The municipal bond market's sell-off on Wednesday forced the $99.68 million La Porte Independent School District deal to come to market with its bonds on the long end featuring 4% coupons.
"We were originally premarketing with 5% coupon, and we went to a 4% structure" for bonds maturing in 2025 and later, a source with knowledge of the deal said in an interview. "On the term bond in 2039 [that carries a 5% coupon], we had to collapse the 2035 to 2039 maturities into a term structure."
First Southwest priced the unlimited tax school building bonds with yields ranging from 0.30% with a 3% coupon in 2016 to 3.13% with a 5% coupon in 2039. The 2039 maturity is the only maturity past 2025 with a 5% coupon.
The source said increasing yields across the Municipal Market Data curve prompted the decision to change the coupons on the long end of the deal.
"The La Porte deal had to adjust the structure of its yields because of the MMD scale over the day," he said. "Most deals in the market had to make price adjustments."
The muni yield increase was mostly experienced on the long end of the curve, with yields for bonds maturing in 14 to 30 years rising by five basis points, according to MMD's triple-A scale. Bonds maturing in nine to 13 years yields increased by four basis points, by three basis points for bonds maturing in seven to eight years, by two basis points for four to six year maturities, and by one basis point for three year maturities. The front end of the curve held steady.
Municipal Market Advisors reported that the two-year municipal bond held steady on Wednesday at 0.30%, the 10-year's yield increased by three basis points to 2.11%, and the 30-year's also increased by three basis points to 3.26%.
The source said the sell-off was a reaction to a spike in Treasury yields that started Tuesday.
"The Treasury market was off and then came back today, but the municipal market did not come back," he said. "[The muni market] was in bad shape all day."
Treasuries began selling off on Tuesday after the ISM Manufacturing Index report showed its composite index rose 1.8 points to 57.1 in July, the best reading since April 2011.
The 30-year Treasury's yield rose by 11 basis points on Tuesday, the 10-year's increased by nine basis points, and the two-year note by five basis points. The 30-year and the 10-year Treasuries continued selling off on Wednesday morning, but started to recover by Wednesday afternoon after Russia's President Vladimir Putin outlined a cease-fire plan following a discussion with a Ukraine leader, market participants said.
The 30-year Treasury yield declined by three basis points from the morning to 3.15%, and the 10-year by two basis points during the same period to 2.41%. The two-year note held steady at 0.53%.
The La Porte ISD deal did well despite the coupon adjustments, according to traders. A trader in Virginia said he heard the bonds were getting plenty of demand, and the deal went very well.
"La Porte is a more traditional deal, it's not Houston but still a suburb of Houston, and it's still in the Deer Park area which is a good area," he said. "The bonds also have the Public School Fund guarantee."
The bonds are rated triple-A by Moody's Investors Service and Standard & Poor's with underlying ratings of Aa2 and AA from the two rating agencies, respectively.
There is a sealed bid on the 2015 maturity, and the bonds can be called at par in 2024. The deal was originally scheduled at $110 million, but was decreased to $99.69 million and then $99.68 million over the course of the day, according to Thomson Reuters.
The source with knowledge of the deal said retail mostly bought maturities under 10 years, and that institutional buyers bought the longer bonds.
Even with the adjustments, the trader in Virginia noted, the 2039 maturity's 115.77 price was high.
"If the 5% triple-A start coming in 125 or higher, there will be some pushback," he said.
The Florida Board of Education's $220.5 million of general obligation public education capital outlay refunding bonds were also sold with below 5% coupons on the deal's longer maturities.
Maturities from 2026 to the issuance's final l2035 maturity all came with 4% coupons, except for the 2029 and 2031 maturities, which had 3% coupons.
JPMorgan won the bid for the deal, with yields on the bonds ranging from 0.15% with a 2% coupon in 2015 to 3.30% with a 4% coupon in 2035. The 2017 to 2025 maturities were all wrapped with 5% coupons.
A spokesman for J.P. Morgan didn't respond to calls about whether the muni selloff bonds was a factor in setting the coupons.
The $350 million Houston Independent School District's variable rate limited tax schoolhouse bonds were priced by Morgan Stanley with a 270 day soft put, a source with knowledge of the deal said.
The bonds have a single maturity in 2039 with a 0.30% yield and a 1% coupon. The mandatory tender date on the bonds is June 1, 2015.
The deal has a sinking fund on a term bond in 2039.
