is expected to be considered by the bank's board in January.

Top Of Page 

Banks Accumulate Record Muni Holdings, as Growth Slows

Monday, October 21, 2013
By Christine Albano

Banks' holdings of municipal bonds grew to another record in the first half of 2013 as they cashed in on an opportunity for higher yields.

The 500 Largest Municipal Portfolios at U.S. Banks

"With the second quarter sell-off in the bond market primarily impacting longer duration issues, the yield spread over marginal funding costs provided by high credit quality, long-duration municipals became quite attractive," said Craig Thorton, managing director at Stifel Nicolaus & Co. "Bank funding costs are tied to the front-end of the yield curve, which showed little variation during the quarter," he said. "Consequently, many institutions found the yield spread from existing holdings weren't impacted by the sell-off, but they could now add bonds at yield levels that hadn't existed for quite some time."

As of June 30 commercial and savings banks and savings and loans in the United States owned $275.66 billion on a cost basis -- up 8.5% from the previous period -- and $274.33 billion on a fair value basis -- up 4.2% from the previous period, according to quarterly data of the top 500 U.S banks' municipal portfolios as provided by Thomson Reuters Bank Insight. The holdings were the most in records dating back to 1991.

The growth comes on the heels of a 22% increase in 2012 and 23% growth in 2011. Banks' demand for munis was fueled at year end 2012 by increased profitability and a need to invest revenue in the face of declining commercial-loan generation and proposed federal regulations, muni experts said.

While banks continued to expand their presence in the $3.7 trillion municipal industry, the pace of growth declined from the the year-on-year growth rate posted in the prior six months.

Experts said the slower growth could be attributed to a combination of market concerns over low interest rates leading up to June, headline risk stemming talk of possible Federal Reserve Board tapering and credit concerns triggered by Detroit's impending bankruptcy and Puerto Rico's financial crisis.

"The slowing in municipal bond asset accumulation by banks is likely due to the low level tax-exempt interest rates had fallen to by the start of 2013," said Chris Mier, managing director of the analytical services division of Loop Capital Markets. In addition, he said, the fall in municipal bond prices in May and June of 2013 depressed fair value.

Others said market events were a factor in keeping growth below the increases for the 12 months ending Dec. 31.

"Has the erosion in the market's overall value because of higher rates taken that number down -- perhaps," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management. He also questioned to what extent the ill effects of Detroit's bankruptcy and Puerto Rico's faltering economy had in slowing banks' participation. "These two events are largely second half 2013 events," he said.

Still, banks posted record exposure despite the volatility that led some sectors, such as households, to trim their ownership in the face of rising interest rates, a struggling economy, a weak Treasury market, and concern over Fed tapering its economic stimulus. The Fed postponed tapering at its September meeting and maintained the program at $85 billion of purchases a month.

Households -- traditionally the largest holder of municipal debt ahead of banks, mutual funds and insurance companiesowned $1.647 trillion as of June 30, a 7.7% decline over 12 months.

Banks have added to their municipal portfolios every year since 1996 when they held $75.02 billion on a cost basis and $76.81 on a fair value basis.

Wells Fargo Bank increased its holdings mid-year by 13%, or $3.87 billion to maintain the largest portfolio at $33.48 billion.

JPMorgan Chase Bank had the second largest muni portfolio and posted the largest increase as it boosted its holdings by 28%, or $4.64 billion, to $21.21 billion.

Citibank ranked third with its $18.74 billion portfolio, though it posted the largest decline. Citibank's portfolio fell by 4%, or $777 million, from $19.52 billion at year end.

Fourth-ranked U.S. Bank, which reduced its muni holdings in the two prior years, decreased its holdings by another $282.7 million, or 4.7%, mid-year to $5.74 billion.

Some smaller muni investors, such as Bancorp Bank, experienced extraordinary growth. The Wilmington, Del.-based bank more than doubled its holdings to $338.1 million.

Others decreased their portfolios significantly over six months, including Emigrant Bank of New York, which cut its muni investments for the second year in a row, a 44% reduction to $207.8 million.

Some of the previous growth by banks may have been exaggerated in the statistics, according to George Frieldander, a muni analyst at Citi.

"The net increase over the prior two years at a number of major banks was inflated by the conversion of [letters of credit] to actual holdings of [variable rate demand notes], which showed as an increase in reported holdings," he explained.

Mier said if banks, going forward, mirror the increases of the first half of 2013 they could come close to 2012's year-end growth.. "If banks continue to add from July 1 to the end of this year at the same rate as the first six months, the full year change for cost basis is going to be 17%, not 8.5%," Mier said. "By year's end, we would not be surprised if banks had accumulated about $300 billion in municipal bonds on a fair value basis for all of 2013," he added. "This would produce an increase of about 12% -- not the pace of 2011 or 2012 -- but still a fairly rapid pace of accumulation."

Given the market tone in recent months, banks should be poised to further increase their participation in the municipal market going forward, according to Mier.

"Loop Capital Markets believes that the higher tax-exempt interest rates caused by the Federal Reserve tapering discussion and the influence of the city of Detroit bankruptcy filing, plus the public discussion of Puerto Rico's woes have elevated tax-exempt interest rates sufficiently to induce banks to pick up the pace once again," Mier said. "The yield relationship between tax-exempt interest rates and Treasury bond rates is also an incentive to purchase more municipal bonds."

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Muni Market Faces $4.19 Billion Amid Concerns

Sunday, October 13, 2013
By Christine Albano

As issuers prepare to bring more than $4 billion in long-term supply to the primary market this week, negative headlines regarding ongoing mutual fund outflows, as well as the impact of a weakening market for Puerto Rico's debt and potential fallout from the debt-ceiling debate, continued to weigh on the municipal market.

Michael Pietronico, chief investment officer at Miller Tabak Asset Management said the lack of supply is helping to stem some, though not all, of the price volatility. "Puerto Rico has blown Detroit away as the number one problem for the municipal market," he said on Friday. "It remains challenging to find consistant demand outside of 10 years on the municipal yield curve, so sluggish supply should keep the trend in weaker prices from picking up pace."

According to Ipreo LLC and The Bond Buyer, new volume is set to include $4.19 billion of negotiated and competitive deals, led by a $955.8 million offering from the Dormitory Authority of the State of New York. That compares with a revised $3.51 billion in the prior week, according to Thomson Reuters.

"That said, it is obvious that outflows from municipal mutual funds are weighing on sentiment negatively," Pietronico added. "Puerto Rico is reason number one mutual fund outflows have picked up again."

OnThursday, Lipper FMI reported that investors withdrew $729 million from municipal bond mutual funds for the week ended Oct. 9 -- in what was the 20th consecutive week of outflows.

A New York underwriter said the market displayed a quiet pre-holiday tone on Friday ahead of a three-day weekend to celebrate Columbus Day. but earlier in the week he observed decent new-issue activity, regardless of any larger market and political concerns.

He expects the largest issues pricing next week, such as the Dorm deal and a $360 million financing from Battery Park City Authority, will be "very acceptable and should do well."

Issuers hope their deals will gain recognition and attention amid the barrage of existing concerns hanging over the market, the latest of which was a warning from Fitch Ratings on Friday that said it would consider putting the United States on rating watch negative if the debt ceiling is not raised before the Treasury reaches its $16.7 trillion limit on Oct. 17.

The Dorm deal -- the week's largest -- is expected to test the market when it is priced by JPMorgan Securities on Thursday, following a retail order period on Wednesday. The deal is comprised of state sales tax revenue bonds rated AAA by Standard & Poor's and AA by Fitch.

The Battery Park deal consists of senior revenue debt to be priced by Citi on Wednesday, after a retail order period on Tuesday. The $353.6 million tax-exempt serial bonds mature from 2014 to 2026, while the $6.8 million taxable debt matures in 2014 and 2015. The bonds are rated triple-A by Moody's and Standard & Poors.

Evidence of headline volatility continued to spook the market last Friday as the benchmark, triple-A general obligation scale ended unchanged at a 4.18%, up from 4.11% last Monday, according to Municipal Market Data. Last Wednesday munis were weaker in sympathy with Treasuries as some Puerto Rico bonds. some in blocks as large as $2 million or higher, were said to have traded lower because of the recent downgrade by Moody's Investors Service of $6.8 billion of COFINA debt to A2 from Aa3. The rating company cited a weak economy and a much weaker underlying credit rating.

Yields for the commonwealth's debt soared to double digits in the secondary market last week as investors continued their concern over budget reform, cost-cutting and revenue generation measures, and pension and tax reforms under the Gov. Alejandro Garcia Padilla administration.

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Washington State Preps Garvees for Seattle Bridge Project

Thursday, September 12, 2013
By Tonya Chin

LOS ANGELES - Washington will bring its second ever Garvee bond deal to market next week to finance the replacement of a floating highway bridge to help ease traffic in the Seattle region.

The state is expected to sell $295 million of federal highway grant anticipation revenue bonds on Wednesday. A retail order period is not currently planned, but it will depend in market conditions, according to Ellen Evans, the state's deputy treasurer.

Bank of America Merrill Lynch is the lead underwriter on the deal. Foster Pepper PLLC is bond counsel and Montague DeRose and Associates and Piper Jaffray & Co. are financial advisors.

Proceeds from the sale will finance a portion of the Washington State Department of Transportation's multi-billion dollar State Route 520 floating bridge and landings project, which is under construction.

The project includes constructing a new bridge and other structural improvements along the SR 520 Corridor between Seattle and Redmond.

The new bridge, expected to open to the public in late 2015 or early 2016, will replace the Evergreen Point floating bridge over Lake Washington, the longest floating bridge in the world at 1.42 miles long. Its replacement will be widened to six lanes from four, including space for pedestrians and capacity for light rail.

"It's really putting together the great state of Washington with the U.S. Department of Transportation," Evans said of the financing. "It is an important source of funding for our SR 520 project and we look forward to a good response from the market."

Last year, the state sold $500 million in its first Garvee bond deal, which also went toward financing the SR 520 Bridge and related projects.

That deal priced with yields ranging from 0.7% with a 3% coupon in 2015 to 2.75% with a 5% coupon in 2024.

Wednesday's deal with also be structured with serial bonds maturing from 2015 through 2024, but it will have one slightly lower credit rating.

Moody's Investors Service in November downgraded Washington's Garvee bond rating to Aa3 from Aa2 and assigned a negative outlook based on the uncertainty surrounding future federal reauthorizations and funding levels.

The ratings agency simultaneously downgraded 26 other Garvee bond ratings for the same reason.

Moody's affirmed the rating and outlook on the new Garvee bonds, but noted the solid debt service coverage. Analysts said that even in the event of severely reduced federal highway funding, debt service on the Garvees would still likely be covered while funding for new projects would be significantly curtailed.

"Washington has regularly submitted construction projects for funding reimbursement," analysts said. "The state is a donor in terms of its allocations, receiving less in total federal gas tax revenues than the amounts it contributes."

Standard & Poor's affirmed its AA rating on the bonds, with a stable outlook, citing good future debt service coverage based on historical grant receipts, and a sound bond structure.

The bonds are secured by a first lien on the state's federal highway aid reimbursements credited to Washington's DOT. Federal highway funds are derived from the 18 cents per gallon federal gas tax and other allocations.

Like Moody's, Standard & Poor's also cited concerns about a possible decline in federal funds or delays to reauthorization.

"Program rule changes, constrained funding sources, and federal budget pressures could lead to lower authorization and appropriation levels and diminish coverage, which we currently view as very strong for most Garvee issues we rate," credit analyst Mary Ellen Wriedt wrote in a report. "Weaker or varying levels of appropriations could reduce the overall level of support and predictability associated with the grant programs, which, in turn, could affect our ratings."

However, Standard & Poor's expects continued strong coverage levels and does not expect the AA rating to change during its two-year outlook period.

Congress has yet to pass a full new six-year transportation funding bill after the most recent six-year bill - the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users, or SAFETEA-LU -expired in 2009.

Since then, Congress has extended the program 12 times. Moving Ahead for Progress in the 21st Century, or MAP-21, was signed into law July 7, 2012 and authorizes federal transportation funding through Sept. 30, 2014.

Although MAP-21 provides funding certainty for the next year, it does not address longer-term issues regarding the sustainability of the federal program or solvency of the Highway Trust Fund, says Michael Pietronico, chief executive officer at Miller Tabak Asset Management.

"In the event of a decline in federal resources following the expiration of MAP-21, state capital improvement programs overall could be materially affected as a larger portion of funding needs would fall to the responsibility of the states, and would require increased state gas taxes or mean deferral of large capital projects," he said.

His firm assigns Washington's Garvee bonds an internal rating of A1, below the double-A ratings from Moody's and Standard & Poor's.

Pietronico said the credit quality of the bonds reflects, in addition to reauthorization uncertainty, WSDOT's pledge to first obligate and use federal transportation funds for debt service payments on the bonds, the solid trend of federal highway aid received annually by WSDOT, which is projected to provide sound debt service coverage, and an additional bonds test of 3.5 times maximum annual debt service.

When Washington issued its first Garvee bonds, Evans said the state had incorporated several strategies to strengthen the bond security, including a more restrictive additional bonds test and a 12-year limit to the amortization of the bonds to reduce reauthorization risk.

"This second issuance of Garvees has the same credit structure as the first issuance of Garvees, and we think that it's very strong," Evans said. "We're very pleased with the payment process, the reimbursement process, and with the interaction with the U.S. Department of Transportation in terms of processing the direct Garvee reimbursement."

In its report, Standard & Poor's said the state's track record of maximizing federal grants and effectively managing the grant reimbursement is a credit strength.

The entire SR 520 Corridor Program has been budgeted to cost the state $4.65 billion, according to bond documents. The State Legislature has so far authorized $2.7 billion in funding, which will come from a variety of sources.

Around $1.8 billion is estimated to come from bond proceeds, $547 million from motor vehicle fuel taxes, and $74 million from toll revenue. Other funding will come from sales tax deferral, federal funds, and local contributions.

SR 520 tolling for the project began in December 2011. Drivers on the old bridge are charged tolls through transponders attached to their car. If drivers do not have the electronic pass, a camera will record their license plate and they will be mailed a bill. Tolls for drivers with the electronic pass range from $1.70 to $3.70. For others, tolls range from $3.25 to $5.25.

Evans said the state legislature has not authorized Garvee issuance for any other transportation projects in the state and they don't expect issuing additional Garvees for the SR 520 project.

The state is planning additional financing for a portion of the project, which will likely come in the form of toll-backed bonds. Evans said those will likely be issued in 2015.

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Volume Inches Up to $5.86B

Sunday, September 8, 2013
By Christine Albano

A $495 million competitive sale of Arkansas general obligation bonds will lead primary market activity this week as long-term volume increases after last week's holiday lull.

The GO is part of $5.86 billion in long-term issuance headed to market this week, as estimated by Ipreo LLC and The Bond Buyer. Last week, Thomson Reuters reported that issuers trimmed sales to a revised $1.43 billion for the past week, which was shortened by the Labor Day and Rosh Hashanah holidays.

The Arkansas highway construction deal will be offered on Tuesday with serial bonds from 2014 to 2023 and is rated Aa1 by Moody's Investors Service and AA by Standard & Poor's.

The deals arrive after municipals posted slight gains on Friday, following Treasury prices higher on news that the Bureau of Labor Statistics' August employment report showed payrolls were up 169,000, less than forecast, and the June and July figure was cut to 74,000.

Managers didn't read too much into the gains on Friday, but said the market is moving in the right direction. "The municipal market has to show that a solid bottom in prices is in place before any meaningful rally can occur," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management.

The gains marked a reversal after Municipal Maraket Data reported 10-year and 30-year yields ended at 3.04% and 4.51% on Thursday, two basis points higher than where they began last Tuesday, amid concerns over illiquidity and heavy mutual funds redemptions.

"Today's bond-friendly data on the employment picture in the United States may slow the pace of redemptions from mutual funds as investors conclude that any Fed tapering is already priced in," Pietronico said Friday, referring to expectations that the Federal Reserve may begin to reduce it's bond purchasing program.

Elsewhere in the competitive market, a $485 million sale of state personal income tax bonds will be offered by the New York State Urban Development Corp. on Tuesday with serialsfrom 2015 to 2024.

In the negotiated market, a $384.6 million Miami-Dade County, Fla., deal will be priced by Raymond James & Associates Inc. on Tuesday, following a retail order period on Monday. The four-pronged deal is rated A3 by Moody's and A by Fitch Ratings, and contains two series that are subject to the alternative minimum tax.

AA $286.88 million sale of lease revenue bonds from the Alameda County, Calif., Joint Powers Authority is also pricing this week. Rated Aa3 by Moody's and AA by Fitch, the bonds will be priced by JPMorgan Securities LLC on Thursday and structured as serial bonds maturing from 2018 to 2035.

The Texas Private Activity Bond Surface Transportation Corporation will issue $277 million of senior lien revenue bonds on Thursday when JPMorgan prices the 2038 and 2043 term bonds that are rated Baa3 by Moody's and BBB-minus by Standard & Poor's.

The Monroe County Industrial Development Corporation will sell $265 million of revenue bonds for the University of Rochester when JPMorgan prices it on Tuesday, after a retail order period on Monday. The deal is rated Aa3 by Moody's and AA-minus by the two other major rating agencies and matures serially from 2014 to 2033 with term bonds in 2038 and 2043. Series C is taxable and matures from 2014 to 2028 with a term bond in 2033.

A $580 million taxable fixed-rate note sale from the Providence Health & Services Obligated Group will dominate the short-term arena when Bank of America Merrill Lynch prices it on Thursday with Aa2 ratings from Moody's and AA from Standard & Poor's and Fitch Ratings.

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Muni Bond Fund Carnage Continues; August Was 4th Down Month

Wednesday, September 4, 2013
By Andrea Riquier, Investor's Business Daily

Municipal bond funds suffered through the dog days of summer, with a fourth straight month of negative returns in August.

Investors increasingly convinced that the Federal Reserve will begin tapering its bond buying program led the exodus. Muni funds were also slammed by alarming headlines on issuers from Detroit to Puerto Rico.

"Generally when you get headlines about muni bond issuers they're hardly ever good news," said Michael Pietronico, CEO of Miller Tabak Asset Management in New York, which has $950 million of municipal assets under management. "It's one of those markets where, if nothing is going bad, no one talks about it."

Detroit, which filed for Chapter 9 on July 18 in what would be the largest-ever municipal bankruptcy, has been driving those headlines. The city's emergency financial manager proposed cuts to payments of general obligation debt, long considered the safest muni security because it is backed by a pledge of the issuer's full faith and credit.

General Obligation Bonds

That proposal has scared some investors, said Matt Dalton, who manages $1.6 billion of munis at White Plains, N.Y.-based Belle Haven Investments. Dalton thinks general obligation bonds will take a short-term hit, but pointed out that no final decisions had been made about treatment of Detroit's debt, let alone whether such treatment would set a market precedent.

Bonds from other Michigan issuers are most likely to be impacted by Detroit's filing, Dalton said. Michigan single-state funds were down 2.38% in August, trailing the overall average for munis, off 1.70%, according to Lipper Inc.

Matt Fabian, managing director at Municipal Market Advisors, said that only 0.3% of general obligation bonds have ever defaulted. Default risk clusters by sector in the municipal market, Fabian notes.

In fact, it's Puerto Rico, not Detroit, that represents more of a systemic risk to the market, Fabian said. Puerto Rico bonds are layered throughout the muni fund world because they are exempt from federal and all state taxes.

Fabian said Puerto Rico's woes, such as escalating debt and persistent budget imbalances, should be a concern to mutual fund investors because the island's troubles could impact fund valuations. The Commonwealth had more than $70 billion of outstanding debt as of March, according to government statistics.

With interest rates inching higher, there are solid buying opportunities in the intermediate to long-term range right now, Pietronico said, and no need to go lower on the credit spectrum.

Rate Questions Dominate

Uncertainty about rates will dominate the muni world in the coming weeks. "It's going to be difficult for bonds to rally in front of the unemployment figures and the Fed meeting" this month, Pietronico said.

Fabian compared the current market bloodbath to the period from late 2010 through early 2011, when the Build America Bond program was coming to an end, and bank analyst Meredith Whitney issued a warning about "hundreds of billions of dollars of defaults" in the municipal world.

That was the worst period of outflows ever, Fabian said, and it lasted 25 weeks. Then bonds got cheap enough that investors returned. The current stretch of outflow has lasted 13 weeks, he said, but there may still be some slack in funds.

"A lot of the people who came into muni funds in the last year to chase the positive momentum - we have lost a lot of those investors. We could lose more."

Dalton agrees with that assessment. "There will be a fourth month when the individual investor opens up his statement and sees negative returns. That will continue to feed into people wanting out."

But Dalton sees a silver lining. "I think we're in the ninth inning of this move and we're setting ourselves up to have a rally in fixed income going into year-end."

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N.J. and N.Y. Deals Headline Primary Market

Monday, August 19, 2013
By Christine Albano

Aug. 19 (Bond Buyer) -- The New Jersey Transportation Trust Fund Authority will test the primary market this week with an $850 million long-term financing, part of an increasing slate of new offerings that is expected follow last week's $5.5 billion California note sale, which attracted demand amid market weakness as yields on long-term munis rose in sympathy with Treasuries.

According to Ipreo LLC and The Bond Buyer, issuers are expected to bring a combined $4.10 billion of negotiated and competitive offerings to the market this week, after a revised $3.81 billion priced last week, according to Thomson Reuters.

California's mammoth revenue anticipation note sale dominated most of the attention when it was priced by JPMorgan last Thursday and was oversubscribed by retail and institutional investors. It achieved the lowest yields in four decades during the repricing as the first series of $1.5 billion yielded 0.21% with a 2% coupon in 2014, and the second series of $4 billion yielded 0.23% with a 2% coupon in 2014.

Retail investors bought $1.65 billion of the notes, and institutional investors — largely money market funds — purchased $8.6 billion, according to the Treasurer's office.

Officials at the N.J. Transportation Trust Fund Authority and the New York State Dormitory Authority are hoping their deals can garner similar attention from investors when they share the spotlight as this week's largest deals. Both issues will be priced by Bank of America Merrill Lynch & Co.The N.J. deal's official pricing will take place Tuesday, following a one-day retail order period for the serial structure maturing from 2014 to 2044. The bonds are rated A1 by Moody's Investors Service and A-plus by Standard & Poor's and Fitch Ratings.

The State University of New York dormitory facilities revenue bonds, will be priced on Thursday, following a Wednesday retail order period. Rated Aa3 by Moody's and A-plus by the two other major rating agencies, the deal is structured with serial and term bonds. The maturities were still being finalized at press time.

The two credits should find buyers, according to Michael Pietronico, chief executive officer at Miller Tabak Asset Management, even though many investors are looking for bonds on the very short end of the yield curve and some remain concerned that the Federal Reserve Board will start tapering its bond purchases. "Both credits are approved for purchase by many conservative investors and as such we would expect retail to have interest at various points in the yield curve, depending on the pricing," he said.

The deals come following some volatility after a rise in Treasury yields last Thursday translated into weakness on the municipal side. Municipal yields rose as much as five basis points and the 10-year ended at a 2.85%, according to Municipal Market Data. The 30-year rose four basis points to 4.37% -- up nine basis points on the week, according to MMD.

"Miller Tabak Asset Management believes it is likely that the market will require a yield penalty on any significant issuance beyond 10 years on the yield curve until mutual fund flows turn positive and the Federal Reserve begins to taper its bond purchases," Pietronico said. "In fact, it is quite possible both of those events may actually occur very close in proximity as duration shedding by investors has little to do with inflationary concerns and everything to do with trying to play the 'taper.'"

The week's other sizable deals include a $322 million Columbus, Ohio, sale of various purpose unlimited and limited tax bonds by Bank of America on Tuesday, after a retail order period on Monday. The natural triple-A-rated deal is structured with $296.56 million of tax-exempt debt and $24.92 million of taxable debt, but the maturity structure was unavailable at press time.

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Now Stable Across the Board, Washington Preps $864M Deal

Thursday, August 1, 2013
By Tonya Chin

LOS ANGELES — Boosted by two improved outlooks on its already high credit ratings, Washington is set to sell $864 million of general obligation bonds in a three-part competitive offering on Aug. 7.

The deal will include $533 million of various purpose GO bonds, $275 million of motor vehicle fuel tax GO bonds, and $56 million of taxable GO bonds. Proceeds will go toward financing various capital projects and transportation projects, including a tunnel in Seattle.

Foster Pepper PLLC is the bond counsel. Montague DeRose and Associates and Piper Jaffray & Co., Seattle-Northwest Division, are the financial advisors.

"The Washington State GO credit is one that we are comfortable buying as a firm," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management. "The very sound management practices in both forecasting and budgeting by the state keep this issuer wellrespected by the market, and as such, we see solid demand for its upcoming sale."

Chris McGann, a spokesman for the treasurer's office, said the state expects investor demand to be further strengthened by two recently improved credit rating outlooks.

Moody's Investors Service and Fitch Ratings both revised their outlooks on the state to stable from negative ahead of next week's sale, citing its improving financial position.

Moody's assigned the bonds its second-highest Aa1 rating. Both Standard & Poor's and Fitch assigned their equivalent AA-plus ratings. S&P's outlook remains stable.

Maturities on the various purpose GO bonds range from 2017 through 2038. The fuel tax bonds will mature in 2014 through 2038, and the taxable bonds will mature in 2014 through 2017.

"The series are structured with level debt service, which is characteristic of the sate of Washington's conservative financings," McGann said.

Proceeds from the various purpose bonds will provide funds for state expenditures on capital projects and state programs for outdoor recreation, habitat conservation, and farmland preservation.

The motor vehicle fuel tax GO bonds are being issued to provide funds to pay and reimburse state expenditures for state and local highway improvements, including high occupancy vehicle projects in Pierce County, improvements to Interstate 90 at Snoqualmie Pass East, and improvements to the State Route 522/Snohomish River Bridge.

Proceeds will also go toward replacing the SR 99 Alaskan Way Viaduct-a main north-south route through Seattle-with a bored tunnel. Part of the structure was damaged during a 2001 earthquake and studies have shown that it may collapse if another major earthquake occurs.

The total cost for the tunnel replacement is estimated at $3.2 billion. The new tunnel is scheduled to open to traffic in December 2015.

The taxable GO bond proceeds will go toward financing and reimbursing state expenditures for non-transportation related projects that cannot be financed with tax-exempt bonds.

All of the GO bonds are backed by the state's full faith, credit, and taxing powers, but the fuel tax bonds are first payable from state excise taxes on motor vehicle and special fuels.

McGann said the state typically has semi-annual GO bond sales, and usually issues them competitively.

Washington last came to market with GO bonds in January, selling $230 million of various purpose GO bonds, $324 million of motor vehicle fuel tax GO bonds, and $785 million of refunding bonds.

Yields on the various purpose GO bonds ranged from 0.2% with a 2% coupon in 2014 to 3.1% with a 4% coupon in 2038. Yields on the motor vehicle fuel tax bonds ranged from 0.6% with a 5% coupon in 2016 to 3.25% with a 4% coupon in 2043.

State Treasurer James McIntire said following the January bond sales that the state saved more than $79 million, citing its strong credit rating and reputation for prudent financial management.

Since January, the state's economic gains that have boosted revenues, improving reserve position, and largely recurring budget balancing solutions led to Moody's assigning an improved outlook.

Analysts said they expect that the state will continue to address any budget gaps that emerge, as it has in the past, and absorb the substantial increase in mandated basic education funding.

The most recent Washington budget was not passed without drama — after two special sessions, lawmakers passed a budget June 27, averting a shutdown of most of state government that would have taken effect July 1.

But the end result kept Washington in the ratings agencies' good graces.

"The Aa1 general obligation rating incorporates Washington's sound management tools such as its quarterly consensus revenue forecasting process and demonstrated willingness to address budget shortfalls, along with an economy that is improving and expected to out-perform the nation over the long term, despite a slow recovery," Moody's said in a report.

Analysts also noted employment gains and improvement in the state's housing market, but said these strengths are tempered by exposure to the cyclical aerospace industry and above average debt ratios.

Moody's also warned that significant future increases required in K-12 education funding will pose out-year budget challenges.

In raising its outlook to stable, Fitch noted the improvement in the state's economic and revenue performance.

Following the revisions, the state treasurer said the improvement would help Washington generate strong investor interest.

"They provide a measure of optimism about the state's housing market and overall economy, but especially recognize the Legislature's willingness to take the actions necessary to pass a balanced budget for the 2013-15 biennium," McIntire said in a statement.

However, he noted that there are still challenges ahead that will require a larger, and farther reaching effort, to overcome.

Fitch cautioned that the state is particularly vulnerable to reductions in consumer spending, since it has no income tax and relies on consumption-based revenues.

This makes watching consumer spending trends a must for prospective buyers, said Miller Tabak's Pietronico.

"Investors who perceive the economy as having better prospects down the road may find greater comfort in this credit as it relies heavily on consumption - based revenues," he said.

Pietronico added that the fact that there is no state income tax might result in the deal pricing slightly wider relative to the benchmark triple-A due to its size.

Standard & Poor's said that while the sales tax-based revenue structure is sensitive to economic cycles, it is to a lesser degree than those of states that rely primarily on income taxes.

The agency has maintained a stable outlook on Washington since 2007. Analyst said the outlook reflects the agency's view that the state's liquidity, financial trends, and strengthening economy point to an improving financial position.

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Shell-Shocked Strategists Weigh Yield, Risk

Friday, June 28, 2013
By Christine Albano

June 28 (Bond Buyer) -- Asset managers are trying a little of everything after a historic selloff catapulted municipal bond yields some 60 basis points higher a week ago.

As the start of the third quarter and summer reinvestment season neared, some managers were limiting their exposure by sticking with bonds maturing within five years and increasing their credit surveillance and liquidity to protect assets from further weakness. Others were buying, taking advantage of rare 5%-plus yields on the long end -- particularly in new issues.

"Once the sting of the decline wears off, the municipal market will see some inspired demand from retail investors who have been starving for attractive income levels for a long period of time," Michael Pietronico, chief executive officer at Miller Tabak Asset Management, told The Bond Buyer on Tuesday.

Though some new issues were still being postponed on Thursday due to market conditions, the market firmed up starting Wednesday, allowing underwriters to cut yields 20 basis points on new deals. The single-A-rated $1.3 billion Illinois general obligation sale was more than six times oversubscribed and the yield on its final 2038 maturity was cut to 5.65% from 5.85% from the original scale at the time -- yet still 180 basis points higher than the comparable generic triple-A GO scale at the time, according to Municipal Market Data.

On Thursday, the benchmark GO scale continued to fall and ended at 3.83%, down eight basis points from 3.91% the prior day.

Investor reaction to the historic market turmoil was running the gamut from pleasantly surprised to shell-shocked. How they ultimately react may be a key determinant in the market's performance as the new quarter begins.

"The early summer months normally equate to a much firmer market based on historically-high levels of cash hitting portfolios in the form of bond interest payments and maturities," Pietronico said.

Due to the market turmoil, however, that cash may take longer to find its way back into the market, according to Anthony Valeri, senior vice president of research at LPL Financial.

"We had expected the municipal market to benefit from seasonal strength at the start of July, but that will likely be pushed back until mid-July," Valeri said in a weekly market commentary. "While some compelling opportunities are emerging in the municipal market, illiquid markets and the approaching quarter-end suggest investors may be better served waiting until after the July 4th holiday."

In addition, the "extremely sharp correction" has thrown expectations for strong summer performance into disarray for portfolio managers, Matt Fabian, managing director at Municipal Market Advisors said in his weekly commentary.

"While prices have not yet found a bottom, and while municipals may continue to sell off strongly for a week or more, the current crisis reflects an endemic condition of our market," he explained. "In the long-term, this proclivity to crisis means fewer investor dollars -- in particular from large and concentrated investors who prize liquidity the most -- especially when better alternatives abound."

Some managers said they will continue to be active in the municipal market, while others are adapting renewed cautiousness in the aftermath of the selloff.

Triet Nguyen, managing partner at Axios Advisors and 32-year municipal veteran, said his independent research firm specializing in municipal bonds, including high-yield and distressed sectors, will pay closer attention to credit, liquidity, disclosure, and available cash.

"Given what we just went through, we will have to be much more mindful of the liquidity characteristics of our portfolios," he said on Tuesday. "The best way to improve liquidity, in high-grade as well as high-yield, is to stick with decent size issues with broad distribution or index-eligible issues."

In addition, he said the firm - a sub-advisor that provides credit research and strategies for clients with $2.4 billion in assets under management - will adapt a larger cash cushion of 10-20% and improve its credit vigilance.

Though rates have rebounded, Pietronico said his firm will largely maintain its conservative management in terms of duration and credit quality, and recommends taking advantage of high-quality municipals yielding 4% and 5%.

"We see this municipal market dislocation as an enormous opportunity to lock in overly generous absolute yield levels relative to economic growth and inflation as we see it evolving," he said.

Robert Doty, president of municipal consulting firm AGFS, said on Tuesday that investors should be buying short to intermediate-term maturities - not longer than five years - to buffer against future interest rate volatility on the long end of the curve.

"Investors should be very conservative because of the risk in the bond market," Doty said. "If you are holding bonds to maturity, you will have a lower return, but at least you won't lose principle."

At the same time, he said investors should avoid panic selling, and reaching for yield in the backdrop of rising interest rates and inflation fears. "I don't think it makes sense to buy longer term bonds," he said. "People who are stretching for yield and buying long-term, high-yield bonds are going to get hurt, and they are probably going to panic and lose a lot of principle."

Views also varied on the other short and long-term effects of the sell-off."I think the market will catch a bid and stabilize once we get past this week," Nguyen said on Tuesday. But "going into quarter-end, and with the surge in supply, I think it's not inconceivable another 20 to25 basis-point adjustment will be required to move the new issues."

Jim Colby, portfolio manager and senior municipal strategist at Van Eck Global, noted that the ratio of municipal bond yields to Treasury yields at or above 100% for most durations could provide potential value not seen in over two years.

Colby helps to oversee nearly $2.1 billion in municipal bond Market Vector ETFs.

Valeri of LPL noted that municipal to Treasury yield ratios are at their highest levels of the past year as the average triple-A-rated 10- and 30-year municipal to Treasury yield ratios were at 119% and 117%, respectively, in the past week.

"At a time when taxes are more likely to go up than down, municipal yields well above Treasury yields are an extraordinary value," said Jonathan Lewis, chief investment officer of Samson Capital Advisors in a June 21 market bulletin.

But just how far rates move in either direction and how the sell-off will affect future market volatility has experts at odds.

"One should not expect a bounce higher in prices anytime soon, but as the year progresses and higher rates take their toll on the economy and financial markets, we expect rates to come back down gently," Pietronico of Miller Tabak explained.

Nguyen of Axios said another major selloff in the September-October time frame "cannot be ruled out" as further back-up might be necessary to move potential supply bulges between the third and fourth quarter.

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Post-Holiday Market Spotlights $500MM MTA Deal

Tuesday, May 28, 2013
By Christine Albano

May 28 (Bond Buyer) -- A $500 million transportation revenue offering from New York's Metropolitan Transportation Authority is part of an estimated $4 billion slate of new issuance that seeks to attract investors as they return from the Memorial Day hiatus looking for ways to put almost $100 billion in spring redemption money to work.

The deal will be the first large financing to test the post-holiday market when it is priced by JPMorgan for retail investors on Wednesday, followed by an institutional pricing on Thursday. The bonds are rated A2 by Moody's Investors Service, and A by Standard & Poor's and Fitch Ratings. The structure was not available at press time.

Just before the arrival of June 1 redemptions, Ipreo LLC and The Bond Buyer estimate this week's new volume at $4 billion, compared with a revised $7.24 billion last week, according to Thomson Reuters. According to Interactive Data, there are $54.46 billion in current and advanced refundings, and maturing bonds and note redemptions slated for June 1.

Municipal experts say investors with spring reinvestment needs can find value in the current market – but some disagree on where to find it.

"At the moment we see the market as ripe with opportunity as long as investors take a long term approach," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management. "Buying bonds in the secondary market is more appealing to us at the moment, as negotiating lower prices and higher yields for our clients is value we can add in this environment."

With reinvestment season on the horizon, a California underwriter said retail investors will favor bonds in the first 10 years of new financings – to match bonds issued back in 2003 that are now eligible for current refunding.

Beyond that, they will have little interest because of the lack of yield incentive for extending further. "The tough part of the curve is the 15- to 20-year range," he said.

The MTA deal arrives on the heels of Federal Reserve Chairman Ben Bernanke's promise to continue fueling the bond market with his monetary accommodation strategy.

The weakening in prices that began back on May 17 prevailed through the pre-holiday market, as the municipal-to-Treasury ratio slipped.

The ratio of five-year ratio fell to 94.4% from 112.3%, while the 30-year dropped to 96.6% from 98.2%. At the same time, the 10-year and 30-year benchmark yields increased four basis points each last Thursday to 1.90% and 3.08%, respectively, according to Municipal Market Data. Since May 17, the 10-year yield increased nine basis points from 1.81% and the 30-year yield jumped 13 basis points from 2.95%.

Between now and early July, the California underwriter expects the supply – and demand -- of New York and California paper to increase in anticipation of the next big redemption date on July 1, on which another $37.23 billion in redemptions in expected, according to Interactive Data. "There is a lot of money to be reinvested in New York and California both," he said. "I see it as one of the bigger years we have had as far redemptions" in the last decade, he said.

In addition to the MTA deal, issuance planned for this week includes a $368.70 million sale of Columbus, Ohio, general obligation refunding bonds in what will be the largest redemption to date of Build America Bonds due to federal subsidy cuts.

Under the BAB program, municipalities were given a federal subsidy equal to 35% of the issuers' interest cost on the BABs. The subsidies were reduced as part of the across the board government belt-tightening known as the sequestration.

The bonds, which are scheduled to be priced on Wednesday by Bank of America Merrill Lynch, will refund various 2009 and 2010 BABs into traditional tax-exempt, fixed-rate GO bonds and may be structured as serial bonds, according to a source at Merrill.

Rated triple-A by all three major rating agencies, the deal will consist of $326.8 million of tax-exempt various purpose unlimited tax refunding GOs, and $41.9 million of taxable various purpose limited tax refunding bonds.

In the competitive market, a $250 million sale from the Los Angeles Community College District is structured to mature serially 2013 to 2037 and slated for Wednesday.

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Iowa Deal Tests Market Amid $5.8B Slate

Monday, April 29, 2013
By Christine Albano

April 29 (Bond Buyer) -- A $1.2 billion Iowa Finance Authority offering for the construction of a new fertilizer plant is the week's largest planned deal amid almost $5.8 billion in new volume. It could be a tough sell due to its timing on the heels of the Texas fertilizer plant explosion two weeks ago and investors' mixed reactions to economic numbers released late last week.

It will be the first substantial deal to test the market, which was quiet to one basis point firmer in spots on Friday afternoon, market participants said. The week's smaller offerings include a $350 million of New Jersey General Obligation bonds that are earmarked for competitive pricing on Wednesday, and $255 million of financing for the El Paso County, Texas, Hospital District.

"The municipal bond market was firmer in spots yesterday, but overall general market yields were generally unchanged,"Interactive Data reported on Friday. "The market has a positive tone today and yields are one basis point to two basis points lower in the intermediate and long end of the curve, with municipals benefitting from a stronger U.S. Treasury market."

An estimated $5.76 billion is expected to be priced this week, according to The Bond Buyer and Ipreo LLC, versus a revised $5.60 billion last week, according to Thomson Reuters. On Friday, the market was mostly muted following the morning announcement of a worse-than-expected increase in real gross domestic product. annual rate of 2.5% in the first quarter of 2013 – just short of the 3% increase expected by economists.

Municipals were range-bound last week, amid uncertainty over interest rates, as the Labor Department announced a better-than-expected drop in initial jobless claimsfor the week ending April 20. Claims fell by 16,000 to 339,000.

Markets participants last week said the Iowa deal could face a headwind from the negative headlines after the explosion of a Texas fertilizer plant two weeks ago that killed 14 people and injured more than 100.

The deal on behalf of the Iowa Fertilizer Co. will be comprised of tax-exempt Midwestern Disaster Area Bonds that will refund short-term financing to help pay for construction of a nitrogen fertilizer plant in southeast Iowa.

The financing will come to market on Tuesday in a pricing structure that includes term bonds slated to mature in 2019, 2022, and 2025. Citi is the senior book-running manager.

The bonds are already in the speculative-grade category with ratings of BB-minus by Standard & Poor's and Fitch Ratings, and one New York public finance banker said the bonds will have to come cheap in the context of the current market, where yield spreads between quality classes have narrowed.

"There is probably good institutional demand at the right price point," he said. On Thursday, the generic, triple-A general obligation scale in 2043 was yielding 2.90%, according to Municipal Market Data.

The week's offerings are likely to attract investors' interest."Miller Tabak Asset Management expects money to continue to be put to work selectively by investors as global growth is sputtering and inflation fears are turning to deflation concerns," said Michael Pietronico, chief investment officer of the New York City-based firm.

The New Jersy GO deal, consisting of serial bonds maturing from 2014 to 2033, was originally scheduled to price last Tuesday, but officials from the state Treasurer's office decided to postpone the sale to give the market time to digest last week's crowded calendar in the aftermath of other larger deals from the Garden State earlier in the month. Rated A1 by Moody's Investors Service, and AA-minus by Standard & Poor's and Fitch, it is an example of an offering with investment- grade ratings from a specialty state where investors typically gravitate toward quality and exemption from high state taxes.

Rating agencies said the state's rating exemplifies its high wealth levels and broad economy offset by a high debt burden and a multitude of spending pressures, such as continued capital needs.

In other activity, the El Paso County Hospital District plans to sell a combination of tax and revenue certificates of obligation and GO refunding bonds on Tuesday. The negotiated deal will be led by Bank of America-Merrill Lynch and will be rated AA-minus by Standard & Poor's and AA by Fitch.

The Louisiana Local Government Environmental Facilities Authority is gearing up to issue $218 million of subordinate lien revenue debt for the East Baton Rouge Sewerage Commission Project.

Citi will price the two-pronged financing on Wednesday consisting of $126 million of tax-exempt subordinate lien revenue bonds maturing in 2035, 2043, and 2048, as well as $92 million of Securities Industry & Financial Market Association floating-rate notes that track the London Inter-Bank Offered Rate (LIBOR) index. The deal is rated A1 by Moody's, A-plus by Standard & Poor's, and AA-minus by Fitch.

Elsewhere in the short-term market, Fulton County, Ga., is preparing a $200 million sale of tax anticipation notes for competitive bidding on Wednesday, backed by the county's general fund and rated SP1-plus by Standard & Poor's and F1- plus by Fitch.

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Rutgers Coaching Abuse Scandal Fails to Deter Rally: Muni Credit

Friday, April 26, 2013
By Michelle Kaske
of Bloomberg

April 26 (Bloomberg) -- Debt of Rutgers University is gaining the most since May even after a coaching abuse scandal roiled New Jersey's largest public college and added to its risk of a credit downgrade.

Securities of the eighth-oldest U.S. college are benefiting from the longest rally in 20 years in similarly rated municipal bonds. The school fired its men's basketball coach this month after video showed him kicking players and hurling epithets. Moody's Investors Service called the issue a "credit negative" that may curb donations. It put Rutgers on review for a rating cut in November because of debt it may take on as it acquires a health-sciences university.

Still, the extra yield on Rutgers bonds over AAA munis has shrunk about 25 percent since November, and is close to an 11- month low, data compiled by Bloomberg show. Investors want New Jersey debt apart from the state's general obligations as well as the higher relative yields, said Michael Pietronico, chief executive officer of Miller Tabak Asset Management in New York.

Benchmark local issues offer "yields so painfully low that investors are going to overlook those and try and get a little extra yield by going down a notch or two on the credit spectrum," said Pietronico, who oversees $910 million of munis.

Merge Ahead

Founded in 1766 and based in New Brunswick, about 42 miles (68 kilometers) southwest of Manhattan, Rutgers has more than 58,000 students on three campuses. It's set to merge with the University of Medicine & Dentistry of New Jersey July 1. Moody's rates Rutgers's $1.2 billion of debt Aa2, third-highest.

Munis graded AA, the same as Rutgers, have earned 1.3 percent this year, compared with 1 percent for AAA benchmarks, Bank of America Merrill Lynch data show. AA bonds also beat top- rated munis in 2012 and 2011, for the longest winning streak since 1992.

"Typically a state university, a flagship university, is a good credit story," said Phil Condon, who manages $26 billion of munis at Boston-based DWS Investments. "It's supported by the state government, has a brand and has strong matriculation."

School Investigation

The school is investigating how the basketball program managed claims of abusive behavior by the coach, Mike Rice, after Rutgers suspended and fined him four months ago instead of firing him, Moody's said in a report this month. Rutgers fired Rice April 3. Athletic Director Tim Pernetti resigned two days later. University President Robert Barchi has stayed on.

Pietronico said Rutgers will emerge more quickly from its coaching scandal than Pennsylvania State University, where former President Graham Spanier was ousted over the Jerry Sandusky child sex-abuse scandal. The school has the same Moody's rating as Rutgers.

"This is not Penn State," Pietronico said. "This is not a situation where the credit will be weakened because of potential law suits."

Rutgers faces the threat of a credit downgrade because of how the university handled the abuse claims, which may cause donor support to "wane" as the school investigates the issue, Edith Behr, a Moody's analyst in New York, said in the report.

'Credit Negative'

"These events are a credit negative for Rutgers because they draw criticism from national media and public officials, raise questions about governance and management practices at the university, and strengthen the possibility of government investigations and possible legal actions," Behr wrote.

"We are optimistic that we will preserve our credit rating," Steve Manas, a Rutgers spokesman, said in an e-mail. "We are confident that the university will move beyond these transitory matters without any long-term negative effects on our financial position."

Even with a potential rating cut, investors are demanding less additional yield on Rutgers debt, using BVAL pricing analysis.

Rutgers bonds callable in May 2020 and due four years later are valued at a yield spread of about 0.8 percentage point above benchmark debt, compared with about 1.1 percentage points Nov. 20, the day before Moody's placed the school under review for downgrade.

The difference was as low as 0.73 percentage point last month, the narrowest since May.

Internal Grade

Investors are looking to pad returns with 20-year general- obligations yielding 3.89 percent, below the 52-year average of about 5.9 percent, a Bond Buyer index shows.

Miller Tabak has an internal grade on Rutgers two levels below what the rating companies assign, Pietronico said.

While the school's yield spreads have narrowed, Rutgers debt gives investors an alternative to New Jersey's general- obligation credit or debt repaid with state revenue that's allocated annually by the legislature, he said.

"If we're getting compensated for that A1 rating that we have internally, we'll go ahead and buy the bonds," Pietronico said. "Rutgers is a name we own and we're comfortable owning it."

Issuers led by the Iowa Finance Authority, which is offering $1.2 billion of tax-exempt revenue debt, plan to sell about $3.6 billion of long-term munis next week, the slowest period since March, Bloomberg data show. Proceeds of the Iowa sale will finance a fertilizer facility.

Ten-year benchmark munis yield 1.77 percent, close to a three-month low. Still, the tax-exempt bonds are cheaper than comparable-maturity Treasuries, which yield 1.71 percent.

The yield ratio between the two securities, a measure of relative value, is about 104 percent, compared with the five- year average of about 100 percent. The higher the ratio, the less expensive munis are compared with federal debt.

--Editors: Mark Tannenbaum, Stacie Sherman

To contact the reporter on this story:
Michelle Kaske in New York at +1-212-617-2626 or

To contact the editor responsible for this story:
Stephen Merelman at +1-212-617-3762 or

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Puerto Rico Investors on High Alert After PRASA Downgrade

Thursday, March 28, 2013
By Christine Albano

Though analysts and municipal managers said Tuesday's Standard & Poor's downgrade of the Puerto Rico Aqueduct & Sewer Authority was widely expected, the cut — the second experienced by one of the commonwealth's issuers in as many weeks — means more stress and concern for Puerto Rico bond holders, and could likely lead to less liquidity, wider spreads, and consequently, costlier trips to market.

Municipal experts said the downgrade of the PRASA senior-lien bonds to BB-plus from its prior investment-grade BBB-minus rating, with a negative outlook, adds another layer of concern for investors on the heels of a March 20 downgrade by Fitch Ratings and a March 13 downgrade from S&P of the general obligation rating - both one-notch to BBB-minus with negative outlooks.

The latest S&P action also lowered the rating of the authority's bonds guaranteed by the commonwealth by one notch to BBB-minus, with a negative outlook, while the stand-alone credit profile of the authority was left unchanged at BB-plus. It also creates additional strain on the commonwealth given its existing economic and fiscal imbalances - namely a $2 billion budget deficit, pension funding shortages, and lack of economic diversification - that its financing arm, the Government Development Bank, is working to repair, they said.

"Although no more so than the GO downgrade by S&P and recent Fitch downgrades, the PRASA drop is certainly indicative of the long road ahead," said Alan Schankel, managing director of Janney Montgomery Scott. "When rating agencies change a rating, they often start with the main issuer and then that change ripples through peripheral issuers," he explained.

After recently starting to show signs of tightening from previous highs, spreads on long Puerto Rico bonds in general have again started to widen out, especially in the wake of the recent downgrades, experts noted.

Spreads on Puerto Rico bonds were approximately 230 basis points wider than the 30-year benchmark triple-A GO scale as of March 22 — after peaking at 275 basis points between December 2012 and January 2013, according to Municipal Market Data. In early January 2012, by comparison, spreads were at 152 basis points.

Tuesday's PRASA downgrade, however, triggered selling in the secondary market at spreads wider than just a week ago — and even wider than the day before the downgrade. In block trading on Wednesday, for instance, a dealer sold to a customer 5s of 2033 at 5.72%, up five basis points from a comparable block trade Tuesday, according to Municipal Securities Rulemaking Board trade data. That trade took place at a yield 263 basis points higher than the 30-year triple-A GO scale, according to MMD.

Meanwhile, the volatility was more pronounced among odd-lot trades. A dealer sold to a customer 5.25s of 2042 at 5.81%, up 27 basis points from where it was sold Tuesday — which was 272 basis points higher in yield than the generic scale on Wednesday. In addition, bonds from an interdealer trade of 6s of 2038 yielded 5.96%, 23 basis points higher than where they traded Monday — and 286 basis points higher than the long GO scale on Monday.

Schankel said further PRASA downgrades could be on the horizon, since the commonwealth supports the authority directly and through the GDB. He said he has been recommending since last July that Janney's advisors limit their exposure to the troubled Puerto Rico credits and said he will continue to do so.

"If there are no significant indications of improvement in finances and economy in the near term, a drop of the GO rating to junk is likely, and the related issuer ratings would also tumble further," he said.

The GDB is offering a $750 million line of credit to the island's government for the current fiscal year to help cure a larger than expected fiscal 2013 budget gap — namely the $2.17 billion structural operating deficit.

Meanwhile, the ongoing downgrades raise concerns for investors because they are indicative of the severity of Puerto Rico's larger financial conditions, and will likely cause investors to keep their guard up and their ownership of Puerto Rico credits to a minimum, analysts said.

The PRASA downgrade on top of the commonwealth's troubles and prior GO downgrades, "continues to cause investors to be cautious going forward as more cuts may be forthcoming," said Peter Hayes, head of the municipal bond group at BlackRock Inc.

"Moody's cut [PRASA] to non-investment grade in December, so most forced selling was done then," he pointed out.

Speaking exclusively about the GO credit, Hayes said the market had factored in the downgrades, and that valuations had reflected a lower rating profile.

"The larger than expected deficit somewhat caught the market by surprise, but the [GO] rating cut itself was not a big surprise," he explained. "Now, with the rating only one notch from noninvestment grade, investors will continue to keep exposures low," he said referring to the GOs. Hayes oversees the management of $109 billion in municipal assets.

Michael Pietronico, chief investment officer of Miller Tabak Asset Management, has never been a buyer of Puerto Rico GOs or PRASA, and instead prefers the stronger security pledge offered by the Puerto Rico Sales Tax Financing Corporation — known as COFINA — for instance.

"The credit quality of COFINA bonds reflects a structure and revenue pledge that insulates the bonds from the strained general fund operations of the commonwealth," Pietronico said. Miller Tabak - which has $900 million in tax-free bond assets under management - "finds security in the significant, constitutionally-backed legal protections that safeguard bond payments," he added.

The sales tax bonds, for example, have a first claim on all commonwealth sales tax revenue, providing ample current coverage, he noted. "The sales tax base is broad and the retail environment in Puerto Rico has shown strength — even in challenging economic times."

Meanwhile, Hayes said further deterioration of the GOs to speculative nature could transform the credit into a high-yield security and eventually decrease the pool of eligible investors. That scenario could also further damage market liquidity for the bonds and continue to raise borrowing costs for the commonwealth going forward, analysts pointed out.

"There will always be buyers at any rating level — the question is at what price?" Hayes asked.

Schankel agreed that a downgrade of the GO debt to junk will curtail investor participation. "The triple-tax-exemption will continue to be a benefit, but a junk rating would limit use in many portfolios other than high-yield, which could generate selling pressure," he said.

It would also create "dramatically more severe" spread widening than for rating changes above investment-grade, Hayes predicted.

Spreads tightened earlier this year as "some investors sought higher yields and perhaps thought the worst was over for the time being," Hayes noted.

In light of the recent GO downgrades — and the GO credit hovering near non-investment grade — he said it has gotten more costly for Puerto Rico to borrow, and he believes that will again be the case this year, as it was in 2012.

"Should the [GO] rating get lowered to below investment grade, spreads would still move dramatically wider, relative to the broader market," Hayes continued.

Schankel said a speculative rating for the GO debt would compound the existing fiscal struggles and economic recovery. "The rating agencies expect to see positive steps taken relatively quickly, and if that does not happen, junk ratings are ahead," he explained. "Strong actions taken in near term could delay — or, best case, stop — further downgrades."

Despite the obvious fiscal challenges facing Puerto Rico, Hayes is not all negative on the commonwealth's credit prospects.

"Although the fiscal and pension situation is quite dire, they are a large, strategically-important issuer with the ability to undertake many different policy initiatives to help solve its issues," Hayes said.

Schankel agreed, adding: "The proposals we've seen so far from the new government are very positive steps, but they will face resistance from various constituencies."

"The proposed steps, such as the expanding sales and use tax base and raising other taxes would help revenues, but could also act as a brake to economic growth," Schankel added. Moody's downgraded the commonwealth's GO debt to Baa3 back in December, while it also downgraded PRASA bonds in December to Ba1 — the highest speculative grade rating — from Baa2.

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Hefty Slate Will Again Test the Market's New Levels

Friday, March 15, 2013
By Christine Albano

March 15 (Bond Buyer) -- When issuers head to the municipal market with a bevy of sizable new offerings the week of March 18 they will be counting on more of the strong demand and less of the weakness that followed last week's largest deals and forced underwriters to institute some handsome yield concessions.

The largest benchmark deal to test the market's volatility will be the $1.4 billion revenue financing from the New Jersey Turnpike Authority. Planned for pricing by JPMorgan on Wednesday, it will headline an estimated $9.51 billion of new volume, according to The Bond Buyer and Ipreo LLC, compared to a revised $6.08 billion that was priced last week, according to Thomson Reuters.

The Series 2013 A turnpike bonds are rated A3 by Moody's Investors Service, A-plus by Standard & Poor's, and A by Fitch Ratings, however the structure was not yet available at press time.

Some municipal experts said that volatility is seasonal and is expected to give way to the beginning of some stabilization in the coming weeks.

"March has inflicted its historical pain and market yields are more compelling for investors," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management. "Given the outsized returns so far in 2013 for the equity market, we suspect some investors will look back to municipals to protect their gains" in the weeks ahead.

The $2.16 billion California various purpose general obligation offering priced Thursday by JPMorgan was a deal that demonstrated the effects the weakness had on the pricing and spreads for large deals. Its 2038 maturity, for instance, was increased by 15 basis points in final pricing from the scale offered during the preceding, two-day retail order period, which itself saw yields were increased two basis points.

The state sold $795.4 million - or 37% - of the total tax exempt offering to retail investors during the order period, according to the State Treasurer's Office. But retail's take represented 89.4% of the $888.9 million of bonds that were originally offered to retail.

In addition, the spread on longer serial bonds backed up by 83 basis points compared to generic, triple-A scale tracked by Municipal Market Data, as the deal's arrival coincided with the fourth weaker trading session, during which the triple-A GO scale increased by as much as three basis points to 3.14% in 30 years, and by one basis point to 2% in 10 years.

The benchmark, 30-year triple-A GO ended at 3.14% yield on Thursday, according to MMD, after starting the week on Monday at a 3.08%.

The New York City Transitional Finance Authority is among the larger deals headed for pricing. The TFA will make an appearance with approximately $900 million of tax-exempt, future tax-secured subordinate revenue bonds and another $121 million of taxable debt expected in the competitive market on Wednesday. Wells Fargo Securities is expected to price the larger offering with a tentative structure of serials maturing from 2016 to 2032 after a retail order period on Monday and Tuesday. The bonds are expected to be rated Aa1 by Moody's, and triple-A by both Standard & Poor's and Fitch. The smaller, taxable TFA subordinate offering of qualified school construction bonds, meanwhile, will come in two series - $100 million structured in a 2038 term, and $21 million maturing as serial bonds from 2013 to 2022.

Massachusetts will join the Northeast activity with its two-pronged sale of GO bonds totaling $525 million scheduled for competitive pricing on Wednesday. The $450 million series is structured with serial bonds maturing from 2017 to 2043, while the $75 million series will mature serially from 2014 to 2018.

The Metropolitan Transportation Authority is slated to sell $500 million of transportation revenue bonds in a negotiated deal being senior-managed by Barclays Capital. The Series 2013 B bonds - whose proceeds will finance transit and commuter projects - will be priced on Thursday, following a retail order period on Wednesday. Serial and term bonds will be offered, but the structure had not yet been finalized at press time.

In the Far West, the State Public Works Board of California will issue $422 million of lease revenue bonds in a three-pronged deal being priced by Barclays. The bonds - which are expected to be rated A2 by Moody's, A by Standard & Poor's, and BBB-plus by Fitch - will be offered to retail investors on Monday, followed by the institutional pricing on Tuesday. The structure was still being hammered out at press time.

That deal will be joined by a $244 million GO refunding from the San Bernardino, Calif., Community College District. Priced by Piper Jaffray & Co. on Thursday, the deal is structured with serial bonds maturing from 2013 to 2033 and is expected to be rated Aa2 by Moody's and AA-minus by Standard & Poor's.

In the Southwest, the Arizona School Facilities Board will issue $315 million of taxable state school improvement revenue refunding bonds rated triple-A by all three major rating agencies. Bank of America Merrill Lynch will price the offering on Tuesday with a structure of serial bonds maturing from 2014 to 2020.

In Texas, a $305 million sale of hospital revenue refunding bonds is on tap from the Harris County Cultural Educational Facilities Financing Corporation. The bonds - sold on behalf of the Memorial Hermann Health System - will be priced by JPMorgan and rated A1 by Moody's, and A-plus by Standard & Poor's.

A $270.6 million sale of toll system revenue refunding bonds from the Miami-Dade County Expressway Authority is set for pricing by Bank of A Merrill on Thursday following a retail order period on Wednesday. The bonds - which are rated A3 by Moody's and A-minus by Standard & Poor's and Fitch - are structured to mature serially from 2013 to 2033.

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Munis Face Another Heavy Slog Led by $1.3B California High Ed Sale

Monday, February 25, 2013
By Christine Albano

Feb. 25 (Bond Buyer) -- After the municipal market struggled to get through a heavy new-issue calendar last week, another slate of sizable new deals will test the market this week, anchored by a $1.3 billion California higher education sale.

The offering from the Regents of the University of California will be part of an estimated $7.79 billion in new volume, according to The Bond Buyer and Ipreo LLC.

"We view the upcoming supply bulge as an opportunity for investors to lock in higher yields as we see a sizeable summer rally as a strong possibility," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management.

The University of California deal will consist of two series: $800 million of tax-exempt debt maturing serially out to 2033 with a final term bond in 2039, and $500 million of taxable debt maturing serially out to 2028 and a final term bond in 2039.

JPMorgan will price the tax-exempt portion on Thursday following a retail order period on Wednesday, and will price the taxable portion on Wednesday. The bonds are rated Aa1 by Moody's Investors Service, AA by Standard & Poor's and AA-plus by Fitch Ratings.

It comes on the heels of a revised $4.19 billion that was priced last week, according to Thomson Reuters, at a time when the market ended on a firmer tone than it began, aside from some deals that struggled to get done and in the end came with slight concessions.

"Miller Tabak Asset Management expects concessions for large deals to continue for the next month or so until the market reaches a firmer technical footing," Pietronico said. "Should the Treasury market rally we expect munis to underperform and gain much-needed ratio to draw in more institutional accounts."

Last week, the generic, triple-A general obligation scale in 2043 ended at a 2.94% on Thursday after closing at a 2.92% on Tuesday and as high as 2.96% on Wednesday, according to Municipal Market Data.

Traders said bonds were higher in the secondary market on Thursday, following steady to weaker trading on Tuesday and Wednesday.

Last week's new-issue activity was headlined by a pair of negotiated deals, the larger of which was a $527.3 million Los Angeles Department of Water and Power.

Senior-managed by Bank of America Merrill Lynch, the power system revenue bond issue was priced with a final maturity in 2031 that carried a 3% coupon and 3.10% yield. The bonds are rated Aa3 by Moody's, and AA-minus by Standard & Poor's and Fitch.

The New York City Municipal Water Finance Authority sold $455.95 million of second general-resolution revenue bonds in a Barclays Capital-led deal that was priced with trifurcated coupons of 3.75%, 4% and 5% in the 2047 bullet maturity that was priced to yield 3.85%, 3.75% and 3.50%, respectively.

The deal's one-day retail order period last Tuesday generated $56 million in orders, and the bonds are rated Aa2 by Moody's and AA-plus by Standard & Poor's and Fitch.

Besides this week's mammoth California higher education deal, the Big Apple will be in the spotlight for the second time in as many weeks when New York City issues $853.72 million of GO debt in a negotiated deal led by Morgan Stanley, which will offer the bonds to retail investors on Monday and Tuesday ahead of the official pricing on Wednesday.

The three-pronged offering consists of tax-exempt new money and refunding debt, but the structure was still being determined at press time.

Elsewhere in the Northeast, the the Massachusetts Water Resources Authority is slated to issue between $170 million and $289 million of revenue debt expected to be rated Aa1 by Moody's and an equivalent AA-plus by S&P and Fitch.

Slated to be offered to retail investors on Tuesday, the bonds will be officially priced for institutions on Wednesday by Jefferies & Co. with a tentative structure of serial bonds maturing from 2016 to 2032 with a term in 2036.

In California, a $300 million sale of lease revenue and refunding debt is being planned by Ventura County and is expected to be priced on Wednesday by Citi. The bonds, which are rated Aa3 by Moody's, and AA by Standard & Poor's and Fitch, are structured with serials and terms maturing from 2013 to 2043.

Switching the Southwest, the Houston Community College System is slated to sell $400 million of limited-tax GO bonds in a JPMorgan-led negotiated deal slated for pricing on Tuesday and structured with serials and term bonds out to 2043.

The bonds are rated Aa1 by Moody's and AA-plus by Standard & Poor's, though the full structure was not available at press time.

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Buying Opportunity Seen as History Shows March Loss: Muni Credit

Friday, February 22, 2013
By Michelle Kaske
of Bloomberg

Feb. 22 (Bloomberg) -- Yields in the $3.7 trillion U.S. municipal-bond market are the highest in six months and may rise further in March -- as they have in 14 of the last 20 years, according to data compiled by Bloomberg.

Investors next month will be looking to dispose of munis to raise cash for tax payments before the April 15 deadline even as states and localities boost bond sales to $8.7 billion over the next month, Bloomberg data show. That's 21 percent above their three-month average.

March selling may push tax-free yields up by as much as 0.15 percentage point, said Michael Pietronico, who manages $875 million of munis as chief executive officer of Miller Tabak Asset Management in New York. That may create a buying opportunity, he said, with Bloomberg data going back to 1993 showing there's a 50 percent chance of interest rates falling back in April.

"March is the best month to put cash to work," Pietronico said in a telephone interview. "You want to be throwing money at municipal bonds because yields generally move higher" before falling again "immediately after that."

Issuers from California to Maryland are set to borrow next month as investors are looking for higher yields after interest rates on 20-year general-obligations in January fell close to their lowest levels in 47 years, according to a Bond Buyer index. Total returns for tax-exempt securities in March were negative 14 times during the past two decades, worse than U.S. Treasuries and stocks, according to Bank of America Merrill Lynch data.

Stock Run

Next month, bondholders may try to capture past gains on their tax-exempt holdings while some will sell tax-exempt assets and shift the proceeds into the stock market, "which has been on quite a run over the last couple of months," said Neil Klein, who helps oversee $1.2 billion of fixed income at Carret Asset Management in New York.

While the Standard & Poor's 500 index fell 0.6 percent to 1,502.42 yesterday, it's near the highest level since October 2007, Bloomberg data show.

"What we're expecting for March is a minor rotation from bonds to cash or from bonds to equities," Klein said. "There will be some degree of selling pressure as people look to capture gains or raise cash to pay taxes."

The anticipated increase in muni sales will surpass the amount of payments that investors receive from principal and interest on their tax-exempt investments that they need to reinvest, Pietronico said.

Spending Cuts

"The uptick that we will get will outnumber the redemptions and coupon interest that will hit for the month," Pietronico said.

While investors may be poised to sell, the impact may be muted by the effect of about $1.2 trillion in across-the-board budget cuts over nine years that are set to begin March 1 unless President Barack Obama and Congress reduce expenses and raise revenue.

If lawmakers are unable to craft a plan by the deadline, yields on Treasuries and tax-exempt securities would fall in anticipation that the spending cuts will slow the U.S. economy, pushing investors toward safer assets, Pietronico said. That would help moderate any anticipated selloff next month, he said.

"That could be very much a positive for U.S. Treasury prices," Pietronico said. "So there's a chance that if Treasuries rally if the spending cuts are enacted, that municipals can hold their ground" in March.

Yields Rise

Municipal-bond interest rates have increased this year, along with those on U.S. Treasuries, amid signs that the economy is improving. Yields on benchmark tax-exempts maturing in 10 years rose about 0.19 percentage point in 2013 to a six-month high of 1.88 percent yesterday, Bloomberg data show.

In March, munis have lost value 14 times from 1993 to 2012, compared with 12 for Treasuries and eight for the S&P 500, Bank of America Merrill Lynch data show.

'Moderate Loss'

For tax-exempt debt next month, "the likelihood is that it will be a moderate loss," Pietronico said.

Following are pending sales:

MARYLAND plans to borrow $898 million of tax-exempt debt through competitive bid as soon as March 6, according to Bloomberg data. Moody's Investors Service rates the state AAA, its highest grade. (Added Feb. 22)

CALIFORNIA'S VENTURA COUNTY PUBLIC FINANCING AUTHORITY is set to issue $300 million of tax-exempt lease revenue bonds as soon as next week, Bloomberg data show. Proceeds will help finance a replacement wing at the Ventura County Medical Center and pay down short-term debt, according to bond documents. Standard & Poor's rates the sale AA, third-highest. (Added Feb. 22)

--Editors: William Glasgall, Justin Blum

To contact the reporter on this story:
Michelle Kaske in New York at +1-212-617-2626 or

To contact the editor responsible for this story:
William Glasgall at +1-212-617-3023 or

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Issuers Trim Down Offerings After Eventful Week

Saturday, February 9, 2013
By Paul Merrion

A $500 million state bond issue that was postponed indefinitely just hours before it was scheduled for auction on Jan. 30 was more than just a victim of a volatile bond market and bad timing. It was the first test of Illinois' ability to borrow after the collapse of pension reform efforts in December.

The report card, for now, is marked "incomplete."

When Illinois returns to the market for this bond sale and $2 billion more in borrowing planned later this year, it will become clear whether Illinois has reached a point where investors demand an even bigger reward for the risk they are taking with the state's debt. But many market observers say that point was reached last month when the state balked at a higher-than-expected cost of borrowing $500 million.

"Everybody involved in the municipal market understands that things are getting worse, not better" for Illinois, says Michael Pietronico, CEO of Miller Tabak Asset Management LLC, an investment firm in New York with $870 million in assets under management. "There's been a cascade of news from Illinois, none of which seems good for the longer term."

The state's credit rating was downgraded to the lowest in the nation just days before the bond sale was scheduled to take place. State officials blamed questions about the new rating and "unsettled markets." Interest rates did spike higher in late January, and Wisconsin also postponed a $260 million bond issue, rated one notch below AAA, but came back and sold it easily last week.

With money slated for highway projects and school construction, Illinois needs to sell its $500 million bond issue soon or lose the first part of the construction season. But last week's State of the State speech by Gov. Pat Quinn and the upcoming release of his proposed budget for next year make it difficult to produce all the disclosures to investors that are necessary for the state to go back to the market in the next few weeks.

However, without any new, positive information—such as a breakthrough on pension reform or a realistic plan to reduce budget deficits—investors are unlikely to be much more receptive than they were last month.

"Illinois is going to have to pay high yields to sell debt, plain and simple," Chicago economist David Hale says. "There's no sign that will end anytime soon."

Too High and Too Wide

The question is what premium the state has to pay relative to the overall market, and there has been no disclosure of exactly what bidders were willing to pay or what Illinois officials were hoping to get. But market sources say the gap was about 30 basis points, or almost a third of a percentage point above the spread for existing Illinois bonds.

Rather than negotiate with one or two large buyers, the state planned to take competitive all-or-nothing bids to raise $500 million. Because the deal was pulled, the online auction didn't take place. But dealers discussed with the state whether they planned to bid and their tentative price.

"We've been careful not to comment," says Abdon Pallasch, a spokesman for the governor's budget office. But he characterized the spreads as "too high and too wide."

In recent months, Illinois bonds have traded at about 1.5 percentage points higher, or 150 basis points above the rate for the most creditworthy state government borrowers. But those bonds sell in chunks of a few million dollars at a time, and bond dealers were said to be looking last month for a spread of 175 to 180 basis points to absorb $500 million in new Illinois bonds.

That may not sound like much of a difference, but it adds up to several million dollars, probably tens of millions of dollars of additional interest cost on bonds that pay interest for up to 25 years.

"The only way they could get investors to change their minds is to change their spending habits," says Mr. Pietronico of Miller Tabak. "The market will pay what the market wants to pay. They aren't going to be able to jawbone the market higher. They have to act."

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Issuers Trim Down Offerings After Eventful Week

Monday, February 4, 2013
By Christine Albano

Feb. 4 (Bond Buyer) -- State and local municipalities are preparing to pare down issuance this week after an eventful week in which the tax-exempt market saw repeated softness, a second large financing in as many weeks was postponed, and the Federal Open Market Committee announced it would stand pat.

An estimated $4.78 billion in new volume is slated to be priced this week, according to The Bond Buyer and Ipreo LLC. That is noticeably lower than in the previous week when a revised $5.98 billion entered the market, according to Thomson Reuters.

"We see the market as entering a consolidation phase for the next few days until the Street works their way out of the underwater inventory they have," said Michael Pietronico, chief executive officer of Miller Tabak Asset Management.

The single largest deal this week hails from the competitive calendar and is a $490 million general obligation sale by Santa Clara County, Calif., slated for Thursday.

The week's second-largest offering is also competitive, $325 million of triple-A-rated Prince George's County, Md., limited-tax consolidated public improvement GOs. The deal is comprised of $137.59 million of new-money bonds and $186.48 million of refunding bonds, both pricing on Tuesday.

The reduced volume is more evident in looking at the upcoming negotiated volume, which will be reduced to an estimated $2.95 billion, according to The Bond Buyer, down from $4.37 billion the prior week, according to Thomson Reuters figures.

The largest deal on the negotiated calendar is a $208.1 million sale from the Phoenix Civic Improvement Corp. of senior-lien airport revenue refunding bonds that are subject to the alternative minimum tax. Barclays Capital is expected to price the bonds — which are rated Aa3 by Moody's Investors Service and AA-minus by Standard & Poor's — on Tuesday.

In addition, Connecticut is planning to sell $200 million of state revolving fund general revenue bonds that are slated for pricing by Bank of America Merrill Lynch on Wednesday, following a retail order period planned for Tuesday. The bonds have natural triple-A ratings and the deal is comprised of $123.48 million of new-money debt in Series A maturing serially from 2014 to 2031, and $77.51 million in refunding debt in Series B maturing serially from 2017 to 2027.

The new issues will arrive on the coattails of last week's softness when prices fell in many of the trading sessions on most maturities, traders said. As of Wednesday, the 30-year generic, triple-A general obligation yield inched up three basis points to 2.87%, while the 10-year generic scale increased two basis points to 1.82%, according to Municipal Market Data.

"While we would like to see yields higher like most everyone else, the correction that has happened in municipals has created some value, especially in lower coupon bonds," Pietronico said. Those lower coupon bonds were found in some of last week's deals.

Among the larger GO reofferings last week, Citi won the bid for $325.6 million of triple-A-rated North Carolina bonds, whose yields ranged from 0.17% with a 3% coupon in 2013 to 2.03% with a 5% coupon in 2025. The final maturity was priced three basis points higher in yield than the comparable triple-A GO scale on the day of the pricing, according to MMD.

Last week was also the second consecutive one in which a large new deal was postponed just before making a planned trip to market. This time it was Illinois' competitive $500 million GO sale, which was expected to price last Wednesday, but is now on hold indefinitely due to a myriad of concerns, notably a Standard & Poor's downgrade.

During the week of Jan. 21, legal complications surrounding an Ohio Supreme Court appeal delayed the pricing on Jan. 23 of a nearly $2 billion JobsOhio Beverage System financing.

The two-series deal ended up being priced last Monday and Tuesday. The financing was comprised of $1.1 billion of taxable statewide senior lien liquor profit revenue bonds in Series 2013 B that included a final 2025 maturity with a 4.53% coupon priced at par; and $404 million of tax-exempt senior lien liquor profit revenue bonds that were priced with a final maturity in 2038 with a 5% coupon to yield 3.34% — 58 basis points higher in yield than the comparable triple-A scale at the time of the pricing, according to MMD.

In other noteworthy news last week, the FOMC announced it will keep the target rate for the federal funds rate at zero to 0.25%, and reiterated its stance that rates will continue to stay low as long as unemployment remains above 6.5% and inflation is projected to stay under 2.5%.

The release of any other data could have an effect on volume going forward, sources said.

"Given that issuers, including Illinois, are looking for better conditions to borrow, investors may find that supply in the near-term could dry up quickly if the economic data weaken in the days ahead," Pietronico said.

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New Jersey Agency Completes $2 Billion Muni Deal, Largest of Week

Wednesday, January 23, 2013
By Kelly Nolan
Dow Jones Newswires

New Jersey's Economic Development Authority completed the largest municipal bond deal of the week Wednesday, a roughly $2.2 billion deal that's part of a broader state effort to reduce its exposure to riskier derivative bond debt.

The state agency was able to lower yields on parts of the $1.6 billion tax-exempt portion of its deal, but it increased yields on other parts, suggesting demand was mixed. A 10-year maturity offered a yield of 2.39%, 0.72 percentage point more than comparably maturing triple-A rated debt on Thomson Reuters Municipal Market Data's benchmark scale and 0.03 percentage point less than the 2.42% offered earlier Wednesday. But a 15-year maturity had a yield of 2.87%, versus 2.82% earlier.

The state also sold about $380 million in notes and $250 million in taxable debt Wednesday. The EDA deal was the week's largest new bond sale, according to a bond calendar from Ipreo LLC.

Michael Pietronico, chief executive at Miller Tabak Asset Management, said he wasn't surprised that some adjustments had to happen to get the tax-exempt portion of the New Jersey deal done. He said because of the interest-rate risk associated with longer debt, it made sense shorter maturities were more heavily bought.

"The interest rates the state got were still impressive, given the size of the deal and the state's well-documented financial issues," said Mr. Pietronico, whose firm oversees about $870 million in munis. He declined to comment on whether or not his firm participated in the EDA deal.

Bill Quinn, a spokesman for the state Treasury, said the state was "pleased with the market reception for the bonds, and we achieved all our objectives for the financing."

The New Jersey EDA deal comes as the muni market is rebounding from a weak December, and demand is generally showing signs of improvement. Investors have put more than $1 billion into muni-related mutual funds in each of the past two weeks, according to Lipper FMI, after taking money out of funds the three weeks prior. Buyers also have billions of dollars to put to work from coupon and bond-redemption payments from earlier this month.

"The demand side of the equation is kicking back in again," said Jamie Iselin, head of municipal fixed income at Neuberger Berman, which oversees about $11 billion in munis. The EDA is "a well-known issuer, and appropriation is a popular way the state issues debt."

Mr. Iselin declined to comment on whether his firm participated in the EDA offering.

Proceeds of the bond sale will go toward reducing the EDA's derivative bond exposure. When the refinancing is complete, the state expects its exposure to variable-rate bonds to drop 40% to about $1.15 billion and the amount of interest rate swaps to be reduced about the same amount, said Mr. Quinn, the state Treasury spokesman.

The move is part of a broader effort by the state of New Jersey to dial down how much of the riskier debt it has on its books, he said.

"Because of the expenses and market risks associated with variable-rate debt and interest-rate swaps, we are seeking to convert a large portion of our variable-rate debt into fixed-rate debt in the current favorable interest-rate environment," Mr. Quinn said.

The EDA debt is rated A-plus by Standard & Poor's and Fitch Ratings and A1 by Moody's Investors Service, a notch below where each rating agency grades the state's debt, because the bonds depend on the state legislature appropriating the money from its budget each year.

While investors and rating agencies tend to view the reduction of riskier derivative debt as a positive for a state or local government's credit profile, the EDA's bond deal comes as the state of New Jersey is facing some financial challenges and recovering from significant damage from superstorm Sandy, which made landfall in late October.

According to Fitch, the state's revenue expectations have been optimistic: revenue receipts for the first five months of the fiscal year, through November 2012, were 5.6% behind budgeted levels. That could be in part due to Sandy's impact, although receipts through October were already 4.1% behind expectations, Fitch said. Meantime, the state's public employee pension plans were just 67.3% funded on an aggregate basis, as of July 1, 2011, the rating agency said. New Jersey's December 2012 unemployment rate, at 9.6%, is also above the national level of 7.8% and up from 9.2% a year earlier.

Howard Cure, director of municipal research at Evercore Wealth Management, said New Jersey "does have some issues," but ultimately, investors shouldn't be concerned about the state paying appropriation debt, like Wednesday's deal from the EDA.

The Garden State frequently issues debt that's repaid in this manner, and market access is important because New Jersey regularly sells muni debt, Mr. Cure said.

"We have every expectation the state will pay," said Mr. Cure, whose firm oversees $3.8 billion in assets. Evercore planned to participate in the deal, Mr. Cure said, as yields on some parts of the offering looked attractive enough.

-By Kelly Nolan; Dow Jones Newswires;

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Washington State Selling $1.2B of GOs

Wednesday, January 23, 2013
By Randall Jensen

Jan. 23 (Bond Buyer) -- SAN FRANCISCO — Washington will competitively sell $1.2 billion of general obligation bonds Wednesday into a market ready for a big deal during a down month.

"The market has been starved for paper. It is a technically strong part of the calendar year," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management.

"Perhaps [Washington's deal] may have to come a little bit cheaper because of its sheer size, but there should be plenty of demand for it because it is a very good trading name and certainly well-respected credit."

The state will sell four series of bonds in four auctions: $551 million of various-purpose GO refunding bonds, $125 million of motor-vehicle tax refunding GOs, $230 million of various-purpose GOs and $323 million of motor-vehicle tax GOs.

On Friday, the Municipal Market Data benchmark yield index ended with its 10-year bond at 1.67% and 30-year debt at 2.72%.

A block of $4 million of Washington State various-purpose GO bonds maturing in 2017 sold Tuesday in the secondary market at a price of 121 of par and a yield of 0.65%.

In August, Citi beat out seven other firms during the state's sale of $338.7 million of various-purpose general obligation refunding bonds at a true interest cost of 2.59%. Bank of America Merrill Lynch bid the lowest out of a group of eight to grab Washington's $364.5 million of motor vehicle fuel-tax refunding bonds with a true interest cost of 2.52%.

The money raised by this week's bond sale will be used for various state construction and transportation projects. The new-money side of the deal will have maturities from one year out to 30 years.

Washington is rated double-A-plus across the board. However, Moody's Investors Service and Fitch Ratings revised their outlook on the state in January to negative due to weaker revenues. Standard & Poor's has maintained its stable outlook.

Moody's said in a report last week that the state's negative outlook reflects the size of the revenue falloff caused by the recession, continuing budget gaps, modest reserves and high fixed costs for Washington's above-average debt position.

Moody said its rating also reflects the state's sound management tools, a willingness to address budget shortfalls and strong demographic trends.

"Washington's economy is on the mend, and its revenues are poised to grow — albeit more slowly than during prior economic expansions," S&P said in its report last week.

After this offering, the state will have $18.2 billion of GO bonds outstanding, of which $7.2 billion is payable first from its motor-vehicle fuel tax or toll revenue from the Tacoma Narrows Bridge, according to S&P.

Washington's financial advisors on the sales are Montague DeRose and Associates LLC and Seattle-Northwest Securities Corp. Bond counsel is Foster Pepper PLLC.

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Illinois Fiscal Woes Front and Center as it Readies Bond Sale

Wednesday, January 23, 2013
By Yvette Shields

Jan. 23 (Bond Buyer) -- CHICAGO — Illinois' $500 million bond sale next week will offer a fresh view into the market's appetite for yield versus risk as investors digest a barrage of negative fiscal news about the state, from pension reform stuck in the political muck to a warning that coffers are running precariously low.

Comptroller Judy Baar Topinka on Monday warned of a $9 billion bill backlog and a $1 billion shortfall in funds needed for social and human services.

The state's rocky fiscal foundation was also underscored by its release last week of three-year budget projections that raise questions over whether Illinois can afford to let its 2011 tax increase partially expire in fiscal 2015.

The state's pension crisis, illustrated by $95 billion of unfunded liabilities, and cash-flow problems creating the massive bill backlog, are cited by rating agencies as two core strains on Illinois finances. The 2011 income tax hike provided a temporary salve that eased pressure on the operating budget but its looming partial expiration adds to the specter of further credit deterioration.

Fitch Ratings earlier this month put the state's single-A rating on negative watch, warning that continued inaction by lawmakers to shore up the pension system over the next six months would drive a downgrade.

The flurry of negative news comes as the state plans to enter the market with a competitive sale of general obligation bonds next week to raise funds for its ongoing $31 billion capital program, and as lawmakers are expected to resume efforts to tackle pension reforms.

The state pays a steeper interest rate penalty in the primary market than other states or similarly rated credits. It pays 50 basis points to 200 basis points over the triple-A MMD scale depending on maturities and the security. Spreads tightened in secondary market trading last year as Illinois benefitted from a quest for yield that keeps demand up, compressing spreads throughout the municipal market.

"The state continues to trade pretty well even in front of this coming deal as investors continue to look for yield in an environment where there is not a lot of yield," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management.

While some conservative investors won't buy Illinois paper, those looking for yield see the state's strong GO statutes that make repayment a priority as a key selling point. The market believes pension reforms will eventually happen "no matter how painfully long they might take" and investors "would be surprised if the state were not to make the income tax increase permanent or at least extend it," Pietronico said.

The latest bad news came Monday from Topinka, whose office manages the state's books. She warned of the rising backlog and said Illinois is $1 billion short of appropriated funds needed to cover expenses.

"We know today that many of our programs and agencies will run out of authorized funding months before the end of the fiscal year," Topinka said. "We need to end the denial and address those budget shortfalls before they jeopardize critical services that our residents depend on."

She recommended that either state agencies set aside reserves to address the shortfall or lawmakers act to increase appropriations. If the latter option is taken, she urged the General Assembly to identify a revenue source to cover the additional spending.

Several key Democratic legislators said they intend to introduce legislation that would authorize short-term borrowing to pay down bills. Past proposals from lawmakers or Gov. Pat Quinn ranging from $4 billion to nearly $9 billion have failed to generate sufficient support to win passage.

The other significant news came last week from Office of Management and Budget acting director Jerry Stermer in three-year budget projections required under a 2010 law.

The projections show the state faces deep cuts and will make little headway in paying down its bill backlog after the current fiscal year due to the strain of rising pension payments and a drop in income tax collections in fiscal 2015.

The state anticipates personal income tax collections will drop to $14.3 billion in fiscal 2015 from $15.7 billion in fiscal 2014. They will take a steeper fall to $12.2 billion in fiscal 2016. Corporate income taxes would also fall from $2.9 billion expected in the next fiscal budget to $2.1 billion in fiscal 2015 and $1.7 billion in fiscal 2016. The general fund budget, estimated at $35 billion in fiscal 2014, would fall to $30.5 billion in fiscal 2016.

The declines come as the individual income-tax rate that was raised to 5% from 3% in January 2011 will drop to 3.75 %, and the corporate income tax rate that was raised from 4.8% to 7% will fall to $5.25 % midway through fiscal 2015.

The state is on pace to close out the current fiscal year with an $8.3 billion bill backlog. It drops to $7.4 billion in the next fiscal year and remains there through fiscal 2016, based on the current revenue picture. Tax growth of $600 million expected next year will be more than consumed by a $945 million increase in the state's pension payment, to $5.1 billion.

"Illinois faces tremendous fiscal challenges in the coming three years," the OMB report reads. "The challenge in the years ahead is management of the state's accumulated bills in the face of continuously increasing pension contributions and the statutory reductions" of income tax rates. Steep cuts of 5.7% and 13.6% will be needed in fiscal 2015 and 2016, respectively.

"The urgency of the crisis is being reinforced by the state's own projections," said Richard Ciccarone, chief research officer at McDonnell Investment Management LLC.

Illinois may continue to enjoy market access but its penalties could worsen should less favorable market conditions arise and the state hasn't acted to turn the fiscal tide. "A pension fix is the lynchpin," Ciccarone said. "But the idea of a temporary tax is also being discredited by the numbers."

Deputy budget director Abdon Pallasch said the projections underscore "that the pain gets more severe the longer we go without pension reform." Asked whether Quinn would eventually push to make permanent or extend the tax hike, he would say only: "We continue to focus to pension reform."

Stermer has said that given the likely legal challenge unions will mount to any pension reforms, the state would not incorporate potential annual contribution savings into its next few budgets, further adding to the pressure on the general fund. The governor must unveil his fiscal 2014 budget by Feb. 20, although he has asked the General Assembly to allow him to delay the budget until March 6.

Earlier this month, after lawmakers adjourned their veto session without adopting pension reform, Fitch put the state's A rating assigned to $26.2 billion of GO debt on negative watch. The state's pensions are just 40.4% funded. If downgraded, Illinois would join California at the A-minus level. Puerto Rico is rated BBB-plus. All other states are rated in the double-A category.

Lawmakers could not settle on a plan despite mounting pressure from Quinn, civic and business groups, and the public to chop the obligations. Various proposals would cut benefits, raise contribution rates and retirement age, and some support shifting the costs of suburban and downstate teacher pensions now paid by the state to local districts.

Moody's Investors Service assigns a negative outlook to Illinois' A2 general obligation rating as does Standard & Poor's, which rates the state A.

Illinois will take competitive bids on $500 million of GOs on Jan. 30 in its first GO sale since last fall.

Public Resources Advisory Group is advising the state and Mayer Brown LLP and Burke Burns & Pinelli Ltd. are bond counsel on the 25-year bonds, according to state director of capital markets John Sinsheimer.

The rating agencies have not yet issued reports on the new sale, but state finance officials recently discussed the deal with analysts, Sinsheimer said. They also discussed the state's new three-year budget projections.

Illinois won't be conducting any special investor outreach or roadshow since it's a competitive sale. "I think the banks understand the state's strong general obligation pledge. The municipal calendar has been fairly light and so we would expect that the banks are seeking inventory for their desks and would hope that translates into attractive bids," Sinsheimer said.

The state last sold GOs in a small $50 million competitive issue last September. While secondary trading prices provide an indication of the market's perception of state paper, the new sale will provide a fresh data point for the state along with investors. "We will be looking closely at the results to gage where spreads come in to give us an idea of where we stand with the market," Sinsheimer said.

In an April refunding, the state paid a yield 65 basis points over the triple-A MMD on its shortest maturity, while the final maturity in 2025 came in at 171 basis points over MMD.

The threat of further credit downgrades did "not shake our advice to add to state of Illinois positions for incremental income and safety," Municipal Market Advisors said in its weekly outlook report issued last week. "State law well protects payments to bondholders, meaning the risk of payment default likely has not meaningfully changed despite the pension system's troubles."

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