The muni market's seemingly insatiable appetite for high-yield bonds is to be tested this week by a $1.15 billion debt sale for a tire factory in Oklahoma.
A local agency called the Salina Economic Development Authority, charged with spurring economic growth in Oklahoma, is borrowing the debt to build and equip the plant. The factory will be managed by American Tire Works — an offshoot of a company domiciled in Finland. ATW is working with Black Donuts Inc., a Finnish consulting and
The bonds are unrated and will be sold only to qualified investors, features that indicate a high degree of risk. The debt is backed primarily by revenues derived from the operation of the plant. Interested buyers will have to weigh the credit concerns with what is slated to be a juicy yield. Roadshow documents modeled debt with an 8% coupon and a 8.46% tax-free yield.
"Anytime you get a deal of this size, over $1 billion, it's going to be a test," said Chad Farrington, co-head of the municipal bond group at DWS Group. He also said prospective buyers will have to weigh recent market volatility. Some top-rated benchmark muni yields are roughly 30 basis points higher than where they started the month as concerns over economic conditions lowered prices.
The deal's size could make it attractive to investors, especially given the steady demand for high-yield debt, Farrington added. With limited supply of large high-yield deals outside of a transaction for the private California-to-Las Vegas
"It's all going to come down to all these investors' tolerance for this kind of credit," Farrington said.
High-yield municipal bonds have outperformed investment-grade debt by about 0.65 percentage point so far this year. And risker transactions have done well, supported by strong inflows into high-yield funds.
"Even with the recent rate volatility, many new deals are being sold with reduced yields at final pricing," Nuveen said in a report on March 17.
Pricing for the American Tire Works deal is expected around March 26, according to a spokesperson from HilltopSecurities, the bank underwriting the sale. Initial roadshow documents included an expected pricing date a week earlier. Often the sale dates for such large, high-yield transactions are fluid.
The debt is being issued through the Public Finance Authority, a Wisconsin-based conduit that often sells municipal bonds on behalf of private entities around the country.
Private companies can gain access to the tax-exempt state and local government debt market for qualified projects that derive a public benefit. In this case, the factory will create 500 new full-time jobs and is expected to manufacture 4.3 million American-made tires each year. The focus will be on replacing tires for sports-utility vehicles and light trucks.
Representatives for the company did not respond to a request seeking comment on the bond sale.
