Puerto Rico debt trading picked up in the secondary market Tuesday, indicating to some market observers that calm before the storm may be ending soon.
Puerto Rico Electric Power Authority (PREPA) 5s in 2042 volumes exploded on Tuesday, increasing more than sevenfold to $23.03 million from just $3.28 million on Monday, according to data provided by Markit. Yields on the tranche weakened to 10.882% Tuesday from 10.855% on Monday, though most traders have been more interested in PREPAs price, which slipped to 48.75 from 48.875 in the same time frame, according to Municipal Securities Rulemaking Board's website EMMA.
"What's most curious about the trading is the timing," noted a New York based trader. "It's coming down to a matter of days before [the letter of credit expiration] which is what will really determine what's going on down there."
Because of the looming deadline, the spike in trading may indicate that information surrounding the bank negotiations is getting leaked to certain market players, traders said. A bulk of the trading came from hedge funds looking to buy up the island's debt, a second New York trader said.
"It looks like some people know things that the rest of the market doesn't," he said.
Even trading on PREPAs Build America Bonds, a taxable offering, spiked on Tuesday. Volumes shot up to $10.9 million in secondary trading on Tuesday from just $420,000 on Monday, according to EMMA. Yields subsequently fell to 13.422% from 14.22% as prices inched up to 47.5 from 44.672, according to EMMA.
While PREPA is the only entity with the deadline rapidly approaching, the island's policy of comingling funds between unpaid receivables and PILOTs (payment in lieu of taxes) have made the enterprises irrevocably intertwined, said a New York based trader. The tangled relationship between the public corporations have made dreams of truly ring fencing any entity, especially PREPA, seem impossible, continued the trader.
The pickup in volume wasn't limited to PREPA. The commonwealth's general obligation 8s in 2035 saw continued heavy trading, with yields inching up to 9.089% on Tuesday from 9.034% the day before, according to Markit. Another tranche of Puerto Rico's GO 6.5s in 2040 saw a $5 million trade on Tuesday, the first since July 25th, that drove yields down to 8.759% from 9.388%.
Puerto Rico's sales tax financing corporation bonds experiences a second day of round lot trading, with yields on its 6s in 2042 rising to 8.299% on Tuesday from 8.078% on Monday.
The rest of the secondary market, however, was largely quiet and mixed, both New York based traders agreed. Yields on the commonwealth of Pennsylvania GOs 5s in 2022 strengthened to 2.24% from 2.27%, while yields on the New Jersey State Turnpike Authority's 5s in 2038 softened to 3.75% from 3.73%, according to Markit.
The market was steady across the curve on Tuesday, with the 10-year benchmark closing at 4.482%, according Municipal Market Data's triple-A scale.
According to the Municipal Market Advisor's 5% triple-A scale, 30-year and two year note yieldswere unchanged at 3.42% and .31% respectively, while the 10-year benchmark yield rose one basis point to 2.24%.
TOBACCO DEAL IN THE ASHTRAY
Trading in the primary market was sluggish, thanks in part to the delay of a Rhode Island Tobacco Settlement Financing Authority sale. The nearly $600 million issuance was set to be the week's largest negotiated deal and slated to price on Tuesday. Citigroup, the lead manager, pulled the deal, making it day-to-day as two Oppenheimer Rochester funds challenged the bond deal in a Rhode Island state court.
Market sources said Oppenheimer's objection probably stemmed from the seniority shuffle. Proceeds of the deal were intended to to entirely refund the state's Series 2002 tobacco bonds and partially refund its Series 2007 tobacco bonds, which are subordinate to the 2002 bonds. After the Series 2014 bonds are placed, they would have been effectively senior to the 2007 bonds, analysts said.
However, a $20 million payment to the state was probably the source of Oppenheimer's concern agreed traders.
"The state is collecting a chunk of money on the back of this deal and the 2007 holders, or Oppenheimer, are saying that 'yes, we're subordinate, but those state allocated funds should have been allocated towards our repayment first,'" a New York based analyst said.
At the end of day Tuesday the deal hadn't come to market and traders didn't expect the debt to place until late this week or early next.
AN OVER CONFIDENT PRIMARY
What remained in Tuesday's primary was a handful of smaller regional deals, most of which were oversubscribed and bid on aggressively. The one exception was the Economic Development Authority of Culpeper County issue. The Virginia competitive deal was priced aggressively, only to find unsold balances in the deal's intermediate maturities, said a New York based trader. Robert Baird won the bid for $51.415 million of lease revenue refunding bonds, with yields ranging from 0.3% on a 4% coupon in 2015, to 3.55% on a 3.5% coupon in 2032, according to data provided by Bloomberg.
Unsold balances occurred in the 2024, 2025 and 2026 year maturities, according to both traders.
Both traders were confident the balance would sell within a couple of days, noting the softness of the Treasury market probably hurt pricing. Treasuries were unchanged from Monday's market close on the short end of the yield curve up to the five year. The 10-year benchmark slide down one basis point in yield to 2.14% and the 30-year yield was down two basis points to 3.28%.
The rest of Tuesday's primary offerings, however, placed successfully, including the $573.6 million University of Chicago negotiated deal which was priced to yield 1.43% on a 5% coupon in 2019, to 3.60% on a 5% coupon in 2038, according to data provided by Ipero.
The deal was rated AA plus by Fitch Ratings, AA with a negative outlook by Standard & Poor's, and Aa2 by Moody's Investor Services.
"[University of Chicago] was kicked down in ratings recently, but we think its still fundamentally a very strong credit," the first New York based trader said.
