Miller Tabak Asset Management, LLC
Miller Tabak Asset Management HomeOur PhilosophyStrategiesMTAM TeamContact Us
In The News

In The News - 2014

  News from 2015
December 31, 2014 Oregon Brings Lottery Bonds for Transportation, Development Projects - The Bond Buyer
November 13, 2014 Upgraded California Selling $1.2B of GOs - The Bond Buyer
October 3, 2014 Waiting Game: Retail Buyers Hoard Cash for Future Rate Increase - The Bond Buyer
September 18, 2014 California GOs Are Going Green - The Bond Buyer
August 24, 2014 Market Post: Dreary Late Summer Volume Dips to $2.53 BB - The Bond Buyer
June 29, 2014 Volume Dips to $2 Billion Ahead of Holiday - The Bond Buyer
May 18, 2014 Volume May Reach $5.7 Billion, Led by Missouri Highways - The Bond Buyer
April 30, 2014 April Bond Sales Decline - The Bond Buyer
April 27, 2014 Market Endures Slim Pickings as Volume Falls to $4.46 Billion - The Bond Buyer
March 24, 2014 Fund Managers Eye Economy as They Set 2nd Quarter Strategy - The Bond Buyer
February 23, 2014 With Sharp Decline in Refundings, New-Issue Supply Slid 12.5% in '13 - The Bond Buyer
February 16, 2014 Muni Issuance Dreary Ahead of Billion-Dollar P.R., Texas Deals - The Bond Buyer
February 7, 2014 Port Authority Plan Returns Emphasis to Transportation - The Bond Buyer
February 4, 2014 Morgan Stanley Eyes Top Spot With Boost From Retail Network - The Bond Buyer
January 12, 2014 Muni Volume Perks Up Amid Coupon Reinvestment - The Bond Buyer
  News from 2013
  News from 2012
  News from 2011
  News from 2010
  News from 2009
  News from 2008

Top Of Page 

Oregon Brings Lottery Bonds for Transportation, Development Projects

Saturday, December 31, 2014
By Tonya Chin

SAN FRANCISCO - The Oregon Convention Center in Portland, as well as many other development projects throughout the state, will receive funding from a $412 million lottery bond sale Oregon is planning for next week.

The deal is expected to price Jan. 8 with Citi running the books for a team of seven investment banks; it will be sold in six series of serial tax-exempt and taxable bonds.

Hawkins Delafield & Wood LLP is bond counsel.

"In general, the state uses lottery bonds to fund high priority transportation and economic development projects around the state," said Laura Lockwood-McCall, director of the debt management division at Oregon's Treasury. "Other interesting projects that this bond issue will fund include a grant of $10 million as part of a larger project to repair a defunct rail line that runs along the Oregon coast, to the Port of Coos Bay and through the Coast Range to Eugene."

The 134-mile Port of Coos Bay rail line rehabilitation is estimated to cost around $31 million. It will restore the rail line that had served as a link between inland communities and the coast for nearly 100 years before closing in 2007 due to neglect and underinvestment.

Next week's deal also funds $42 million of Connect Oregon grants, which are made on a competitive basis to both public and private entities to improve statewide multi-modal transportation connections, Lockwood-McCall said.

Other projects that will get funding include local water projects, libraries, health centers, energy efficiency programs, transit and marine navigation improvements, and affordable multi-family housing.

The Oregon Convention Center's controversial hotel project will receive $10 million of funding from the deal.

The publicly backed project faced legal challenges to construct the hotel until last month, when a judge validated the financing plan for the project. The hotel is estimated to cost $212 million, with around $60 million from issuing bonds that would be paid off with room taxes.

In total, Oregon will issue around $120 million of new money debt for these projects next week. The remaining portion of bonds is being sold to refund outstanding lottery revenue bonds.

Lockwood-McCall said the most recent numbers estimate that $269.8 million of outstanding lottery revenue bonds will be refunded, producing present value savings of $16.7 million or 6.2% of the refunded bonds.

"Ironically, we refunded about $250 million in lottery bonds in July 2014 at what seemed like terrific rates, achieving roughly $15 million in present value savings," Lockwood-McCall said. "So the continued drop in long term muni rates over the past few months was a bit of an unexpected Christmas present to the state's taxpayers."

As long as rates hold at current levels, she said it's likely the state will be refunding other general obligation and revenue bonds in January and early February 2015.

In the forthcoming deal, the new money tax-exempt bonds will have a final maturity in 2035, and the new money taxable bonds will go out to 2024. The refunding bonds will have final maturities in 2027, 2028, and 2029.

"We were the first state to issue lottery-backed revenue bonds over 30 years ago, and since we were the first to develop this type of revenue bond, we incorporated very strong credit features to entice investors, including a four-times coverage additional bonds test and a fully funded debt service reserve," Lockwood-McCall said.

The lottery bonds are secured by a first lien on the unobligated net proceeds of the state lottery.

The state also has constitutional provisions regarding the priority of payment of lottery bond debt service from net lottery proceeds.

The state has a moral obligation pledge to replenish shortfalls in the debt service reserve fund.

"Given our lottery program's long track record of sound management and operations, and these security features, it is not surprising that our lottery bonds have garnered strong ratings," Lockwood-McCall added.

Moody's Investors Service has assigned a Aa2 rating and Standard & Poor's assigned its AAA rating. Both assign stable outlooks.

The high ratings, as well as the overall lack of Oregon paper in the market, are likely to help garner strong demand from investors next week, according to market experts.

"Given the low overall level of Oregon debt [Miller Tabak Asset Management] believes this deal will do well both with in state investors and national accounts looking to diversify their portfolios," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management.

His firm gives the bonds an internal A1 rating, based on the strong performance of the state lottery, but notes concerns of the discretionary nature of lottery purchase and the heavy dependence on video lottery.

Michael Ginestro, director of municipal research for Bel Air Investment Advisors LLC, also said the deal should be well-received, based on the many credit strengths it has going for it.

"When you look at this lottery bond and you compare it to other state-type miscellaneous, or pledge-tax type bonds, this really stands out as one of the stronger of many," he said. "I think this particular credit will find a home because of the broad amount of credit strengths it provides."

He pointed to the state's strong additional bonds coverage test, its quarterly revenue forecast as part of the budget process, and the well-protected debt service payments.

Standard & Poor's analysts said they assign the bonds their highest rating because of the strong debt service coverage, a robust lottery revenue tracking framework, active management, and strong bond protections.

"We don't anticipate that credit quality will come under negative pressure during the two-year outlook horizon," analysts said. "However, if negative pressure on the rating were to occur, we expect that it would involve a rapid deterioration in economic conditions resulting in a sharp pullback in consumer spending on the lottery program's gaming opportunities."

Moody's assigned a rating two notches lower, citing similar credit strengths. However, analysts pointed out that lottery sales are dependent upon game diversity and that a possible Native American gambling growth or expansion of neighbor Washington's state lottery could increase competitive pressures.

Analysts also noted the inherent volatility in the lottery's performance, given the consumer based nature of pledged revenues.

"However, we expect any declines in revenues to be mitigated by proactive management, statutory and constitutional protections limiting future competition, limits on in-state competition, minimal cross-border competition, and the state's inherent interest in the continued profitability of the operation," Moody's said.

Oregon last sold lottery bonds on July 17 in a $214 million offering in three series.

Yields ranged from 0.14% with a 5% coupon in 2015 to 2.8% with a 5% coupon in 2027.

Lockwood-McCall said she's hoping for strong demand for next week's deal.

"There has been somewhat of a dearth of new Oregon paper in the market over the past several months, so we are hoping this bond issue appeals to both retail and institutional investors who are looking for a quality credit to add to their portfolios," she said.

Top Of Page 

Upgraded California Selling $1.2B of GOs

Thursday, November 13, 2014
By Tonya Chin

SAN FRANCISCO — With its credit reputation on the upswing, California is in a position to capitalize today when it prices $1.2 billion of general obligation bonds.

The Nov. 13 competitive offerings will be sold in three series of taxable, tax-exempt and refunding bonds.

Standard & Poor's upgraded the state's credit rating to A-plus from A Nov. 4, after California voters approved a rainy day fund ballot measure.

The agency said the constitutional provision would partially mitigate California's volatile revenue structure by setting aside windfall revenue for use during periods when state tax revenue could fall materially short of forecast.

"We expect that California will now build a material budget stabilization account fund balance in the coming years, and that it will continue to pay down deferred liabilities and debt in advance of the 2018 expiration of a temporary income tax surcharge," said Michael Pietronico, chief executive officer and senior portfolio manager at Miller Tabak Asset Management.

He also noted that the state's financial position at the end of fiscal 2014 was its strongest of the past decade.

"That being said, MTAM expects that this upcoming deal will need to cheapen up relative to where the secondary market spreads have been as of late as overall market supply has been elevated lately and direct retail demand has been inconsistent due to low overall yields and a surging stock market," he said.

Moody's Investors Service, which upgraded the state's rating to Aa3 from A1 in June, said the passage of the rainy day fund measure is a credit positive for the state. The agency affirmed its Aa3 rating on the bonds.

Rob Williams, director of income planning for the Schwab Center for Financial Research, said the upgrade is a positive in some ways, but a negative for investors that are looking for a boost in yields.

"The average individual retail investor is really still looking for yields," he said. "It may be surprising, but the higher credit quality is not what they're looking for."

Williams added that institutional buyers are still looking for supply and a big deal in California is appealing to them, but they're also looking for yield and an upgraded credit is not as attractive.

"I think there will likely be demand from institutional buyers, just given the lack of supply in the market," Williams said. "They're getting less in return for it, just given what the absolute levels are."

This week's deal includes $270 million of taxable bonds.

A $304 million series of tax-exempt refunding bonds will advance refund outstanding GO bonds for debt service savings. The state estimates the present value savings to be about $40 million, according to Drew Mendelson, spokesman for State Treasurer Bill Lockyer.

The largest series -- $630 million of new money tax-exempt bonds -- will fund projects from 12 different voter-approved bond acts. The largest amount-$580 million-is for transportation projects under Proposition 1B, the Highway Safety, Traffic Reduction, Air Quality, and Port Security Bond Act of 2006.

"The state's general obligation bond law requires that the bonds be sold on a competitive basis unless the treasurer determines that a negotiated sale will result in a lower interest cost," Mendelson said. "For this sale, we do not believe a negotiated sale would result in a lower interest cost, therefore we are selling the bonds on a competitive basis."

Orrick, Herrington & Sutcliffe LLP is bond counsel. Public Resources Advisory Group is financial advisor.

As California's financial position has improved in past years, its GO bond yields have contracted against Municipal Market Data's generic triple-A municipal bond.

Since the beginning of 2014, that spread has tightened to 9 basis points in five year maturities from 29 basis points. In the 15-year bonds, spreads have come down to 30 basis points from 56 basis points, and in the 30-year bonds, spreads have dropped to 39 from 62.

"California bonds have rallied as investors largely baked in continual good news," said analysts at Municipal Market Advisors in a recent report.

The state's improved financial position was boosted by the passage of Proposition 25 and Proposition 30 in 2012. Prop. 25 removed the requirement that a two-thirds vote of each house of the legislature was necessary to pass the budget.

Prop. 30 increased sales and income taxes for several years to prevent cuts to the education budget.

Despite the credit improvements, the state's ratings remain low among the states. Among Standard & Poor's ratings, California is the third lowest-ranked state. New Jersey carries an A rating and Illinois carries an A-minus rating.

"Municipal analysts recognize that the state's credit fortunes are prone to volatility, both from natural and man?made causes," MMA analysts said. "California's employee liabilities and infrastructure burdens are drags to the state's ratings upside."

The state currently has large unfunded obligations, including $57 billion for the California Public Employees' Retirement System, and $65 billion in other post-employment benefits.

The largest liability-$74 billion for the California State Teachers' Retirement System-was recently addressed in Gov. Jerry Brown's 2014-15 budget, which enacted a plan for the state, school districts, and teachers to together increase CalSTRS contributions.

MMA said other concerns for credit analysts include the state's proclivity toward real estate bubbles, as well as its other unique risks, such as the current three-year drought and recent earthquake in Napa.

"While earthquakes are a constant concern, reports of 'California's devastating drought,' low reservoir levels, and potential for fires has caused considerable analyst concern," MMA's analysts said. "A recent UC Davis report argues the drought will cost the state's economy $2.2 billion this year and lead to a loss of 17,000 jobs."

Despite these reports, MMA said the state has limited macro-economic consequences as it ranks among the top states for growth.

California has a gross state product of $2.2 trillion and is responsible for 13% of U.S. gross domestic product.

California gets its lowest score from Fitch Ratings, at A.

Fitch analysts said the rating is based on the state's institutional improvements made in recent years, its disciplined approach to achieving and maintaining structural balance in recent budgets, and the consequent fiscal progress made to date.

"Fitch believes that these gains provide the state with a greater capacity to address future fiscal and budgetary cyclicality," analysts said. "However, California's credit standing is likely to remain lower than most states for the foreseeable future given the magnitude of the state's budgetary and financial challenges, despite its key credit strengths."

All three credit rating agencies assign stable outlooks.

Top Of Page 

Waiting Game: Retail Buyers Hoard Cash for Future Rate Increase

Friday, October 3, 2014
By Christine Albano

Retail investors are keeping their powder dry, holding money out of the municipal market as they wait for the Federal Reserve Board to make good on its promise of higher interest rates, municipal managers said.

"There is an expectation and hope for higher rates, but no urgency to put cash to work," said Peter Delahunt, managing director of the municipal bond department at Raymond James & Associates. "The frustration continues to keep cash either on the sidelines or in the short part of the curve, with some throwing in the towel to move out the curve, or down in credit to capture more yield."

The fund managers report a palpable absence of retail participation in direct bond purchases as issuance has picked up in recent weeks. With year-to-date supply down approximately 12% and estimates of net negative supply for 2014 ranging between $30 and $40 billion, historically low municipal to Treasury ratios and headline risk are also contributing to the pull back.

"People are not in love with the rates and they are worried about when the Fed starts to tighten," said George Friedlander, chief municipal strategist at Citi in an interview on Monday.

In the meantime, many investors are keeping their assets liquid and waiting for the right opportunity to invest, the muni managers said.

"When municipal bond supply does move higher and yields grind higher, in light of that, we see retail investors becoming more engaged in spending cash and locking in higher yields," Michael Pietronico, chief executive officer at Miller Tabak Asset Management in an email on Monday.

He said traditional retail investors are reining in the duration - or interest rate sensitivity - of their portfolios and have higher cash weightings than the historic norm.

"The typical investor that buys their bonds through a retail broker is letting the cash pile up," Friedlander agreed. "There is so much cash on the sidelines, it adds to the cash that's already there."

At midyear, household ownership of individual municipal bonds was at its lowest level since the first quarter of 2006, according to the latest flow of funds data released on Sept. 18.

The household sector, which includes retail, reduced its holdings of municipal bonds to $1.602 trillion in the second quarter of 2014, from $1.609 trillion in the first quarter. That compares to the $1.665 trillion held in the second quarter of 2013.

Andy Chorlton, portfolio manager at Schroders Investment Management North America, said declining rates prompted the reduction in household ownership.

"The universe of municipal bonds is shrinking" in a trend that surfaced after the 2008 financial crisis, Chorlton said in an interview on Tuesday.

Massive outflows from municipal bond mutual funds over 31 consecutive weeks in 2013 was a sign of that withdrawal, Chorlton said.

That trend reversed this year. Muni funds have reported inflows for eight straight weeks, including a $235.5 million gain in the week ended Oct. 1, according to Lipper FMI.

Still, "the money that came out of the municipal market last year on the back end of interest rate fears hasn't come back," Chorlton said.

A 2.3% increase September volume was met with strong demand, with some deals oversubscribed, yet the retail pace is still sluggish overall, managers said.

"Retail seems consistent, but slow," Delahunt of Raymond James said.

"There is a lot of cash on the sidelines right now waiting for anything with some spread to it - especially if it is a different name," or structured with 5% coupons rated A or better, Delahunt added.

Chorlton agreed that retail participation is waning.

"In the last few months, there was strong outperformance of municipals versus other asset classes, but there was not a big inflow of retail," he said.

In addition, Friedlander said the market lacked the "groundswell of extra demand" in specialty states that typically surfaces in June, July, and August to meet summer reinvestment needs.

"People are not in an urgent hurry when their bonds come due to get that money immediately reinvested," Friedlander said. "The psychology is they will reinvest when it makes sense to buy and when they feel there is something attractive, and they have no problem waiting."

Meanwhile, municipal-to-Treasury yield ratios currently on the lower side of historic norms are another barrier for many investors, experts said. For instance, the five-year municipal bond yielded 69% of its Treasury counterpart on Thursday, while the 10-year was at 88.3%, according to Municipal Market Data.

The 10-year is closer to its normal level over the past decade, the five-year is well below its 10-year norm of 87%, Friedlander pointed out.

"If we see percentages back to 100%-plus of Treasuries in 10 years our inquiries will grow dramatically," Delahunt of Raymond James said. "We still have some investors that are staying on the sidelines waiting for a better entry point."

Chorlton said many investors are letting their municipal positions roll off due to the low absolute yields and headline risks, but that the accumulation of cash could be viewed as a positive trend for the market.

"There is longer-term support because some of that cash will work its way back into the municipal market," he said.

Friedlander noted that household ownership of municipal debt began slipping in 2012 when rates were "painfully low" and holdings paled in contrast to the $1.871 trillion households held at the end of 2010.

Investors continue to be patient and hope for higher rates.

But Chorlton pointed out that the wait has been long, and investors are sacrificing value and income in the tax-exempt market in the meantime.

The Federal Reserve has held its benchmark rate at between 0% and 0.25% since Dec. 16, 2008, waiting for the economy to improve, and has recently been reducing economic stimulus by $10 billion monthly in a program that is slated to end this month.

"If you're a client that needs tax-free income your incentive to buy bonds has gone up in the last 12 months," Chorlton said. "We think relative to other classes, munis still offer value for higher-rate tax payers."

For instance, he said clients are earning a taxable-equivalent yield of 4% on the long, high-quality spectrum of the municipal market. While he said rates are not as cheap as they were six months ago, "people have given up an awful lot in the last five years," Chorlton said.

"Individual investors need to decide how long they are willing to stay on the sidelines," he said.

Top Of Page 

California GOs Are Going Green

Thursday, September 18, 2014
By Tonya Chin

SAN FRANCISCO — California is planning its first offering of green bonds next week as a $200 million portion of its $2.3 billion general obligation bond sale.

Green bonds, dedicated to funding sustainable and environmentally beneficial projects, are a relatively new segment of the bond market, with the first municipal issuance sold last year by Massachusetts.

This year, green bonds have been growing in popularity, with total sales reaching $20 billion in just the first half of 2014, according to estimates from Bank of America. That amount includes all sectors of the bond market, not only municipal debt.

"We wanted to give investors a way to buy bonds they know will be used exclusively to finance projects that improve and protect the environment," said Tom Dresslar, a spokesman for California State Treasurer Bill Lockyer.

The projects that could receive green bond proceeds were approved in 2006 under Proposition 84, which authorized $5.4 billion of GO bonds to fund water-related projects, and Proposition 1B, which authorized around $20 billion of GOs for transportation.

While the green bonds are dedicated to environmental projects, they are otherwise structured identically to the other GO bonds to be sold next week.

"As I understand it, they are GOs and payments come out of the same general fund all GOs are paid from," said Marilyn Cohen, founder of Envision Capital Management in Los Angeles. "Other than a marketing hook I don't understand the differentiation, other than the funds are supposed to go to a specific green project."

In general, the market tends to look at the security of bonds, and not the use of proceeds, said Matt Fabian, a managing director at Municipal Market Advisors. In this case, the bonds will be sold largely on the strength of California's GO pledge.

However, selling "green bonds" does offer certain benefits to issuers.

In theory, a green bond finances environmentally efficient government services, which should garner savings and reduce the overall cost of government operations, Fabian said. It can also help increase demand for municipal debt.

"By giving them green status, it may open them up to socially responsible investors, so they get a broader class of investors," Fabian said. "In this current market, having more investors doesn't really matter, but in a thinner market, that green distinction could be more meaningful."

The current municipal market is not lacking in investor demand, as new issuance has remained low. Municipal primary issuance through August dropped 12.4% from the same time period in 2013, to $203 billion.

By starting to issue green bonds now, Fabian said, municipal issuers can set precedents and develop a program for the future. That way, when there isn't as much demand for new bonds, a "green bond" distinction could be helpful.

"It's a way to build incremental demand, even if right now, there's more than enough traditional demand," he said.

Green bonds have been offered in other areas of the market, including corporate and asset-backed funds, but there have only been a handful of green bonds in the municipal sector.

In 2013, Massachusetts sold its first issuance of "green bond" debt. The state sold $100 million as part of a $670 million GO bond sale. Proceeds went toward financing projects to support open spaces as well as environmental clean-up efforts at various sites.

The state, rated Aa1 by Moody's Investors Service and AA-plus by both Standard & Poor's and Fitch Ratings, sold another $350 million of green bonds this week.

Massachusetts was inspired by a similar program from the World Bank, which has issued more than $3.5 billion in green bonds since 2008.

Other muni green bond issuances include a $213 million issuance from the New York Environmental Facilities Corp. and a $300 million issuance from the DC Water and Sewer Authority, both issued in June.

It's a sector that investors are likely to be hearing more of in the years ahead, said Michael Pietronico, chief executive officer at Miller Tabak Asset Management.

He added that Miller Tabak would approve green bonds that carry the issuer's GO pledge, if the credit fundamentals are strong overall.

"We suspect that if the deal is attractively priced, it will see significant demand due to the overall shortage of bonds available in 2014," Pietronico said.

Next week's California deal will also include $940 million of new money GO construction bonds that will fund various infrastructure projects and pay off outstanding GO commercial paper notes.

Another $950 million of GO bonds are being issued to refunding outstanding debt. Dresslar said the state does not provide pre-sale estimates of net present value savings for refundings.

The remaining $200 million will be mandatory put bonds, which will also fund various state projects and pay commercial paper notes as they mature. Projects to be financed include those under the 2006 transportation bond measure, as well as the Safe, Reliable High-Speed Passenger Train Bond Act for the 21st Century.

The High-Speed Train bond measure, approved by voters in 2008, authorized funding for a high-speed rail system project to connect Los Angeles and San Francisco. The project has been tied up in litigation from opponents challenging it on environmental grounds as well as the legality of bond sales for the project.

Dresslar said proceeds from the bonds will be used for projects authorized under the bond act that are not in dispute in the litigation.

The funds will be used for local connectivity projects to link local rail systems with the future high speed rail line.

"Using proceeds to fund connectivity projects is distinct from using bonds to finance construction of the actual HSR system," Dresslar said.

The mandatory tender put will be, depending on market conditions at the time of sale, between three to ten years.

A failed remarketing on the put date will not result in an event of default, but a stepped-up interest rate.

California's GO bond law allows the state to issue variable rate debt up to 20% of the aggregate amount of long-term GO bonds outstanding. The state has about $3.5 billion in variable rate debt as of July 1, which includes fixed rate bonds with mandatory tenders.

The state's total amount of GO debt outstanding is around $76 billion. Total GO debt with mandatory tenders is around $450 million.

"We're selling [the mandatory put bonds] for a couple of reasons," Dresslar said. "One, they give us a way to diversify what we offer to investors. And, two, they allow us do business at the short end of the yield curve without incurring the expense of obtaining credit enhancement."

The bonds are scheduled to price on Tuesday with Wells Fargo and Citi as joint senior managers. Bank of America Merrill Lynch is joint senior manager for the green bonds.

Orrick, Herrington & Sutcliffe LLP is bond counsel and Public Resources Advisory Group is financial advisor.

Dresslar said the maturity structure will be determined at the time of the sale.

California's GO bonds are rated Aa3 by Moody's, and A1 by both Standard & Poor's and Fitch Ratings. Moody's and Fitch assign stable outlooks, while Standard & Poor's has a positive outlook.

"The positive outlook reflects our view that California's credit quality could strengthen within our two-year outlook horizon, resulting in an upgrade," said Standard & Poor's credit analyst David Hitchcock said in the credit report.

He added that the state ended fiscal 2014 in its strongest fiscal position of the past decade.

In June, Moody's lifted its rating to Aa3 from A1, citing the state's "rapidly improving financial position." In its credit report earlier this month, the ratings agency also noted the state's high but declining debt metrics, strong liquidity, and robust employment growth.

"It isn't just investor enthusiasm," Fabian said of California's financial progress. "It's authentic and fundamental improvement in the state's structural budget balance."

The improvement can be seen in the state's credit spreads, which have significantly narrowed in recent years.

So far this year the spreads between the rate on a California GO bond and a triple-A rated bond have come down to 5 basis points from 29 basis points in five-year maturities, and to 23 basis points from 56 basis points in 10-year maturities, according to Thomson Reuters.

Earlier this month, the state reported receiving a record-low yield on its $2.8 billion sale of revenue anticipation notes. The bonds were sold competitively with a weighted average net interest cost of 0.107%.

The state is planning an additional GO bond sale in November-also to fund various capital projects and repay commercial paper notes.

Top Of Page 

Market Post: Dreary Late Summer Volume Dips to $2.53 BB

Sunday, August 24, 2014
By Christine Albano

As the end of summer approaches and supply continues to dwindle, weekly volume in the municipal market is expected to sink to $2.53 billion, the lowest level in almost six months. A $480 million offering from the Virginia Public Building Authority is the largest deal on the new-issue calendar this week.

Ipreo LLC and The Bond Buyer's weekly estimate is down from the revised $3.46 billion that actually came to market last week as reported by Thomson Reuters. The original estimate was $4.23 billion.

"The market should react positively to the deals … it's pretty starved," said John Mousseau, managing director at Cumberland Advisors in Vineland, N.J.

The Virginia building deal will enter the competitive market with its three-pronged revenue bond offering on Wednesday. The series will consist of $317.13 million, followed by $117.94, and $44.61 million, all of which are rated AA-plus by Fitch Ratings.

The only other sizable competitive deal is expected to be a $106.22 million revenue sale from Fayetteville, N.C., which is rated Aa2 by Moody's Investors Service and AA by both Standard & Poor's and Fitch.

In the negotiated market, a $160.87 million sale from Austin, Texas, is set to be sold in three series consisting of $104.62 million of public improvement bonds; $40.4 million of certificates of obligation; and $15.80 million of public property finance contractual obligations.

Robert W. Baird & Co. will price the deal on Wednesday.

A $116 million Bossier City, La., utilities revenue refunding will be priced on Wednesday by Stephens Inc. Structured to mature serially from 2015 to 2038, the bonds are rated A1 by Moody's and AA-minus by Standard & Poor's.

This week's anticipated volume is the least since the week ending Feb. 28 when $2.49 billion actually came to market, according to Thomson Reuters.

"Buyers continue to look for bonds, as evidenced by continuing inflows," said Alan Schankel, managing director of municipal strategy at Janney Montgomery Scott.

The upcoming quiet week is all part of a seasonal slowdown that the market plans for ahead, according to other municipal experts.

"The municipal market is used to, and expects, this week to be slow, with light new issue volume," said John Donaldson, vice president and director of fixed income at The Haverford Trust Co. in Radnor, Pa.

"Post-Labor Day the deals will ramp up and the real pressure starts with a ton of current refundings as we approach year end," Mousseau said. "Obviously that isn't a lot of net new supply, but the markets still have to clear. That should produce a blip up in intermediate and longer tax-exempt rates."

Michael Pietronico, chief executive officer at Miller Tabak Asset Management, said the expected supply this week is too thin overall to "knock the market out of its current tight range."

Outside of the long-term market this week, a $5.4 billion tax and revenue anticipation note sale from Texas is slated for the short-term competitive market on Monday, although municipal experts said it will be less of a general market offering.

Mousseau said the deal will be of interest mostly to institutional accounts, such as cash funds and short term funds, with the possibility of some demand from high net worth individuals.

"Texas doesn't have a state personal income tax, so there isn't even a built in demand like California notes have," Donaldson said.

"The Texas TRAN deal should garner significant institutional demand if priced attractively for crossover investors to consider," Pietronico added.

Top Of Page 

Volume Dips to $2 Billion Ahead of Holiday

Sunday, June 29, 2014
By Christine Albano

After a short-lived supply boost last week, volume will drop by an estimated $5 billion this week as issuers scale back financings and underwriters and investors head into the Fourth of July holiday.

The first half of 2014 will officially come to an end this week with issuance decreasing to $2.01 billion, according to Ipreo LLC and The Bond Buyer, down from a revised $7.6 billion in the prior week as reported by Thomson Reuters.

The two largest competitive deals that will dominate the primary market this week include a $554.52 million Alabama Public School & College Authority capital improvement refunding and a $450 million Massachusetts general obligation bond sale - both scheduled to kick off the third quarter on Tuesday.

Market participants said demand should remain high for these and other deals in coming weeks - despite the recent overall low supply and yields in the municipal market lately.

"Miller Tabak Asset Management sees a sideways trading environment in the coming days as low supply keeps selling pressure at a minimum," said the New York City-based firm's chief executive officer Michael Pietronico on Friday.

"Confusion over the trajectory of the U.S. economy given the harsh pullback in economic activity during the first quarter of 2014 is likely to keep interest in fixed-income high even as yields remain historically very low," he added.

Inflows for all municipal bond funds rose to $233.5 million for the week ending July 18, from $147.7 million last week, according to Lipper FMI, while outflows among municipal money market funds slowed to less than a million dollars in the week ended June 23, after $1.2 billion of outflows last week as reported by

The municipal market strengthened late last week in the midst of negative rating news affecting some of Puerto Rico's key issuers. Yields on bonds maturing in three to eight years fell as much as two basis points; nine to 29 years slipped as much as one basis point, while short term yields remained steady, according to the Municipal Market Data's triple-A scale.

The scale in 2044 declined by nine basis points to 3.29% as of last Thursday, compared to where it began last Monday, according to MMD.

Issuers of negotiated activity this week hope that strength continues when they price respective deals this week, including a $322.12 million refunding of gas supply revenue bonds from the Lancaster Port Authority, as well as a pair of Texas deals.

RBC Capital Markets will price the Lancaster deal on Tuesday with a serial structure maturing from 2014 to 2019 and a Aa3 Moody's rating.

In addition, JPMorgan Securities will price a $333 million Dallas Independent School District unlimited tax refunding issue also on Tuesday with an all-serial structure that matures from 2014 to 2034. The bonds are rated triple-A by Moody's and Standard & Poor's by virtue of being backed by the state's Permanent School Fund.

Elsewhere in Texas, the Houston Higher Education Finance Corporation is preparing to sell $101.1 million of education revenue and refunding bonds in a negotiated deal priced by Raymond James & Associates on Tuesday.

Structured with serial bonds from 2015 to 2034 and term bonds in 2038 and 2044, the deal is also backed by the Texas PSF guaranty.

Other deals planned this week include a $200 million Los Angeles Department of Water and Power revenue bond sale slated for pricing by Wells Fargo Securities on Tuesday with a structure of serial bonds maturing from 2020 to 2029 and a term maturity in 2017.

The bonds are rated Aa3 by Moody's and AA-minus by Standard & Poor's and Fitch Ratings.

Top Of Page 

Volume May Reach $5.7 Billion, Led by Missouri Highways

Sunday, May 18, 2014
By Christine Albano

Municipal bond volume will jump to the most in four weeks as a Missouri transportation financing and a Connecticut general obligation offering vie for attention as this week's largest deals.

These and other issues are expected to bring a total of $5.74 billion of long-term new deals to the primary market, according to Ipreo LLC and The Bond Buyer, up from a revised $4.98 billion last week as reported by Thomson Reuters. Original estimates for last week called for $5.14 billion.

The estimated $894 million Missouri Highways and Transportation Commission financing will arrive in the negotiated market on Tuesday, following a one-day retail order period on Monday.

Bank of America Merrill Lynch will price the deal, which is backed by pledged revenues, as $581.98 million of first-lien refunding state road bonds maturing from 2017 to 2026 in Series A, and $312.47 million second-lien refunding state road bonds maturing from 2018 to 2025 in Series B.

Series A is rated triple-A by all three major rating agencies, while Series B is rated Aa1 by Moody's, AAA by Standard & Poor's and AA-plus by Fitch.

Connecticut will issue $650 million of its GO refunding debt in a negotiated deal led by Morgan Stanley & Co. on Wednesday, following a retail order period on Monday and Tuesday.

Rated Aa3 by Moody's and AA by S&P and Fitch, the bonds will consist of a serial structure. The exact maturities were not available at press time.

"Both deals will see significant demand due to the low overall level of supply in both Missouri and Connecticut," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management.

Ohio's Cuyahoga County is planning to sell $230 million of certificates of participation for a convention center hotel project.

The negotiated deal will be senior-managed by Stifel, Nicolaus & Co. on Thursday and is rated Aa3 by Moody's and AA-minus by S&P.

A two-pronged deal from the East Bay Municipal Utility District will lead the activity in the California market this week.

Both offerings will be priced on Tuesday and will be rated Aa1 by Moody's, AAA by Standard & Poor's, and AA-plus by Fitch.

The $204 million offering of water system revenue refunding bonds on behalf of Alameda and Contra Costa counties will be senior-managed by JPMorgan Securities LLC.

The bonds, which mature from 2015 to 2026, will be offered to retail investors on Monday.

Wells Fargo Securities will handle the pricing of a separate $131 million portion of water-system revenue refunding bonds, which are structured to mature from 2027 to 2035.

Massachusetts will sell $200 million of its GO debt on Wednesday in a deal that will be federally taxable.

Rated Aa1 by Moody's, and AA-plus by Fitch, the bonds are structured to mature serially from 2015 to 2024 and the proceeds will finance capital projects within the state.

This week's projected volume would be the largest since the week starting April 21, when $6.37 billion came to market.

Before that, volume was last this high on the week of March 10, when Puerto Rico's $3.5 billion offering boosted the total.

A decline in muni volume has helped prop up prices this year, amid demand for tax free yields.

Total volume through April this year was $89.34 billion, compared with $122.71 billion a year earlier.

Top Of Page 

April Bond Sales Decline

Wednesday, April 30, 2014
By Hillary Flynn

Municipal bond sales fell again in April, mired in a weakening economy.

Long-Term Bond Sales: January-April

Sales in April totaled $23.02 billion in 796 issues, a $4.61 billion drop from March, according to preliminary data from Thomson Reuters. Volume was 34.5% lower than April 2013's sales, which totaled $35.14 billion in 1,147 issues.

"New projects do not seem to be robust due to the slowing economic backdrop," Michael Pietronico, chief executive officer at Miller Tabak Asset Management, said. "The GDP coming out today showed that it was only 0.1% higher. Municipalities don't seem that engaged in wanted to start new projects."

The advance gross domestic product number announced on Wednesday showed growth slowed to 0.1% in the first quarter from the 2.6% pace in the fourth quarter of 2013. Growth fell short of the market consensus of about 1.1%.

"It's politically unpopular to finance things," Matt Fabian, managing director at Municipal Market Advisors, said in an interview. "At some point states are required to raise revenues to pay the debt off."

Most of the decline from March's volume reflected the $3.5 billion Puerto Rico general obligation bond issuance that came to market on March 12. Pietronico said that the Commonwealth's GO did elevate March's levels and described it as a "one-off."

The preliminary figures for April don't reflect sales on the last day of the month.

General obligation bond issuance fell by 22.4% to $11.52 billion from 555 issuances this April from $14.86 billion from almost 200 more issuances for the same month in 2013. The amount of revenue bonds released decreased by 43.3% to $11.5 billion from $20.28 billion last year.

New-money issuance was down, though it fell off by only 17.6% for April after dropping by 31% in March from 2013's levels for the two months. New-money totaled $12.74 billion from 457 issuances in April.

"Municipalities are trying to get debt down to levels they think are appropriate, and the slowing economy is not doing a lot to generate animal spirits in terms of new products," Pietronico said.

Refunding sales came in less than half of what they were in April 2013, declining by 55.2% to $5.81 billion in268 issuances after reaching $12.98 billion in 553 issuances in February.

"Issuance is also down because refunding deals have been slower than expected due to the interest rate environment," Pietronico said.

He does not see refunding deals or issuance in general picking up anytime soon.

"From our perspective we expect it to be on the light side this year," he said.

"You have fewer refunding targets now," Fabian said. "The kinds of bonds that have been refunded lately have been done through current refundings, not advanced refundings."

Fabian says that there are very few advanced refundings because the yield curve has been so steep this year.

"Advanced refundings do not work as well when the yield curve is steep," he said.

In terms of current refundings, there are fewer of those because there has been low issuance in 2014, Fabian said.

Pietronico also does not foresee any changes in the Federal Reserve's interest rate policy effecting issuance in 2014.

Issuance fell across all the sectors, weakening the most for environmental facilities and development, which came in 94.9% and 58.2% lower than their 2013 levels, respectively. Environmental facilities sales fell to $29.1 million in one deal from $567.7 million in 10 sales in the same month last year. Development issues for April totaled more at $1.04 billion from 17 deals, compared compared with $2.52 billion from 16 issuances in 2013.

Healthcare has dropped by 73.5% to $977.6 billion from 21 issuances from the $3.69 billion it had reached in 2013.

"A lot of issuance has been in healthcare in the last year or two," Fabian said. "Its been hospitals merging and now there are fewer hospital mergers; its dried up issuance."

Direct issuers and colleges and universities were the only types of issuers to experience gains in April, with direct issuers' growing by 345.4% with two issues for the month amounting to $634.3 million. Direct issuers in April 2013 only accounted for $142.4 million, even though there were nine issues.

The number of issues from colleges and universities that came to market declined by four, but the 25 issuances in April 2014 reached $1.9 billion, up from $709.9 million a year earlier.

The biggest state issuers, New York and California, both issued less than their 2013 levels, though New York dropped by less than California. New York's issuance decreased by 2.6% to $10.27 billion in three deals from $10.54 in three deals in April 2013.

California's volume dropped by 43.1% to $11.3 billion from $19.9 billion in April 2013. The state had sold $19.9 billion last year in a single issue. It had two issues in April this year.

Idaho showed the biggest jump in volume, as issuance increased by 337.3%, with 38 deals totaling $354.2 million.

"Its such a small state that anytime it issues debt, it is going to skew the numbers higher because it does not issue that much," Pietronico said. "You won't see that kind of change in California or New York, which are much greater issuers."

Top Of Page 

Market Endures Slim Pickings as Volume Falls to $4.46 Billion

Sunday, April 27, 2014
By Christine Albano

An $834 million Pennsylvania general obligation sale may get plenty of attention this week in a market with little else to focus on, as volume reverts back to 2014's skimpy norm after inching up last week.

The supply crunch continues to be challenging for investors and issuers alike.

"The low new issue supply is forcing investors into the secondary market for bonds and is keeping bond dealers proud of their offerings and reluctant to cut prices," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management.

The chronically low municipal bond supply is emblematic of both anemic growth in the economy and somewhat higher rates impeding issuers from refinancing debt at a faster rate, Pietronico said.

Ipreo LLC and The Bond Buyer estimate that new, long-term volume will decline this week to $4.46 billion, from the revised $6.37 billion that came to market last week, as reported by Thomson Reuters.

Some observers note a positive aspect to the thin volume.

"The relatively light new issue supply of the first four months of 2014, combined with sustained demand evidenced by positive fund flows, have allowed municipals to significantly outperform taxables this year," said Alan Schankel, managing director at Janney Capital Markets.

As the week's largest deal, the Pennsylvania offering should have extra allure for supply-starved investors. The deal, which is expected to take place in the competitive market on Tuesday, will have a serial structure and consist of $545 million of new-money bonds and $289.45 million of refunding bonds.

The debt is rated Aa2 by Moody's Investors Service and AA by Fitch Ratings.

The rating agencies view the commonwealth's diverse and relatively stable economy and three consecutive timely budgets as key strengths. Its historically-weak financial position and liquidity, as well as its high combined debt position driven by growing unfunded pension liabilities, are the chief credit concerns.

With few other deals to grab investors' attention, an offering from Michigan's Royal Oak Hospital Finance Authority will also be in the spotlight.

The revenue refunding on behalf of the William Beaumont Hospital Obligated Group is planned for pricing by Morgan Stanley on Tuesday with a structure of serial and term bonds rated A1 by Moody's and A by Standard & Poor's.

In other activity, Goldman, Sachs will price two higher education offerings in California on Thursday on behalf of Stanford University, both rated triple-A by all three major rating agencies.

The larger deal is a $290 million revenue sale issued by the California Educational Facilities Authority, while the smaller offering consists of $150 million of taxable bonds issued by the Leland Stanford Junior University.

Goldman was still ironing out the structures for both deals on Friday.

In a separate deal being managed by Wells Fargo Securities, the California Educational Facilities Authority will issue another $125 million of revenue debt on behalf of Stanford University on Thursday rated triple-A by all three rating agencies.

In a related issue, Morgan Stanley will also price $100 million of revenue debt from the California Health Facilities Financing Authority on Thursday on behalf of the Lucile Salter Packard Children's Hospital at Stanford. The bonds are rated Aa3 by Moody's, AA-minus by Standard & Poor's, and AA by Fitch and the structure was being finalized.

The only other competitive deal scheduled is a $199 million sale of North Carolina limited obligation refunding bonds structured as serial maturities from 2017 to 2026 and planned for pricing on Wednesday.

The bonds are rated Aa1 by Moody's and AA-plus by Standard & Poor's and Fitch.

Two other deals pricing this week include a $123 million sale from the North East, Tex., Independent School District of unlimited tax refunding bonds slated for pricing by Citi on Tuesday.

The bonds are structured to mature serially from 2015 to 20333 and are rated Aa1 by Moody's and AA-minus by Standard & Poor's.

In the Southeast, meanwhile, Newport News, Va., is planning to sell $105.84 million of general obligation water refunding bonds on Tuesday. The negotiated deal is being led by Raymond James & Associates Inc. and is structured to mature serially from 2015 to 2034.

Top Of Page 

Fund Managers Eye Economy as They Set 2nd Quarter Strategy

Monday, March 24, 2014
By Christine Albano

Municipal portfolio managers are keeping a wary eye on the economy as the second quarter approaches.

Managers said they plan a range of strategies to buffer their portfolios against expected rising interest rates, low supply and tighter credit spreads, from tweaking duration to adding to high-yield exposure or upgrading credit quality. They also said they will be ready to alter those strategies mid-quarter should market or economic conditions not pan out the way they expect.

"We are always concerned that the Treasury market might lose sponsorship should the economy improve," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management. "All fixed-income managers will be on the lookout for that possibility."

The firm, which manages $980 million of tax-exempt assets, will continue to be overweight in general obligation and essential purpose revenue bonds, particularly in the secondary market, where supply may be more plentiful, given predictions for continued low new-issue supply.

"Miller Tabak Asset Management will be looking to upgrade the credit quality of our client's portfolios as spreads have tightened during the early months of 2014, and compensation has diminished for those buying medium-quality bonds," Pietronico said.

He also said the firm plans to remain focused on the one- to 15-year slope of the curve, though there could be some wiggle room on that strategy. "Ratios to Treasuries will likely determine where most of our client's cash will be spent during the upcoming quarter," he said.

On Friday, the ratio of municipal to Treasury yields in 10 years was reported at 92%, while the ratio in 30 years was at 103.3%, according to MMD. Since Dec. 30, the 10-year ratio has reached a maximum of 98.1% and a minimum of 88.4%, while the 30-year ratio hit a maximum of 108.8%, and a minimum of 101.4%.

Credit-spread tightening and the lack of supply "will be the real story" in the second quarter, said John Mousseau, director of fixed income at Cumberland Advisors, which manages $1.3 billion of tax-exempt assets. "In some real hard to find states, supply will get even harder to find," he said.

Long-term municipal bond issuance is down significantly so far this year — by 33.4% in January and 40.4% in February — driven by a steep decline in refundings.

The continued lowering of the municipal-Treasury ratio will also be a prime concern in the upcoming quarter, according to Mousseau, "especially as you get beyond the fallout last year with the bond funds liquidating."

Municipal funds reported the arrival of $107 million in the sixth consecutive week of inflows in the week ended March 20, according to Lipper FMI data. The influx marked the ninth week out of 10 that mutual funds have reported inflows. The report arrived a day after Federal Reserve Board chairman Janet Yellen announced another $10 billion cut in the monthly stimulus program to $55 billion.

Investors recorded their first inflows into weekly reporting municipal bond mutual funds earlier this year when they added $103 million in the week ended Jan. 15 - the first time since the week ended May 22, 2013 -- after 33 consecutive weeks of outflows.

Investors were spooked by fears over the Federal Reserve Board tapering its $85-billion monthly economic stimulus program and decided to run for the exits.

Nearly a year after that phenomenon, Mousseau expects flows into municipal bond funds to continue to resume in the second quarter.

"I think a lot of people are looking back right now and realizing that the fear of tapering was worse than tapering, and that a lot of that fund selling at the end of June and up to the middle of July was pretty silly in respect to the actual fear of inflation," he said. "It was a retail-driven event and we saw somewhat of a retail-driven cure."

David Litvack, managing director and head of tax-exempt research at U.S. Trust, Bank of America Private Wealth Management, said he will be among those supporting the market in the upcoming quarter as an active buyer of medium investment-grade GOs, essential service, and infrastructure bonds with stable or improving credit characteristics.

"We believe maturities of five to 10 years represent the sweet spot on the yield curve," Litvack said.

On Friday, the generic, triple-A GO scale in 2044 ended down one basis point at 3.74%, while the comparable double-A scale yielded a 3.98%, according to Municipal Market Data.

The mostly steady mutual fund inflows so far this year and the stronger demand for municipals in general is being driven by the fact that interest rates have remained low as well as a "renewed appreciation" of municipal bonds' tax advantages, Litvack noted.

"After a challenging 2013, municipal bonds have rebounded so far this year," he said.

"We expect continued good performance based on improving credit fundamentals, low new-issue volume, and strong demand from tax-sensitive investors," Litvack added.

Meanwhile, the economic landscape will dictate whether Jeffery Elswick, director of fixed income at Frost Investment Advisors, decreases or increases the interest-rate risk when it comes to the any core allocations in the tax-exempt municipal holdings beyond the current eight-year profile.

"Our expectation is that the macro-economy will pick up some momentum heading into the spring," Elswick said. "To the extent we begin to see more tangible improvements in the U.S. economy validating that the recent pull back in economic growth has had more to do with poor weather and less to do with some other type of underlying problems, we would look to lower our average maturity closer to the six to seven-year range." Elswick added."If on the other hand, we unexpectedly see the macro-environment in the U.S. not improve even as the spring rolls around, then we would look to maintain, or even increase somewhat, our current eight-year maturity profile," he said.

In addition, Elswick, whose firm managed just under $2 billion of tax-exempt assets at the end of 2013, plans to add some high-yield exposure to his portfolio, although on the ultra-short slope of the curve.

"When we do decide to add to some of the riskier credit sectors, such as high-yield, we will lean toward the five-year and under portion of the curve if we can find opportunities," he said.

He said he will avoid the longer-end of the lower-rated spectrum where prices are "too rich" in his opinion - and will also refrain from increasing his fund's exposure to Puerto Rico credits. The tax-exempt holdings currently include a 0.5% allocation in five-year paper from the island.

The commonwealth sold $3.5 billion of GO debt earlier this month that was oversubscribed as hedge fund and cross-over buyers were lured by yields north of 8%.

"In particular with the P.R. story, their new bond issuance was certainly a positive and it helps their short-term liquidity, but before we would think about increasing our allocation in our tax-exempt fund," Elswick said. "We want to see if they are able to meet the fiscal targets that the government leadership has recently announced for this year and into next."

Litvack will also be watching the headline risks associated with Puerto Rico, as well as Detroit, for any potential ripple effects in the broader market. He also has concerns about unfunded pensions that are keeping him at arm's length from owning that debt for fear of potential downgrade activity.

Litvack believes much of the pension debacle "is borne disproportionately by a limited number of states and local governments," and supports the issue being in the forefront.

"We are encouraged that pension underfunding has gained a high level of visibility, because this has spurred many issuers to implement reforms to ameliorate the problem," Litvack said.

Portfolio managers will likely be scrambling for bonds to implement their various investment strategies given the low supply forecast in the second quarter.

"With interest rates expected to rise, we believe there will be fewer opportunities for municipal issuers to refinance outstanding bonds for economic savings," Litvack noted. "State and local governments are still enduring some residual austerity from the Great Recession, with less taxpayer willingness to finance expensive capital programs through new bond issues."

The managers, meanwhile, said they are armed for a challenge, and will remain active, even though April can be seasonally sluggish due to personal and corporate income tax season deadlines.

"Given that new-issue deals are likely going to see considerable interest in this low-supply environment we expect to find greater value in the secondary market as yields are likely to be more generous in our view," Pietronico said.

Despite the reduced supply, there will probably be a better overall perception of municipal credit with the arrival of the second quarter, especially since the Puerto Rico deal is behind the market, Mousseau of Cumberland noted.

Participation in the island's GO deal by many different cross-over buyers bodes well in terms of demand for municipals going forward, Mousseau noted. "You probably have some buyers out there that will look to buy tax-free bonds if they get relatively cheaper than Treasuries," he said.

Litvack agreed that the outlook for municipal credit is generally positive, in large part due to increased revenues, particularly at the state level, driven by growing income and sales tax collections.

"Local government finances have improved more slowly, because they receive the lion's share of their revenues from property taxes, which have lagged in the U.S. economic recovery," he said, adding that property taxes are starting to pick up in many areas.

"We believe the combination of strong demand and restrained supply will be a tailwind for municipal bond returns this year," Litvack said.

Top Of Page 

With Sharp Decline in Refundings, New-Issue Supply Slid 12.5% in '13

Sunday, February 23, 2014
By Tonya Chin

Long-term municipal bond volume was down in 2013 as the amount of refunding deals in the market slowed substantially, particularly during the second half of the year.

Total volume during the year dropped 12.5% to $334.6 billion in 11,435 issues from the previous year's $382.4 billion in 13,129 issues, according to Thomson Reuters.

Though issuance was low for the entire year, it didn't start out that way.

"New-issue volume was robust at the beginning of the year, as new money, refundings and taxable offerings all posted stronger numbers versus historical averages," John Dillon, chief municipal bond strategist at Morgan Stanley Wealth Management, wrote in a research report.

January — typically a slow month — began the year with 897 issues totaling $27 billion. That amount was up 54.8% from the same period the year before.

After February, when issuance totaled $24.6 billion, supply averaged roughly $28 billion per month for the remainder of the year. Issuance peaked in April when issuers brought $38 billion to market — a 9.9% increase from the year before.

"New-money issuance remained elevated as state and local government austerity eased and initiatives surfaced to address deferred maintenance," Dillon said. "Meanwhile, low nominal interest rates bolstered refunding deals."

He added that many issuers even turned to taxable debt to refund existing securities a second time, while still clipping savings.

Taxable deals totaled $38.4 billion in 1,215 issues — up 16.8% from 2012. All tax-exempt deals, which totaled $285.9 billion, were down by 15.1% from last year.

"Compared with 2012, there was a notable increase in taxable issuance of health care and education," Citi analysts George Friedlander, Mikhail Foux and Vikram Rai wrote in an end-of-year report. "These two sectors should remain main drivers of taxable supply for the next several years."

Citi analysts expect the marginal but steady increase of taxable supply to continue, and forecast a 10% or greater increase in taxable issuance in 2014 to a total of $41 to $45 billion.

In August, total new issuance dropped 31.9% from 2012 to $22.8 billion. Year over year declines continued each month during the remainder of the year.

"The second half of the year told a very different story," Dillon said. "In a word, 'taper' was the reason for the difference."

Following Federal Reserve chairman Ben Bernanke's mention in June of possibly tapering the Fed's bond-buying program by the end of the year, the tax-exempt market sold off, following Treasuries, and interest rates started to climb.

Yields on the Municipal Market Data scale ended the month of June more than 40 basis points higher than in May. Five-year yields were up 46 basis points to 1.40% on June 28, up from 0.94% on May 31. The 10-year yields were up 47 basis points to 2.56% from 2.09%.

Issuers began to postpone deals due to market volatility and many potential refunding deals were shelved.

Total refundings for the year were down 29.1% from last year at $112.3 billion in 4,351 issues. That followed $158.2 billion in 6,219 issues in 2012. New money was up 8.4% with $161.3 billion in 6,015 issues.

Combined new-money and refunding deals were down 19% with 1,069 issues totaling $61.1 billion.

Among the sectors, only development and housing bonds increased issuance from last year, by 8.1% to $12.2 billion, and by 29.8% to $14.1 billion, respectively.

Bond issuance in the utilities sector dropped 27.6% from last year to $33 billion. Health care bond issuance declined by 22.8% to $28.8 billion and general purpose bonds were down 20.9% at $79.8 billion.

Negotiated issuance was down 17.6% at $243.8 billion, compared with $295.9 billion in 2012. Competitive issuance was also slightly lower last year at $69.3 billion — a 6.4% decline.

Issuers sold $206.7 billion in revenue bonds — down 16.1% from 2012. General obligation bond sales were also down 6% at $127.9 billion.

Fixed-rate issuance dropped 14.1% to $296.7 billion. Variable-rate short bond issuance was also down by 19.4%, while variable-rate long or not-put issuance was up 78.2% at $4.3 billion.

Among states and local governments, each type of entity saw declines in issuance, with the exception of colleges and universities and cooperative utilities.

Colleges sold $14.2 billion of debt — up 14.3% from 2012, while cooperative utilities sold $125.6 million — up 131.7%.

State agencies sold $94.9 billion of bonds in 1,170 issues, which was an 18.5% decline from the year before. Cities and towns issued 23.5% less than last year with 3,231 issues totaling $44.9 billion.

Analysts are projecting that 2014 will be an even bleaker year than 2013 in terms of new issuance.

Citi analysts are estimating that new-issue volume will decline to $315 billion at the end of the year. Morgan Stanley is also projecting issuance will drop by somewhere between 8% and 12%.

Michael Pietronico, chief executive officer and senior portfolio manager at Miller Tabak Asset Management, said his firm sees forecasting supply as a function of one's view of the direction of interest rates.

"Given that the perception in the market is for interest rates to trend higher, it seems likely in our view that supply could surprise on the lower end of many firm's projections," he said. "Refunding deals of any great magnitude are likely to be few and far between and as such we are taking the approach here of putting cash to work as supply should be difficult to find — especially in the summer months."

Top Of Page 

Muni Issuance Dreary Ahead of Billion-Dollar P.R., Texas Deals

Sunday, February 16, 2014
By Christine Albano

Deal supply will slip again as a $400 million Metropolitan Transportation Authority issue is expected to be the biggest transaction of the holiday shortened week amid a seasonal slump in volume.

According to Ipreo LLC and The Bond Buyer, long-term new issuance is estimated at $2.28 billion this week. The expected volume compares with the $3.43 billion of revised issuance that was reported by Thomson Reuters last week.

"It's just a slow ride in here," a New York-based trader said. "It's always slow in January and February, but it's a little slower than usual. I think we are just going through a temporary volume-related drought," he added.

"Due to lack of new issuance this week, MSRB trading volume was relatively light at $6.9 billion, compared to $12.7 billion average for the prior four Thursdays," wrote Alan Schankel, managing director at Janney Montgomery Scott on Friday in a daily fixed income report.

The MTA's transportation revenue bond sale of serial and term bonds will be led by Morgan Stanley on Thursday, following a Wednesday retail order period. The bonds are rated A2 by Moody's Investors Service and A by Fitch Ratings, while the Standard & Poor's rating was not yet confirmed at press time.

Citi will price a $201 million sale of Louisiana state highway improvement revenue bonds on Wednesday. Maturing from 2015 to 2034, the bonds are rated Aa3 by Moody's, and AA by Standard & Poor's and Fitch.

The Georgia Housing & Finance Authority will bring a $156 million sale of single-family mortgage revenue bonds also led by Citi on Thursday, following a Wednesday retail order period.

Though volume will be low, he market should benefit from policies such as tapering of the Federal Reserve's economic stimulus, some muni professionals said.

"The tighter policy is being felt globally -- especially in emerging markets -- and this should lend support to fixed-income in general and municipal bonds in particular," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management.

With little volume in recent weeks, analysts said the impact of Puerto Rico's downgrade by all three major rating agencies and its planned GO sale later this month has stolen the attention.

Gov. Alejandro Garcνa Padilla asked the Puerto Rico legislature to approve up to $3.5 billion aimed at refinancing obligations and addressing liquidity concerns, which were a key factor in the downgrades.

Issuing the junk-status GOs means much higher yields, market participants said, questioning whether there will be enough demand to support the new deal.

"With many funds prohibited from buying high-yield names there is definitely doubt," said Anthony Valeri, market strategist at LPL Financial. "At yields above 8% to 9% there is interest, but below that, demand does not seem sufficient."

Schankel of Janney said trading levels in block size Puerto Rico bonds in the secondary market have remained firm during and after the downgrades. Puerto Rico GOs with 5% coupons due in 2041 trading at 7.98% on Thursday were "consistent with the 8% area of recent block trades," he said.

The commonwealth will conduct a webcast at 2 p.m. on Tuesday ahead of the deal, which will be led by Barclays Capital, RBC Capital Markets and Morgan Stanley.

"The key for now is access to needed liquidity and getting this deal done," Valeri added. "That will buy P.R. some time and get the commonwealth past a key hurdle."

Besides the upcoming Puerto Rico sale, a $1 billion offering of highway revenue bonds from the Texas Transportation Commission is expected to be priced next week by Piper Jaffray Inc.

Top Of Page 

Port Authority Plan Returns Emphasis to Transportation

Friday, February 7, 2014
By Robert Slavin

The Port Authority of New York and New Jersey's proposed 10-year $27.6 billion capital plan returns the authority's emphasis to transportation projects.

The plan calls for the authority to spend 82% of its capital budget on transportation-related projects. Just 18% would be spent on the World Trade Center.

The authority said the plan "provides a roadmap to focus the agency on its core mission of maintaining and building transportation infrastructure and provides for projects that will have meaningful benefits to the millions of travelers who use its airports, tunnels, bridges, ports and rail system."

The authority's staff presented the plan to its Capital Planning, Execution and Asset Management Committee on Tuesday. The public is asked to deliver comments on it by Feb. 14 but the authority will review submissions made through Feb. 18. The authority's board will vote on the plan Feb. 19.

The port authority is rated Aa3 by Moody's Investors Service, AA-minus by Standard & Poor's, and AA-minus by Fitch Ratings. It has $19 billion in outstanding bonds, according to Standard & Poor's. The total does not include $1.2 billion in Liberty revenue bonds for 4 World Trade Center.

"The authority's very large, complex, and growing future capital needs, including major growing commitments to maintain revenue producing assets in a state of good repair; the completion and operation of World Trade Center projects and on-going contributions to subsidize transit operations and non-revenue producing regional economic development projects, will continue to exert credit pressures," said Miller Tabak Asset Management chief executive officer Michael Pietronico. "An increasingly back-loaded debt amortization structure also could exert downward rating pressure as debt escalation would require higher rates of revenue growth in the future."

On Jan. 21 Standard & Poor's analyst Joseph Pezzimenti said that the authority's financial forecast for 2013 to 2018 assumed $18.7 billion in capital spending.

Authority managers expected to fund this approximately 35% from consolidated bonds to be sold from 2014 to 2018. When previously issued bonds are included, total bond funding is expected to cover 45% of capital spending, Pezzimenti wrote.

The authority did not respond to inquiries about the plan's bonding assumptions.

Despite the $27.6 billion size of the proposed plan, Fitch senior director Saavan Gatfield said this might not be enough.

"Recent completed audit reports indicate capital needs may be significantly greater than presently expected over the next 10 to 15 years," he wrote in January.

In creating the plan the authority wanted to improve project selection, authority Chief Financial Officer Elizabeth McCarthy said. The authority rated projects in various categories to determine which to include in the plan.

For existing infrastructure that might need repair or upgrading, the authority said it looked at physical condition and operational impact criterion. Under physical condition, the authority looked at whether the failure of the asset would be a threat to safety, the useful life of the asset, the reliability of the asset, whether the asset require immediate repairs, and the extent to which the asset may become obsolete. Under operational impact, the authority looked at how critical the asset was to the facility where it was located, the potential revenue impact of asset failure, and the asset's impact on customer service.

Authority vice chairman Scott Rechler said the plan heavily emphasizes the state of good repair of existing assets. The authority wants to make sure things are safe, he said. Authority Executive Director Patrick Foye said that 46% of the plan's spending is targeted at state of good repair projects.

The plan breaks down capital projects into aviation; tunnels, bridges and terminals; the Port Authority Trans-Hudson PATH rail transit line; port commerce; and World Trade Center redevelopment categories.

With $8 billion to be invested in the authority's airports, aviation is the biggest category. Within it, the most expensive project (and the most expensive capital project overall for the authority) is a $3.6 billion plan to build a new central terminal at LaGuardia Airport in Queens.

New York state has taken over the management of the project and expects to pick a private sector partner for a public-private partnership in the next five months.

An official under New York Gov. Andrew Cuomo has told The Bond Buyer said the Port Authority is too bureaucratic and slow-moving in its development of capital projects, and setting up a state committee to oversee the LaGuardia project will make the approval process go much quicker, he said.

The port authority plan also calls for a new $2 billion, 33-gate terminal at Newark Liberty Airport.

The plan would include $7.9 billion in capital spending on tunnels, bridges and terminals. Two of the three biggest projects are for New Jersey access to the Lincoln Tunnel to Manhattan, including a $1.8 billion Lincoln Tunnel Access program and a $1.4 billion Lincoln Tunnel Helix Replacement program to replace the Route 495 roadway approach.

Finally, there is a public-private partnership that is already working to replace the Goethals Bridge connecting Elizabeth, New Jersey and Staten Island, N.Y., at a cost in the next 10 years of $1.5 billion.

The plan would authorize $3.3 billion in capital spending for the PATH rail transit system between New Jersey and New York City. The biggest project would spend $1.5 billion to extend the system two miles from the current terminus at Newark Penn Station along the existing Amtrak corridor to the AirTrain station at Newark Airport.

The authority would also spend $1.5 billion on improvements to port commerce facilities. The biggest project would involve changes to Greenville Yards to serve the Global Container Terminal in Jersey City, N.J.

Finally, the plan would authorize $4.9 billion in spending on the redevelopment of the World Trade Center site. Of this total, 62% would be devoted to retail development and the site's common infrastructure.

Airline fees would cover the costs of the airport projects.

However, the PATH transit system requires subsidies that are covered by surpluses from bridge and tunnel operations, Manhattan Institute Searle Freedom Trust Fellow Nicole Gelinas said.

Total vehicular traffic at the bridges and tunnels has declined from 124 million in 2003 to 116 million in 2012. This was partly because there has been less driving in general in the region and partly because of increasing authority tolls, Gelinas said. Yet the authority already has toll hikes scheduled.

The authority's bridge and tunnel crossings collect tolls eastbound only, charging car drivers as much as $13 for cash tolls with discounts for E-Z Pass electronic debit device users. The declining traffic through its facilities raises questions about the authority's ability to cover capital improvements at PATH, Gelinas said.

If the authority adopts the plan it would not be committed to follow it. The authority would approve each capital project as it came up. The authority would monitor the progress of projects on a quarterly basis and make adjustments, it they made sense, authority staff said.

Top Of Page 

Morgan Stanley Eyes Top Spot With Boost From Retail Network

Tuesday, February 4, 2014
By Oliver Renick

When James Gorman was tapped as Morgan Stanley's chief executive officer in 2009, the company, like many others at the time, was in a transformational period.

With the intention of blazing a new post-crisis trail for the company, Gorman - who had led the firm's wealth management business - soon signed onto a joint venture with Citigroup that would give the two firms shared access to Smith Barney's massive retail brokerage.

At the time, the deal marked a step toward balance — an effort to steer the company away from reliance on risk-based revenues. Four years later, with the acquisition of Citi's shares in the rearview mirror, the strategic vision behind the paradigm shift is coming into sharper focus.

The full purchase of Citi's stake in the joint venture, completed in June 2013, presents an opportunity for Morgan Stanley's municipal underwriting team to leap ahead of its competitors. With access to more than 16,456 financial advisors, the firm now boasts the biggest exclusive brokerage in the country.

Pat Haskell, the head of Morgan's institutional muni business, declined to comment when asked if that sprawling network of retail investors is what Morgan Stanley needs to vault past its peers.

"It provides us the distribution capabilities equal to, if not better than, any of the top banks," he said.

But a look at the past decade's league tables tells a pretty clear story.

Year after year, Morgan Stanley has ranked around fourth among the top 10 municipal underwriters, as Bank of America, propelled by retail business after the purchase of Merrill Lynch, wedged a gap between itself and the trailing top five underwriters.

BofA led $45 billion of deals in 2013, followed by JP Morgan and Citi, who expanded their shares to $38.5 billion and $36.8 billion, respectively. Morgan Stanley brought in $20.6 billion.

Now with a brokerage arm that's bigger than league leader BofA Merrill Lynch's 15,316 advisors, it's clear that Morgan Stanley's eyes are on the prize.

"We're going to try and be better at munis in 2014," Haskell said in an interview at the firm's headquarters in midtown Manhattan. "We're going to add risk, we're going to add balance sheet, and we're going to add people."

Nearly 65% of municipal bonds go into retail hands, and for a full-service institution that both writes the bonds and sells them, having access to such a wide array of investors is an invaluable asset, according to Tom Dalpiaz of Granite Springs Management.

"It makes sense for an entity that has a large retail presence to have a very robust underwriting effort in municipal bonds," Dalpiaz, a managing director, said in an interview. "In the municipal business there is still a very large part of the market that is dominated by the retail investor."

Haskell was running the North America rates business for Morgan Stanley when he was asked by Michael Heaney, global co-head of fixed income, to lead the company's municipal effort after the purchase was complete.

It was understood from the onset that the interplay of municipals between the institutional securities business and wealth management would be a core part to the firm's post-financial crisis strategy.

"We plan on growing the municipal business aggressively," Haskell said. "I think it's going to be a time when firms are doing a lot of retrenching, both from a personnel and capital perspective. Alternatively, we are focused on growing our footprint in this business."

Haskell and Charlie Visconsi, co-head of public finance, plan to build the business by taking larger chunks of deals to retail, and offering a diversity of products to issuing clients, including providing direct lending when appropriate, and adding feet on the ground in high-profile municipal regions around the country.

"Morgan Stanley Bank now has deposits exceeding $100 billion," Visconsi said. "The bank needs to put that money to work. This provides an opportunity to offer commercial bank products to our issuer clients."

Putting that money to work through such a Goliath retail network could be an onerous task at the onset, said Tim McGregor, head of municipals at Northern Trust.

"They've been outstanding on the institutional side, and now they have the chance to parlay that on the retail side," McGregor said in an interview. "There's a bit of a learning curve to get retail traders on the same page as institutional traders."

Dealing with retail clients will mean a constant stream of inquiries that will need to be handled systematically, Dalpiaz said. Communication between research teams, bankers and advisors will be pivotal to a smooth operation.

"Focusing on operational issues will be key to success," Haskell said. "We have to integrate the strengths of the platform in order to make all our clients happy with access to our resources."

Morgan Stanley won't be the only firm with impressive retail roots. In December, Citi rebuilt its network through a deal with UBS Financial Services that provides access to 17,000 shared brokers. Wells Fargo has 15,280 advisors at its disposal.

The broadened retail base puts Morgan Stanley in a position to provide new services to each of its clients, Haskell and Visconsi said. For financial advisors, it means a selection of bonds from an array of issuers. For the issuers, it means providing access to capital regardless of market conditions.

"One of the ways to do that is to get bonds into retail hands and the other way is to expand the investor universe," Haskell said. "We think we're much better prepared than we were in the past to offer a variety of products to our issuing clients that we did not have available to us before."

Large mutual fund and hedge fund clients, whose massive string of outflows only recently slowed, may be less of a focus in the future for dealers like Morgan Stanley, according to Mike Pietronico, CEO of Miller Tabak Asset Management.

"We suspect the future of business is going to be more separately managed and individual accounts, versus mutual funds," Pietronico said in an interview. "With that in mind, having access to advisors managing individual accounts can only assist a broker-dealer."

Those SMAs have shown strong demand for bonds maturing in 5 to 10 years, in the intermediate part of the curve, as "ladder-based" investing strategies take hold in a bear market, Haskell said.

Building out the business will mean a wave of new region- and sector-based personnel additions as the firm looks to provide paper from major issuers like the state of California.

"The best real time metric to see how we're advancing our footprint is with volume, and in the last few months we continue to see stronger than average volume," Haskell said. "We expect it to continue to be much better as we add resources."

The firm brought on David Hammer, formerly of PIMCO, as head of secondary trading. Bankers have also recently been added in health care, student loan and higher education sectors, Haskell said.

By reaching into more of the market, Morgan Stanley's approach to retail has bolstered the company's earnings. Net revenue rose 9% to $14.5 billion in 2013, driven by gains in the wealth management sector.

With each deal like November's New Jersey Building Authority bonds, in which Morgan Stanley retailed $215 million of a $327.8 million deal, issuers such as the state's assistant treasurer Steven Petrecca are likely to come back for more.

"It's about tapping all or as many market segments as possible for a better price on the issue," Petrecca said. "They showed they were able to do a complex transaction from beginning to end, pared costs, and the state is very happy."

Top Of Page 

Muni Volume Perks Up Amid Coupon Reinvestment

Sunday, January 12, 2014
By Christine Albano

A $775 million New York City Transitional Finance Authority offering and a $468 million Minnesota state general fund appropriation bond sale will arrive in the primary market as investors decide how and where to reinvest Jan. 1 coupon payments and redemptions.

Given last week's skimpy new-issue calendar, a spotty secondary supply in certain states, a 6% drop in December's volume, and a strengthening of the market so far this year, the large new deals should garner attention.

"Unlike the early weeks of 2013, it can be said that 2014 opens up on a stronger footing for municipal bond demand as market yields have corrected higher - especially those further out the yield curve," said Michael Pietronico, president of Miller Tabak Asset Management.

According to Ipreo LLC and The Bond Buyer, an estimated $4.87 billion will enter the market this week on the heels of just $1.82 billion in the first full trading week of the New Year last week, according to Thomson Reuters.

"We see substantial interest developing for both New York and Massachusetts paper for deals pricing in the near term as the secondary market float for bonds from those states is rather anemic at the moment," Pietronico said.

The TFA's future tax secured subordinate bonds are slated to be priced for institutions by JPMorgan on Thursday following a two-day retail order period on Tuesday and Wednesday. The structure was not yet available, according to a source at the firm late Friday.

The bonds are rated Aa1 by Moody's Investors Service and triple-A by both Standard &Poor's and Fitch Ratings.

The Minnesota offering is expected to price on Tuesday following a retail order period on Monday by book-runner RBC Capital Markets. Rated AA by Standard & Poor's and Fitch, the bonds are secured by a continuous general fund appropriation for debt service for the life of the bonds, barring any legislative repeal.

The deal is comprised of $397.68 million of tax-exempt bonds in Series 2014 A and $70.25 million of taxable securities in Series 2014 B.

Adding to the primary volume, deals from Arizona, Florida, and California will also make an appearance.

A $292.29 million taxable offering is on tap from La Paz County, Ariz., Industrial Development Authority when Raymond James prices the senior lien project revenue bonds on Thursday. Structured as serial bonds maturing from 2014 to 2033, the bonds are rated BBB by Standard & Poor's.

The Jacksonville Electric Authority will issue $250 million of senior and subordinate electric system revenue bonds slated for pricing by RBC on Wednesday. The senior bonds are rated Aa2 by Moody's and AA-minus by Standard & Poor's, while the subordinate bonds are rated Aa3 by Moody's and A-plus by Standard & Poor's. Fitch rates both the senior and subordinate bonds AA.

In California, the city and county of San Francisco are preparing a $209.95 million sale of general obligation bonds for competitive pricing on Thursday with a serial structure maturing from 2014 to 2033.

Last week's largest deal was a $240 million Permanent University Fund offering from the University of Texas that was rated triple-A by all three rating agencies and was priced by JPMorgan with a 2041 bullet maturity at a 4.27% yield -- 14 basis points higher than the generic GO scale published by Municipal Market Data on the day of pricing.

On Friday, the 30-year generic triple-A GO scale in 2044 rallied compared with their taxable counterparts and ended down nine basis points at 4.01%, according to MMD. Despite the richness, 30-year municipal yields still offer more than 105% of the Treasury counterpart on a relative value basis, according to MMD.

"Miller Tabak Asset Management sees the early weeks of 2014 as being ripe with demand for tax-free bonds as investors are confronted with a stock market that is at multi-year highs and bank deposit accounts that yield next to zero," Pietronico said.

Top Of Page