Municipal bond demand is helping the New York City Transitional Finance Authority to find a market for its $675 million of revenue multimodal bonds with a mandatory tender feature.
In a mandatory tender the bondholder puts the bond back to the issuer, whereby the issuer needs to either remarket the bond back out with a similar mandatory tender term with a new rate, fix it out to maturity or, in the case of a highly liquid issuer, hold on their balance sheet until they plan on remarketing again.
The NYC TFA bonds, which were in their second day of retail order Tuesday, carry a mandatory tender on or after Aug. 1, 2024.
"[The Multimodal bond structure] is not typical, and the key to this is they have a mandatory tender," a trader in New York said. "This adds some measure of concern because the mandatory tender benefits the issuer, and the customer might feel like this is somewhat of an issue. But this does not seem to be affecting the NYC TFA bonds' retail sale."
Under a multi-mode structure, the issuer has a few different options for how they facilitate this remarket and in to what mode and term. At the mandatory tender date, the bondholder no longer owns the bond unless they've repurchased it during the remarketing period. Mandatory tenders are a nice way for a large, semi-liquid issuer to play the short-term yield curve.
While this benefits the issuer, the market still prices the bond to the tender date.
The NYC TFA bonds were priced by Morgan Stanley on Monday for retail order with yields ranging from 0.66% with a 4% coupon in 2017 to par with a 4% coupon in 2039. The 2028 and 2029, 2031 to 2033, and 2035 to 2038 maturities weren't available for retail order.
The bonds pricing didn't change during the second day of retail order.
"The bonds had a very good showing yesterday with $263 million in retail orders," the trader said, "I have not gotten any indication that the multimodal aspect of the deal has affected the sale." He predicted the NYC TFA would end up with a "decent book" before the bonds enter their institutional sale on Wednesday.
They received an Aa1 rating from Moody's Investors Service and a triple-A rating from both Standard & Poor's and Fitch Ratings.
"Retail was still interested in the bonds the second day," a trader in Chicago said. "The first day always has the biggest showing, of course, but there was still interest. No one was really put off by the mandatory tender."
The trader in New York does not expect the unusual model to impact the bonds' institutional sale either.
The largest deal of the week, the $1.4 billion issue of San Francisco Bay Area Toll Authority revenue bonds, also received a good deal of attention on Tuesday. Investors said that their pricing has set the bar for the rest of the deals coming to market this week.
The $1.2 billion chunk of the two-part deal came in three series all maturing in 2047 and priced at par.
The $247.8 million portion yields 1.00%, with a mandatory tender date of April 3, 2017. Of this part, $123.9 million is available to institutions, and these bonds have an optional call at par in 2016.
The $552.6 million series was priced to yield 1.5%. There is a mandatory tender date on April 2, 2018. Of this section, $276.3 million is available to institutional buyers and the bonds have an optional call in 2017 at par.
The final $402.5 million part yields 1.875% with a mandatory tender date on April 1, 2019. A $201.3 million part of this series is available for institutional sale, and the bonds have an optional call in 2018.
The second part of the deal, $200 million, had one maturity in 2054 and was priced to yield 4% with a 5% coupon. The bonds have an optional call at par in 2024.
Bank of America Merrill Lynch was the lead underwriter for the entire deal.
The bonds carry ratings of Aa3 from Moody's, AA from S&P and AA-minus from Fitch.
"The market had some weakness last week due to the Puerto Rico troubles," a trader in New York said. "Deals that came yesterday were priced with a bit of a wide spread because of that. But yields barely moved yesterday, and looked stable this morning so this pricing is right on the dot."
Yields on benchmark municipal bonds rose across the curve for three days straight last week, driven by bonds from Puerto Rico and the commonwealth's various organizations and authorities selling off following credit downgrades from the three major rating agencies.
On Tuesday, yields were steady on the short end of the curve and fell one basis point for maturities from 2019 to 2014, according to Municipal Market Data's triple-A scale. Yields were steady to lower according to Municipal Market Advisors, with the two year and 10-year holding at 0.32% and 2.34% and the 30-year yield dipping one basis point to 3.50%. "Issuances the rest of the week will probably come a bit more aggressively than ones sold on Monday," the trader in New York said.
The BATA deal appeals to investors because it offers buyers a place to park their cash for the short-term.
"The Bay Area Toll Authority deal is a put deal, so it will be short, and there has not been enough short California lately so it will do well," the trader in Florida said.
A trader in Dallas also said the BATA bonds will receive demand because the structure is "unique" for such a large deal.
"You see the structure down in Texas on some school district bonds, but don't see it in the general market much," he said. "And Bay Area Toll Authority is a good name, so it will get attention. Bay Area Toll Authority has never come with that structure before."
Morgan Stanley priced $250 million of Kansas Department of Transportation revenue bonds to yield from 2.54% in 2025 to 2.96% in 2030. The coupon on all maturities is 5%. The deal is rated Aa2 by Moody's and AA-plus by Fitch.
Treasuries mostly weakened Tuesday, with the two-year note climbing two basis points to 0.49% and the 30-year yields inching up one basis point to 0.49%. The 10-year benchmark was unchanged at 2.55% from Monday's market close.
