California's $980 million general obligation bond sale on Wednesday will dwarf all other deals in the primary market next week, as the state looks to capture lower yield spreads for a second time this year.
While still burdened with a large deficit, Gov. Arnold Schwarzenegger last year averted a liquidity crisis in the state by encouraging voters to authorize $15 billion in debt issuance.
The market has warmed to the state's credit, as 10-year California GO bonds were trading at yields of 4.07% on Thursday, a 23 basis point spread to the triple-A rated GO benchmark, according to Municipal Market Data. That is down considerably from the 85 basis point spread the bonds were trading in July 2003, the highest level the bonds have traded at since MMD began tracking the data just over 10 years ago.
"I think the credit concerns of the state are behind us," said Dean Gestal, a managing director at Stone & Youngberg LLC in San Francisco. "All the accounts we talk to are very comfortable with the credit."
Retail demand has softened in recent weeks, according to Gestal. But he said the California GO deal can expect "tremendous" demand from institutional investors, who were buyers of a California Public Works Board deal his firm priced last week.
Stone & Youngberg received just short of $1 billion in orders for the $270 million in Public Works Board bonds, and had to bump prices higher, Gestal said. The bonds were rated Baa1 by Moody's Investors Service, A-minus by Standard & Poor's, and BBB-plus by Fitch Ratings.
Uninsured PWB bonds maturing in 10-years with 5% coupons were priced to yield 3.77% on Monday, nine basis points lower than MMD's 10-year triple-A benchmark. The deal saw strong demand from insurance companies, hedge funds, and mutual funds, all of whom Gestal suspects will be looking to participate in Wednesday's GO sale.
California-specific municipal bond mutual funds that report on a weekly basis have suffered from outflows during four of the past five weeks, according to AMG Data Services. The category reported an outflow of $14.05 million during the week ended March 30, the Arcata, Calif.-based fund tracker reported.
The Golden State is currently rated A by Standard & Poor's, A3 by Moody's, and A-minus by Fitch. Public Resources Advisory Group is serving as the state's financial adviser on the competitive sale.
State officials could not be reached last week for details about how the deal would be structured.
In February, the state sold $953 million in California GOs, in which uninsured 10-year bonds with 5% coupons were priced to yield 3.68%, which was 20 basis points higher than the 10-year MMD triple-A GO scale.
Issuance in California during the first quarter totaled $11.61 billion, which was up 8.2% from the first quarter of 2004.
Pennsylvania will also see a supply uptick this week as the Allegheny Sanitary Authority and Pittsburgh each sell bond deals.
The Sanitary Authority deal, which will sell Thursday and be insured MBIA Insurance Corp., will be total between $280 million and $300 million. The bonds will be structured in serial maturities running from 2005 through 2025 with a term bond in 2030, and be callable after 2015.
The authority will be the second issuer to utilize the Demand Seeker electronic retail distribution system offered by the Pittsburgh-based PriMuni.
Bill Inks, director of finance and administration at the Sanitary Authority, said he hopes the system will increase retail participation and lower borrowing costs. The Pittsburgh Public Parking Authority, the first issuer to use the technology in January, estimated that it saved $19,000 by using PriMuni.
While the market was sluggish for much of last week, the Sanitation Authority deal should benefit from the lack of supply in Pennsylvania, according to Paul Kuhns, a managing director of underwriting at Merrill Lynch & Co.
"Things should settle in based on this employment number being out of the way," Kuhns said, referring to the release of lower than expected non-farm payroll numbers on Friday.
Meanwhile, on tomorrow Pittsburgh will sell $230 million of GOs that are expected to be insured. An official at Lehman Brothers on Friday said the insurer had not been determined yet.
Last year, Pennsylvania lawmakers passed a bill overhauling the city's tax code, adding a new taxes for payroll preparation and emergency municipal services, after Pittsburgh officials voiced concerns the city would run out of cash. The city carries underlying ratings of Baa3 from Moody's, BBB-minus from Standard & Poor's, and BBB from Fitch.
Today, King County, Wash., will competitively sell $200 million of limited-tax GOs to fund sewer improvements. The debt will carry an additional pledge of revenues from the county's sewer system. The bonds are rated AA-plus by Standard & Poor's and Aa1 by Moody's. Fitch is not rating the deal.
Seattle-Northwest Securities Corp. and Hattori & Associates are serving as financial advisers for the county on the sale.
A $296 million Nevada limited-tax GO deal is listed on this week's Dalcomp negotiated calendar. An official at Lehman said that the sale may not occur, and is contingent on interest rates. Nevada is rated double-A by Standard and Poor's, Aa2 by Moody's, and AA-plus by Fitch.
