The $1 billion sale of San Joaquin Hills Transportation Corridor Agency, Calif. bonds scheduled to price on Wednesday is the "hot" deal of the week, traders said Monday.
Investors predict the bonds will be generate demand because of the deal's "exotic" structure and low ratings. The deal is coming in two parts: series A, consisting of senior lien toll road refunding revenue bonds, and series B junior lien toll road refunding revenue bonds.
Series A is made up of current interest bonds, convertible capital appreciation bonds, and capital appreciation bonds, which are rated BBB-minus by both Standard & Poor's and Fitch Ratings. Series B consists solely of current interest bonds, which are rated BB-plus by S&P and Fitch.
"It's a unique transaction and certainly taking advantage of a strong primary market because it's a unique credit," a trader in Chicago said.
The deal will do well, he said, because it's a refunding that people who currently hold the bonds will participate in and because the ratings mean they will probably carry high yields.
"It's so hard to find any kind of yield in California, so we can see some folks reach for a little bit of yield," he said. Demand for the bonds "will depend on the scale, but the senior lien are investment grade, they're BBB-minus so high yield funds will like it. Every high yield fund will take a hard look because its large, its California, and its yield."
Inflows into high yield funds for the week ending Oct. 15 rose to $340.6 million, from $259.9 million the previous week, according to Lipper FMI. They increased even as inflows into municipal market funds dropped by 41.7% from the week before.
One of the looming questions, according to traders, is how much of the deal will be purchased by retail investors, who typically boost the performance of bond sales from municipalities in the high-tax Golden State. Market participants said the low ratings may be off-putting to some.
A trader in California said that there are some retail California investors who only purchase high grade bonds, but this deal is "interesting because people have some familiarity with it."
"I think it all depends on where its priced and what spread is going to be," he said. "But given the right kind of pricing with the right kind of spread, there will be some retail demand because we're seen so few issues at the lower end of investment grade that have come out."
The California trader said the ideal spread would be wider than that of the $97 million Kern County Tobacco Funding Corp. tobacco settlement asset-back refunding bonds Raymond James & Associates is expected to price on Tuesday. The bonds were rated BBB-plus by Fitch.
A second trader on the west coast said that he doesn't think tobacco and toll roads are going to be in the same vein.
Volume Surge
This week's jump in volume will boost the performance of deals priced in the primary, market participants said.
Traditionally high volume weeks concern issuers because a glut of bonds coming to market tends to dilute the performance of individual sales. This time, however, traders said that because volume came in lower than expected last week, the market is so hungry for bonds that the increase in volume will bring more attention to the primary and draw more investors interest in the deals.
Volume is expected to total $7.37 billion this week, up from $4.10 billion last week, according to data provided by The Bond Buyer and Ipreo. Investors originally expected $6.34 billion to come in last week.
Traders pointed to the success of the $305.87 million Delaware general obligation deal's retail order period on Monday as an example of how the increased volume this week is causing investors to pay more attention to the primary.
"We learned our lesson last week, you have to grab the stuff when it's available," a trader in New York said. "Delaware's a solid credit, a triple-A. But we're really drawn to it because everyone is buying anything that is available right now, and this week looks like it will be the time to go in."
Yields ranged on the bonds from 0.27% with a 2% coupon in 2016 to 3.08% with a 3% coupon in 2034.
"It's seeing pretty good interest," the trader in Chicago said.
Some of the bonds maturing from 2018 to 2024, and in 2028 and 2034 are not available for retail order. None of the bonds maturing from 2025 to 2027, and from 2030 to 2033 are available for retail order.
"It looks like those are going to be institutional ones, it looks like they will put a 5% coupon in for those other maturities tomorrow," the trader in Chicago said. "[The underwriters] took advantage of the retail demand in the market for a strong credit."
The bonds can be called at par in 2024, and earned triple-A ratings from the three major rating agencies.
Scales
The municipal market sold off Monday morning, after tightening most of last week. Yields for bonds maturing in six years rose by two basis points, according to Municipal Market Data's triple-A scale. They increased by three basis points for bonds maturing in seven to eight years, by four basis points for bonds maturing in nine years, by five basis points for bonds maturing in 10 to 18 years, and by four basis points for bonds maturing in 19 to 30 years.
Treasuries strengthened, with the two-year note yield declining by three basis points to 0.36% from Friday. The 10-year yield dropped by three basis points to 2.19%, and the 30-year by two basis points to 2.96%.
