(Jan. 19, 2012) -- January hasn’t exactly started with a bang in terms of new issuance of municipal bonds, though that isn’t unusual for market. We are re-starting our weekly previews a bit early for next week just to highlight a deal or two. The Alameda County Water District Financing Authority plans to take bids from underwriters next Tuesday (January 24) on $40 million of water system revenue bonds. The deal is worth mentioning because of higher credit ratings, with an Aa2 from Moody’s Investors Service and a triple-A from Standard & Poor’s. On the same day, the Tahoe Truckee Unified School District plans to sell $13 million of general obligation refunding bonds through competitive bids (for School Facilities Improvement District No. 2). S&P rates the bonds double-A. In negotiated sales next week, we expect the San Jose-Evergreen Community College District will sell $70 million of general obligation bonds to finance various capital projects. Voters approved a new G.O. authorization in November 2010 and this sale kicks off issuance stemming from that election. A Series B general obligation bond, estimated at around $20 million, will finance a technology/deferred maintenance endowment, according to documents approved by the district’s trustees at a January 10 meeting. A handful of other deals are expected next week and we will preview them separately.
(Jan. 13, 2012) -- The good old-fashioned January rally is back in the municipal bond market. Certain “generic” tax-exempt yields as measured by indices fell to 1967 levels this week. Our regular updates on various market events will return after the January 16 holiday. We haven’t provided updates during the first couple weeks of the year because of hopes a somewhat revamped Web site would be up and running. That is going to take a couple more weeks, so we will simply resume updates in the current format until the changes are ready to go. Various deals are starting to price again. The Lynwood Unified School District priced $15 million of general obligation bonds this week with an A-minus and A2 rating. Assured Guaranty Municipal insured the bonds. The August 2017 maturity yielded 2.16% and the August 2022 maturity, 3.34%. The August 2027 maturity yielded an even 4.00%.
(Jan. 4, 2012) -- This is a somewhat quieter week in the market. A regular number of updates will begin again during the week of January 9th. It should be noted that year-end statistics are in for 2011. New sales of municipal bonds dropped in 2011 to the lowest level since 2001. Across the U.S., new sales dropped by almost one-third last year compared with 2010, according to statistics compiled by Thomson Reuters. Of course, 2010 volume was distorted by a rush to sell taxable Build America Bonds before that federal giveaway expired. California volume was down by almost 39%, going from roughly $61 billion in 2010 to a little above $37 billion in 2011, according to Thomson Reuters. New-money deals dropped by about 45% across the U.S. 2011, while refunding bond sales dropped by only about 7%. If it wasn’t for refinancing activity, reflecting low interest rates, the 2011 volume totals would have looked a lot worse.
(Dec. 20, 2011) -- We didn’t run our usual preview of this week’s planned bond sales because the calendar is so light ahead of the Christmas to New Year’s Day break. This week’s handful of sales include an $8 million general obligation bond from the Robla School District (Sacramento). The rating is single-A. Also, Brentwood financing authority is selling $25 million of capital improvement refunding bonds. They are rated A-minus. A Rancho Cucamonga finance authority is selling $18 million of unrated Mello-Roos bonds to refinance existing debt. Other deals might price as well but in general it will be a slow week.
(Dec. 16, 2011) -- A few months ago we mentioned that the troubled City of Bell was looking at ways to address its general obligation bonds. Bell was involved in a scandal over gigantic city salaries and the well-publicized mess ended up resulting in new City Council members and various reforms. This week the city decided on a course of action for a general obligation bond “workout” plan. The term “workout” can scare bond investors because it might imply some sort of changes to payments. In this case, however, the “workout” refers to the fact that Bell wants to avoid large tax increases to cover future G.O. bond payments. The city isn’t trying to escape its G.O. obligations (and couldn’t if it tried, in our view). Rather, city officials want to find a way to meet G.O. payments without burdening taxpayers. Bell issued about $50 million of G.O. bonds in 2004 and 2007. However, more than $20 million of those proceeds remain unexpended. This week, based on the agenda item, Bell decided to try two strategies. First, it will use the unexpended proceeds to launch a voluntary tender offer for existing bonds. Second, to the extent the tender doesn’t bring in enough bonds, Bell will defease some of the existing debt. In either case, the city will avoid a property tax increase of 70% to cover G.O. bond payment and instead be able to either lower taxes or require a much smaller increase. The city expects that a combination of the two approaches will be the end result (a tender and defeasance). Bell also looked at refunding the existing bonds. The city was concerned, however, that it wouldn’t save money because the market would require an interest-rate premium in response to the city’s well-publicized problems. The defeasance, which involves placing money in an escrow until the bonds can be called, involves various factors the city is weighing. It will be a good step in 2012 for Bell to get this plan accomplished and it will add to evidence that the city is doing the right thing on behalf of both investors and local taxpayers.
(Dec. 12, 2011) -- California’s bond market doesn’t seem poised to see many new bond sales this week, at least compared with a post-Thanksgiving jump. Today (December 12) will see a benchmark deal of sorts, as Pasadena takes competitive bids on a $26 million water revenue refunding bond. We call it a “benchmark” because of solid credit ratings (AA and AA+). On Wednesday, December 14, the Kentfield School District is taking bids on $9 million of AA general obligation bonds. Other pricings expected this week include the Robla School District (Sacramento) with an $8 million G.O. bond sale; it is rated single-A. An Upland financing authority plans to sell about $12 million of water revenue bonds with an AA-minus rating; bond insurance is a possibility. A Puerto Rico port deal with triple-B ratings is expected to price this week. The deal, tax-exempt for California residents, includes both non-AMT and AMT bonds and a taxable portion. We believe Puerto Rico has another subordinate sales tax revenue bond looming, but we need to make sure we aren’t confusing it with sales tax deals already sold in recent weeks. Other deals could price this week but that is a quick overview of a handful that are expected.
(Dec. 7, 2011) -- Mill Valley’s preliminary official statement for a $4 million certificate of participation sale (Community Center Refinancing Projects) caught our attention a few days ago. Why? Well, in addition to the high AA+ Standard & Poor’s underlying rating for the COPs, the deal also included bond insurance from Assured Guaranty Municipal. At the time, when the initial prospectus was released, Assured Guaranty’s rating was AA+ from S&P and on CreditWatch negative. Since then Assured Guaranty Municipal’s rating was lowered to AA-minus by S&P. Even with that downgrade, however, yesterday’s pricing through competitive bids still included the backing from Assured Guaranty Municipal. That’s a twist you don’t see every day. The COPs, on the city’s own strength, are rated AA+. The bond insurance to back the COPs is rated two notches lower, at AA-minus. Usually bond insurance is used to raise the rating on a lower-rated security (such as a single-A underlying bond). It is also unusual to see a AA+ security use bond insurance in the first place. Maybe it just made sense because investors aren’t as keen on COPs as on other bonds, such as general obligations. Or maybe there was some other factor in this case where the bond insurance made sense for the competitively-bid deal. The five-year COP with a 3% coupon was priced to yield a tax-exempt 1.50%. The 10-year maturity yielded 2.75%. The 15-year maturity yielded 3.75% and the 20-year, 4.25%.
(Dec. 5, 2011) -- The new-issue sales calendar for the week of December 5th includes one larger sale and a mix of smaller deals, at least so far. The Sutter Health $355 million revenue bond sale (Aa3 and AA-minus) we mentioned the other day (Bond Updates, December 1) should price this week. The Imperial Irrigation District plans to sell $23 million electric system revenue bonds. They are rated A1 and AA-minus. The Nevada Joint Union High School District plans a small general obligation bond sale with an Aa2 rating. The Shasta-Tehama Community College District plans to offer G.O. bonds with Aa2 and A+ ratings. City of San Diego C.F.D. special tax bonds are lined up for the Santaluz area. The $53 million of refunding bonds carry a BBB+ rating from Standard & Poor’s. Lease revenue bonds tied to Los Angeles County will sell through competitive bids on Tuesday (December 6). The $59 million deal is rated A2 and A+. On the same day, Mill Valley will offer a small certificate of participation deal that is rated one notch below triple-A (AA+) by S&P. Puerto Rico is selling $400 million of lease rental bonds with Baa2 and BBB- ratings.
(Dec. 1, 2011) -- Assured Guaranty Municipal Corp. and Assured Guaranty Corp., the main active players in municipal bond insurance, kept their double-A ratings after a downgrade from Standard & Poor’s. Both companies fell two notches, to AA-minus from AA+. The downgrade late yesterday had been widely expected after S&P earlier this year published new stricter criteria for rating financial guarantee companies. Assured Guaranty had indicated a few weeks ago that it expected to stay in the double-A category. The outcome was a victory of sorts for Assured Guaranty. There were concerns, when the new S&P standards were first circulated for comment, that Assured Guaranty might get downgraded to a single-A level, making it more difficult to land new business. “This rating action is solely based on S&P’s new criteria for rating financial guaranty companies, as to which we have previously registered our concerns,” Dominic Frederico, president and chief executive officer of parent company Assured Guaranty Ltd., said. “Despite the higher capital standards, Assured Guaranty has maintained its ratings in the AA category by continuing to execute its capital enhancement strategies.” Assured Guaranty Municipal is by far more active in the tax-exempt market, in part because it has limited risk by insuring safer muni bonds rather than including other riskier classes of debt. Other bond insurers pursued a similar strategy in the 1980s when they landed triple-A ratings; a handful of years ago, however, they suffered downgrades after diversifying into riskier business (such as mortgage-related exposure) that didn’t hold up during the financial crisis. S&P cited a “strong competitive position and strong capital” as reasons for the AA-minus rating under the updated bond insurance criteria. The downgrade reflects “largest obligor concentrations” which play a bigger factor in the new criteria. “The stable outlook reflects our expectation that the companies will continue to insure predominately investment-grade U.S. public finance business and maintain their relatively strong competitive position in the financial guarantee market with a strong market presence and a strong distribution channel,” S&P said.
(Nov. 30, 2011) -- An upcoming California Supreme Court decision on new laws affecting redevelopment agencies might not impact most of the tax allocation bonds graded by Fitch Ratings. “If upheld, the legislation could have a significant impact on the future of redevelopment in California, but Fitch Ratings does not believe it will affect most of its ratings on tax allocation bonds (TABs) issued” by redevelopment agencies, the rating agency said. The court could take various actions in regard to two bills being reviewed after legal challenges. One bill eliminates redevelopment agencies; another bill lets an agency stay in existence if it makes higher annual payments to benefit other public entities. “The legislation presents some ambiguity about the flow of funds from county auditor-controllers to bondholders,” Fitch said. “However, Fitch does not believe it was the state legislature’s intent to interfere with the flow of pledged revenue to bondholders. Therefore Fitch believes there is strong incentive for the state legislature to clarify the language to assure that payments flow as specified by the bond indentures created when the debt was offered.” Even if the legislature helps with clarifying legislation, existing redevelopment bonds will face other ongoing challenges due to a slower real estate market. Pressures on tax allocation bond ratings “have increased in recent years due to economic and management factors such as increased leverage, and Fitch expects continued negative rating action due to such pressures,” the rating agency said.
(Nov. 29, 2011) -- The Southern California Logistics Airport Authority said in a disclosure document last week that debt service reserve funds will be used to help cover $10.6 million of debt service payments coming due on December 1 on seven separate non-housing tax allocation bonds. The authority said it is blocked from using internal short-term borrowing that was used in the past to cover payments while awaiting certain funding distribution. The authority cited the uncertainty surrounding a California Supreme Court decision on new redevelopment laws. Many redevelopment activities are frozen pending the decision. The authority said it “should receive adequate funding from property taxes to replenish the reserve accounts during this fiscal year.” However, “uncertainty regarding the outcome of the California Supreme Court decision prevents definitive time estimates.” The airport authority’s redevelopment bonds have been in the news before because they already face various stresses from a slower real estate market in the region around Victorville.
(Nov. 23, 2011) -- For investors wanting to put money to work after the Thanksgiving break, several opportunities will loom during the week of November 28th, including a handful of deals with single-A ratings. Puerto Rico, which can sell municipal bonds exempt from state and federal income tax across the U.S., is lining up a $1 billion sale next week. The Puerto Rico Sales Tax Financing Corp. is selling the senior sales tax revenue bonds. The dedicated sales tax backing gives the bonds higher ratings (Fitch, for example, at AA-minus and Moody's at Aa2) than Puerto Rico’s own general obligation bonds, which fall in the triple-B category. In-state California issuers also have deals planned next week. San Jose expects to price $45 million of airport revenue bonds with A2 and A-minus ratings. Yields will be juicier because of those ratings. A much bigger chunk of the San Jose sale will involve taxable bonds. The California Health Facilities Financing Authority plans $148 million in revenue refunding bonds for Cedars-Sinai Medical Center (A2 and Fitch, A+). The California Department of Veterans Affairs plans to price $173 million of home mortgage revenue bonds with Aa3, AA, and AA-minus ratings. A small part of the deal will include bonds subject to the federal alternative minimum tax. The California Municipal Finance Authority will sell $55 million of bonds on behalf of Emerson College. We discussed this Baa1 and BBB+ deal at length on November 18 (Research page). Two issuers are taking competitive bids from underwriters on November 30 bond sales. A Nevada Irrigation District financing authority is selling $27 million of revenue bonds (rated AA+ and AA) and the Chula Vista Elementary School District will take bids on $25 million of certificates of participation (rated A+ and they might include Assured Guaranty Municipal bond insurance). The Gateway Unified School District in Redding expects to price $8 million of single-A general obligation refunding bonds. The Concord-based Mount Diablo Unified School District, which serves a few east San Francisco Bay area communities, plans to sell $30 million of G.O. refunding bonds with an Aa3 rating. A handful of special tax Mello-Roos bond sales also are expected to price next week. Also, the Los Angeles County Capital Asset Leasing Corp. has a preliminary official statement out for a $59 million lease revenue bond sale (rated A2 and A+).
(Nov. 22, 2011) -- The California State Public Works Board yesterday finished the pricing on $296 million lease revenue bonds for the University of California (Aa2, AA-minus, and AA ratings). A 20-year bond yielded a tax-exempt 4.37%. Backing from the higher-rated University of California made a difference in the yield. The Public Works Board sold lease revenue bonds earlier this month and in October for lower-rated borrowers (A2 and BBB+). A 20-year bond in one of those sales yielded 5.20%.
(Nov. 19, 2011) -- The short week because of Thanksgiving will still feature a relatively big new municipal bond sale. The California State Public Works Board will wrap up a lease revenue bond sale of almost $300 million for the University of California (Aa2, AA-minus, and AA ratings). A retail pricing occurred Friday. Institutional orders on Monday, November 21, will set the final yields. The Rim of the World Unified School District still has a pending general obligation bond sale as far as we know (rated A+). It could price before Thanksgiving. We have mentioned it previously but sometimes a deal gets held over for a week or two. In the week after Thanksgiving, the California Department of Veterans Affairs plans to sell more than $150 million of home purchase revenue bonds. These are rated higher than the state’s G.O. bonds, falling in the double-A category. Our weekly summary didn’t include a couple local school bonds that have been priced. The Covina-Valley Unified School District priced $14 million general obligation bonds (Aa3). A five-year bond yielded a tax-exempt 1.74%; a 10-year maturity, 3.04%, and a 15-year bond, 3.93%. The Paramount Unified School District also priced its $34 million G.O. bond deal (A1 and A). Most of the maturities appeared to be capital appreciation bonds. However, more than $11 million of current-interest bonds due in 2046 were priced to yield a tax-exempt 5.03%.
(Nov. 18, 2011) -- Recently on our calendar, we added a $55 million tax-exempt revenue bond sale on behalf of Emerson College. The California Municipal Finance Authority is the issuer and a preliminary official statement is circulating for the sale. This is one of those bond sales that needs a bit more explanation, especially because it will offer some enticing yields for investors willing to buy a lower-rated credit. For one thing, Emerson College might not ring a bell with California investors. That is because the private college has its main campus in Boston. However, since the college specializes in the study of communication and the performing arts, it is expanding its presence in California. Bond money will be used to help construct the Emerson College Los Angeles Center on West Sunset Boulevard in Los Angeles. Among other things, the 10-story facility will house the college’s existing residential study and internship program that lets students gain experience in film, television, and various other media outlets. The building will include classrooms, student housing, and parking. Earlier this month, Standard & Poor’s lowered its rating on existing bonds backed by Emerson College to BBB+ from A-minus. The BBB+ rating also applies to the new bond sale. “The lowered rating reflects our view of the college’s diluted credit strength because of the series 2011 debt, an expectation of lower, though still positive operating performance going forward, and a very high debt burden,” S&P said. “Although the addition of the Los Angeles campus is a strategic move for the college and has the potential to greatly enhance its academic offerings, the increased leverage, smaller operating margins, and other associated risks are inconsistent with an A-minus rated institution.” Moody’s Investors Service rates the bonds Baa1. Moody’s said its rating reflects “the College’s consistently strong operating cash flow bolstered by net tuition per student growth and a healthy student market as an urban college focused on the study of communications and the performing arts. These credit strengths are offset by high leverage, modest fundraising history, heavy reliance on student charges, and an approved plan to construct a campus in Los Angeles, which is strategically important but creates some near-term construction and start-up risks.” Emerson College was established in 1880 and is named for its founding president, Charles Wesley Emerson, an orator, preacher, and teacher.
(Nov. 17, 2011) -- California’s nonpartisan Legislative Analyst’s Office (LAO) this week reminded lawmakers and everyone else that the state still has quite a budget mess, even if progress was made this year. Just for starters, the LAO expects that general fund revenue and transfers will fall $3.7 billion short of projections. That isn’t too far from the magic $4 billion revenue number that state leaders plugged in so they could pass a so-called balanced budget on time. Under a formula for budget cuts if revenue falls short this fiscal year, about $2 billion of mid-year reductions could be triggered, the LAO says in its new fiscal outlook for California. Even if mid-year cuts are made, the state could end fiscal 2012 with a $3 billion deficit because certain other budget actions won’t pan out, the LAO says. Fiscal 2013, which begins next July 1, looks like it will have a $10 billion shortfall between general fund revenue and expenditures, the legislative analyst says. That is occurring in part because of the expiration of temporary budget-balancing moves from past years. That means the governor and lawmakers need to address a $13 billion gap as they work on the new budget in the early months of 2012. To find a silver lining in all this, the LAO does note that things aren’t as bad as a year ago, when it looked like California faced structural budget deficits of $20 billion a year absent action. In fiscal 2014 the structural gap might be $9 billion and by fiscal 2017 down to $5 billion. Still, it isn’t a rosy picture. “Even under this modest budget scenario, the state faces an ongoing, multibillion dollar annual deficit, even as state revenues expand,” the legislative analyst said. “Our forecast assumes that many billions of dollars of state budgetary and retirement obligations remain unpaid through at least 2017.” The economic recovery also remains sluggish and the housing market is still weak. “The end of the federal fiscal stimulus program and declining governmental employment also are limiting economic growth,” the LAO said. “In this forecast, we project continuation of this slow, arduous recovery, with California’s unemployment rate remaining above 10 percent through mid-2014 and above 8 percent through the end of 2017.”
(Nov. 15, 2011) -- Another single-A nonprofit health issuer is lining up a tax-exempt bond sale, following a recent stretch in which we saw one or two such deals every week. Cedars-Sinai Medical Center plans a $148 million revenue bond sale through the California Health Facilities Financing Authority. Bond proceeds will be used for a current refunding of Series 1997A and B bonds, according to Fitch Ratings. Fitch rates the bonds A+. Moody’s Investors Service rates the bonds A2 and changed the outlook to “positive” from “stable.” The rating reflects “Cedars-Sinai’s strong and stable operating performance over several years, solid clinical reputation and good market share in the fractured Los Angeles market,” Moody’s said. “The revision in the outlook to positive from stable reflects the organization's improving leverage metrics and progress toward completing a major construction project.” Fitch, in a report, said Cedars-Sinai “has a history of strong profitability and cash flow generation that is well in excess” of Fitch’s single-A median ratios. The prospectus for the new sale is already out.
(Nov. 14, 2011) -- Two issuers outside the U.S. borders that can sell tax-exempt bonds will add some diversity to this week’s expected new municipal debt sales. We already mentioned these deals in recent write-ups so won’t add much detail here. Guam is selling $235 million of bonds backed by a business privilege tax. Standard & Poor’s rates the bonds A and Fitch Ratings, A-minus. The Puerto Rico Sales Tax Financing Corp. is selling $400 million subordinate sales tax revenue bonds with a Moody’s Investors Service A1 rating and an A+ rating. Plenty of institutions will be ready to buy these bonds so it can be tough getting in on such deals. The market will be getting ready for the slow week of November 21st that includes Thanksgiving. New-issue sales usually grind close to a halt that week. The California treasurer’s office still lists November 21 as the sales date for a State Public Works Board lease-revenue bond on behalf of the University of California. That doesn’t mean the pricing won’t at least begin this week so we’ll see. The deal of close to $300 million carries ratings in the double-A category and yields will be lower than on other recent Public Works Board deals with lower credit grades. The Southern California Public Power Authority expects to sell $62 million of revenue refunding bonds on behalf of Magnolia Power Project A. The bonds are rated A1 and AA-minus. A few local school district general obligation bonds are looming this week. The Merced Union High School District plans to sell $29 million of general obligation bonds rated Aa3. A deal on our calendar for some time, a William S. Hart Union High School District G.O. bond, should price this week. The $40 million of bonds are rated Aa2 and A+. A Rim of the World school G.O. bond we mentioned previously now looks to price this week. It is rated A+. A $14 million Covina-Valley G.O. school bond is rated Aa3. The Lindsay Unified School District also plans a smaller $3 million G.O. sale; maintaining strong reserves helped the Lindsay district get an S&P upgrade to A+ from A. A $12 million lease revenue bond for the Sacramento Metropolitan Fire District (California Municipal Finance Authority) is rated AA-minus. The Perris Union High School District, Sacramento County, and the City of Fontana plan to sell unrated Mello-Roos special tax bonds.
(Nov. 9, 2011) -- Last week we mentioned that Guam was bringing a single-A deal for a change, thanks to the dedicated tax backing the bonds. Another non-U.S. state that can sell tax-exempt bonds also will be in the market this month with bonds rated higher than its general obligation debt. Puerto Rico’s sales tax financing corporation plans to sell more than $400 million of subordinate sales tax revenue bonds. Moody’s Investors Service rates them A1 and Fitch Ratings, A+, based on support from an island-wide sales and use tax. In contrast, Puerto Rico G.O. bonds are graded triple-B. Puerto Rico bonds provide interest that is exempt from federal and state taxes across the U.S., including California. The State of California also achieved higher ratings for its deficit bonds in the past (they’re called Economic Recovery bonds) than it could for its G.O. bonds. The state did so by pledging certain sales tax revenue. Investors like these bonds because they know the dedicated revenue stream isn’t subject to the annual process of budget fights, etc.
(Nov. 7, 2011) -- For a change, the upcoming week’s new bond sales calendar doesn’t include a deal from the state. California’s various sales of general obligation, lease-revenue, and economic recovery bonds dominated new issuance in recent weeks. Now California is taking a short break; in a couple weeks, however, look for the State Public Works Board to sell $270 million of tax-exempt lease revenue bonds on behalf of the University of California. During the week of November 7th, San Francisco will wear the crown of the dominant issuer as the city and county sells $368 million of general obligation refunding bonds. This deal has been on our calendar for some time and underwriters will submit bids for the bonds on Wednesday, November 9. The San Francisco bonds are rated double-A across the board (though Fitch is AA-minus, not AA). The recent spurt of single-A nonprofit hospitals tapping the tax-exempt market will also continue in the upcoming week as the Rady Children’s Hospital sells $100 million of hospital revenue bonds through the California Health Facilities Financing Authority. Fitch Ratings grades the bonds A+ and Moody’s Investor’s Service, A2. Rady Children’s holds a dominant market share for the greater San Diego area, serving more than 80% of the newborn-to-age-14 population needing such health service. Rady Children’s says it has helped almost 2 million sick and injured children since opening its doors in 1954. As usual, some local school districts will be offering general obligation bonds this week. The West Contra Costa Unified School District plans to sell $79 million of tax-exempt G.O. bonds with Aa3 and A+ ratings. (It also is selling some taxable G.O. debt.) Rim of the World Unified School District, which includes Lake Arrowhead among the communities it serves, expects to price a $10 million G.O. deal. When Rim of the World sold G.O. bonds last year, they were rated A+. Loyola Marymount University expects to sell $21 million of tax-exempt revenue refunding bonds with an A2 Moody’s rating through the California Educational Facilities Authority.
(Nov. 4, 2011) -- The Government of Guam plans to sell almost $250 million of tax-exempt bonds with a nice twist for investors. The bonds are rated in the single-A category. That might not seem to be such a big deal, given that plenty of local governments get single-A ratings all the time for various debt sales. As we have often noted for Guam, however, its bonds either are rated lower than investment grade or sometimes triple-B with backing from utility revenue or another dedicated source. Just as an example, Guam’s general obligation bonds are rated B+ by Standard & Poor’s. That is a full eight notches lower than the single-A rating S&P gave the new bond sale, which will be secured by Guam’s business privilege tax. This tax is a 4% levy of business receipts in Guam. The bonds will be backed by a senior lien on three-quarters of that tax. The revenue will provide “very strong coverage of projected maximum annual debt service” at a little above eight times, S&P said, and a debt service coverage ratio of more than four times by 2014. Fitch Ratings has assigned an A-minus grade to the business privilege tax bonds. It is a plus, Fitch noted, that the structure and revenue pledge “insulates the bonds from Guam's strained general fund operations.” The bonds are expected to price in mid-November. They are tax-exempt from both federal and state income taxes for California and other U.S. residents. Almost $200 million of the sale will be used to pay prior year unpaid income tax refunds. Bond proceeds also will pay certain retirement system liabilities and past-due cost of living adjustments for retirees. “The current administration is taking steps to achieve structural balance in the budget including a hiring freeze, reductions in the use of electricity and vehicles, a rescinding of across-the-board pay increases, 3% budget retention for all agencies and other cost reductions,” Fitch said in a report. “Although the intention is to utilize the borrowing to finance prior liabilities and balance the budget going forward, the current offering is structured with capitalized interest for two years and a deferral of principal payments for five years to provide further relief.”
(Nov. 4, 2011) -- We published our weekly summary a day early so here is how the municipal market fared through Thursday. Tax-exempt rates on Thursday followed U.S. Treasury securities higher, after news that Greece won’t hold a vote on its budget-deficit plan. Concern over more European turmoil boosted U.S. Treasuries earlier in the week and tax-exempt bonds also rallied. Over the last week U.S. Treasury bonds dropped by more than 30 basis points (by three-tenths of a percentage point). In contrast, tax-exempt yields were down by one-tenth of a percentage point or even less on shorter maturities. In other pricings that didn’t make our weekly summary, we note that Assured Guaranty Municipal backed a couple other school deals this week. A $13 million Porterville Unified School District general obligation bond refunding with AGM insurance yielded 2.39% in five years, 3.70% in 10 years, and 4.35% in 15 years. The Central Union High School District sold $9 million of G.O. refunding bonds, also with AGM insurance and an underlying A+ rating. A five-year bond yielded 2.40% and a 13-year maturity, 4.25%. Just to provide some perspective, the City of Santa Monica was in the market this week with high-quality lease-revenue bonds rated one notch under triple-A (Aa1 and AA+). We didn’t chase down the final yields yet, but we believe the five-year bond was in the rough neighborhood of 1.75% and a 10-year closer to 3%. The bonds mature on June 1 of their respective due dates.
(Oct. 28, 2011) -- Investors will have a choice of higher-yielding and lower-yielding lease revenue bonds in next week’s planned bond sales. The California State Public Works Board plans to offer about $500 million of lease-revenue bonds with A2 and BBB+ ratings. You can assume a 10-year maturity will yield more than 4% tax-exempt and a 15-year will be closer to 5%. In contrast, the City of Santa Monica plans to sell about $40 million of lease-revenue bonds with far higher credit ratings (Aa1 and AA+) that are just one notch below triple-A. The city will do well due to its good standing as an issuer. San Francisco, taking underwriter bids on November 2, plans to sell more than $90 million certificates of participation with Aa3 and AA-minus ratings for a Moscone Center South refunding project. The Grossmont Union High School District expects to price $11 million of general obligation refunding tax-exempt bonds with Aa2 and AA-minus ratings. The City of Marysville plans to sell $111 million of health revenue bonds on behalf of the Fremont-Rideout Health Group. These bonds are rated A2 and A. Our October 28 discussion here gives some idea of the tax-exempt yields such single-A nonprofit health bonds are paying, based on other recent sales. Other pricings also are possible next week or the following week. The West Basin Municipal Water District is circulating a preliminary official statement for a $50 million revenue refunding bond sale (rated Aa2 and AA-minus).
(Oct. 27, 2011) -- California’s refinancing of some of its deficit bonds, formally known as economic recovery bonds, totaled about $439 million this week. The biggest chunk of the sale matured in 2016, carried a 4% coupon, and was priced to yield 0.93%. The only other maturity, in six years, yielded 1.10%. Dedicated sales tax revenue makes the bonds higher-rated than the state’s own general obligation bonds. Last week California sold G.O. bonds and paid 2.28% in five years and 2.66% in six years. This week Children’s Hospital of Orange County sold $107 million of single-A revenue bonds through a state health financing authority. A five-year bond yielded 2.62% and a six-year, 2.95%.
(Oct. 26, 2011) -- Nonprofit health issuers keep boosting tax-exempt bond supply thanks to a spate of $100 million-plus sales. We’ve mentioned a handful of these sales in recent days. Another looming sale involves the Rady Children’s Hospital and Health Center, a dominant provider of pediatric service in San Diego County. Rady Children’s soon will sell $100 million of revenue bonds through the California Health Facilities Financing Authority. Fitch Ratings has already graded the bonds at A+. So-called “conservative” investors tend to shy away from such deals. However, they do provide decent tax-exempt yields, especially in this environment, and Rady’s has a good track record of operating results.
(Oct. 24, 2011) -- New issues tied to the State of California continue to take the spotlight each week. The state is catching up on various deals after it delayed new sales earlier this year until a budget was passed. This week’s state sale is driven by attractive tax-exempt rates. California plans to refinance older economic recovery bonds with a new $450 million sale. We call these “deficit” bonds since the debt was originally sold to deal with the state’s past deficits years ago. The bonds also are rated higher (Aa3 and A+) than the state’s general obligation bonds because of dedicated sales tax revenue backing them. They also have a backup general obligation pledge. The California Health Facilities Financing Authority is selling two bond issues on behalf of nonprofits. One deal will benefit Catholic Healthcare West and the other, Orange County Children’s Hospital. We mentioned these single-A deals briefly on October 18 on our General News page. There are a few other new issues planned this week, including a $32 million general obligation bond refunding by the Fairfield-Suisun Unified School District. The California infrastructure bank also is selling revenue bonds for the J. David Gladstone Institutes.
(Oct. 20, 2011) -- California’s initial retail pricing for this week’s general obligation bond sale struck us as aggressive. By that we simply mean the preliminary yields seemed a bit low. Perhaps the state and its underwriters had hoped demand would be solid since the state hadn’t sold many G.O. bonds this year. The final institutional pricing yesterday showed that the initial yields couldn’t hold. The 10-year bond tax-exempt yield rose to 3.70% from an initial 3.51%. The 30-year maturity rose above 5% (to 5.03%) from 4.87%. A five-year bond, which can be popular with smaller investors, rose to almost 2.3% (2.28%) from a preliminary 2.10%. Retail orders also didn’t exactly flood in this week. The smaller retail buyers bought more than one-fifth of the sale but less than one-quarter, down a bit from their participation in September’s sale. While various factors can play into retail trends, it is safe to say some smaller investors just aren’t that thrilled with tax-exempt yields at current levels, even though they have risen in recent weeks. The state isn’t necessarily being singled out. There are some smaller buyers, however, who want added yield from any lower-rated credit; they probably consider it a crime that the state can borrow at less than 4% tax-exempt in 10 years in today’s market. Bigger buyers, such as mutual funds, have to keep putting money to work and found the state sale somewhat more attractive relative to what else is out there. The institutional buyers also focus on credit specifics and have been happier with this year’s state budget, especially because it requires spending reductions if revenue doesn’t meet specified targets. Just for some perspective, what did other borrowers pay in certain sales this week? A Poway Unified School District school facilities improvement district sold G.O. bonds with Aa2 and AA-minus ratings. A five-year bond yielded 1.82% and a 10-year, 3.08%. The 15-year bond yielded 3.97%. The Contra Costa Community College District priced double-A general obligation bonds that yielded 1.68% in five years and 2.94% in 10 years. It’s hard to believe “retail” buyers would be any more excited about the Poway and Contra Costa yields. Indeed, the state’s sale still looks far more attractive when you consider actual default risk and don’t focus on the credit ratings. The West Kern Water District priced certificates of participation with an AA-minus rating, three notches higher than the state. It paid 2.60% on a five-year bond and 3.95% on a 10-year maturity. The yields probably weren’t lower, despite the higher rating, because of the type of security: COPs aren’t considered as strong as a general obligation pledge.
(Oct. 18, 2011) -- California’s initial retail pricing on this week’s general obligation bonds didn’t exactly rally the troops, at least not yet. Roughly one-eighth of the deal was covered by retail orders on Monday, though smaller investors also have today to place orders. A preliminary five-year tax-exempt yield of 2.10% and a 10-year of 3.51% still could rise in the final pricing for institutions. The 30-year yield was 4.87%.
(Oct. 15, 2011) -- California’s $2 billion general obligation bond sale will take center stage among new issues during the week of October 17. Tax-exempt rates are higher than when the state sold G.O. bonds in September and yields on California’s sale will rise accordingly. In September the state’s general fund revenue missed budget estimates by about $300 million, according to a state controller’s report. So far this fiscal year, California is about $700 million short of projected general fund revenue, raising the odds that certain “triggers” will kick in later this year to reduce spending if the revenue shortfalls continue. Other sales expected soon include a $43 million double-A general obligation bond from the Contra Costa Community College District; a prospectus is in circulation for that sale. The West Kern Water District expects to price $22 million certificates of participation with an AA-minus rating. The Amador County Unified School District will take bids on $5 million of G.O. refunding bonds with an Aa3 rating. Yuba City will be selling $11 million of wastewater revenue refunding bonds with an AA-minus rating. Among unrated sales, a Poway Unified School District financing authority will offer $35 million of special tax Mello-Roos refunding bonds.
(Oct. 10, 2011) -- Our summary of last week’s new bond sales activity didn’t list a handful of other deals and one of them is worth mentioning. For a higher-quality benchmark, consider the California Department of Water Resources Central Valley Project water system revenue bonds. They were rated Aa1 and AAA; the five-year maturity yielded 1.50% and the 10-year, a tax-exempt 2.86%. The 15-year maturity yielded 3.58% and the 20-year, 4.08%.
(Oct. 7, 2011) -- The other day we mentioned that the State of California is selling general obligation bonds on October 19. The deal has now been tentatively sized at $2 billion. Investors can’t complain about a lack of new issues from the state. Next week the State Public Works Board will sell almost $500 million of tax-exempt lease revenue bonds. Later in October a refunding of so-called “economic recovery” bonds could total as much as $600 million. In November the State Public Works Board plans to sell $570 million of lease-revenue bonds in two separate deals, including one on behalf of the University of California.
(Oct. 6, 2011) -- Even though bond insurance plays a much smaller role in public finance than before the financial crisis, some weeks it seems like such guarantees have a bigger foothold. This week, for example, a handful of new issues in California included backing from Assured Guaranty Municipal, the main insurer still active in the muni market. AGM continues to hold appeal for some because it is restricting its exposure to municipal bonds, which have less default and credit risk than riskier sectors. The Delano Union Elementary School District sold $12 million of general obligation refunding bonds the other day with an AGM guarantee. The five-year maturity yielded 1.97% and the 10-year, 3.30%. A 15-year bond yielded a tax-exempt 4.22%. The Fruitvale School District priced $8 million of G.O. refunding bonds with Assured Guaranty Municipal backing. A five-year bond yielded 2.02%, a 10-year, 3.45%, and a 15-year, 4.56%. The Palo Verde Unified School District in Blythe priced $6 million of AGM-insured refunding bonds that paid 2.21% in five years and 3.67% in 10 years. (For a comparison of what an uninsured school deal yielded this week, the San Leandro Unified School District priced $8 million of G.O. refunding bonds with an Aa3 rating. The five-year bond yielded 1.75% and the 10-year, 3.00%.) Without the insurance, all the insured bonds discussed above generally fall in the single-A category (including A+ or A1). As we have noted recently, AGM hopes to keep a double-A financial strength rating, even under new stricter criteria from Standard & Poor’s. The deals above also are typical of the size Assured Guaranty Municipal tends to back. So far this year, through September, an average new insured deal was sized at just under $12 million across the U.S. By dollar volume only about 5% of this year’s new sales carried bond insurance; however, based on the number of issues, more than one in 10 featured bond insurance, according to Thomson Reuters statistics.
(Oct. 4, 2011) -- California is going to sell more general obligation bonds on October 19, according to the state treasurer’s office. We thought this sale might come a little later in the fall. However, maybe the state wants to take advantage of current market conditions, which are favorable for issuers. Also, recently we noted that the State of California plans to refund some of its economic recovery bonds. (We call these “deficit” bonds since they were sold to deal with a past budget mess.) The treasurer’s office said the economic recovery bond refunding could be as large as $600 million and is tentatively planned for October 27. About $483 million of State Public Works Board lease revenue bonds will sell next week so California is keeping the new-issue market busy in October.
(Oct. 3, 2011) -- We are aware that municipal bond analysts and others have found another proposal aimed at curtailing the value of tax-exemption for municipal bonds. President Obama’s plan for deficit- and debt-reduction proposals includes language that would affect tax-exemption. We should stress right away that this is only a “plan” and its future passage is highly doubtful. In essence, if federal debt-reduction targets weren’t met, added limits would be placed on the value of tax-exemption. Obama’s jobs bill included another provision that would, in essence, curtail how much tax-exempt income wealthier investors could receive. The debt-reduction proposal would create broad concerns because it would be reviewed each year; the value of tax-exempt income could essentially change from year-to-year, depending on whether other targets are met in the federal budget (at least this is how we understand it). The main overarching concern is that investors wouldn’t want to buy tax-exempt bonds, or would demand huge interest-rate premiums, if the rules for the value of tax-exemption could change from year to year. We doubt such a proposal, if it makes it into a final plan, will make it through the current Congress. As we have mentioned before, however, trial balloons aiming to curtain the value of tax-exemption keep getting floated. In the past, some of them never would have been floated at all. Any market reaction is going to be muted as long as most of the participants assume such trial balloons won’t go forward. It never hurts, however, to know the discussion is occurring. At the very least, defenders of tax-exempt bonds—and there are still many of them—can prepare their defenses.
(Sept 28, 2011) -- What at first glance might appear to be bad news for bond insurers Assured Guaranty Municipal and Assured Guaranty Corp. also at second glance appears to include some good news. The bad news was a decision by Standard & Poor’s to put the insurers on a watch list for downgrade, meaning their AA+ ratings might drop. The good news is that it now appears the insurers will be able to stay in the double-A rating category, even with new stricter criteria from S&P for bond insurers. “The CreditWatch placement is due to significant concentration risk in Assured’s consolidated insured portfolio,” S&P said. “The existing legacy insured portfolio of exposures that Assured maintains contains many exposures that breach the largest-obligors test and are not consistent with the current ratings under our updated criteria. The concentrations are in Assured’s structured finance and public finance insured portfolios. However, we understand from statements by Assured’s management team that the company will take steps such as creating capital or utilizing additional forms of reinsurance to mitigate these concentration risks. We believe it is likely that such actions would support ratings in the ‘AA’ category.” Dominic Frederico, president and chief executive officer of parent company, Assured Guaranty Ltd., said his company is taking several steps that “should satisfy the requirements of S&P’s new criteria to retain our rating in the AA ratings category.” S&P said it placed the ratings on CreditWatch “due to uncertainty” over the ultimate outcome to address concentration risk. The new criteria by S&P, discussed here before, includes stricter limits on exposure to a single issuer, known as “concentration.” Assured Guaranty Municipal is the main insurer still active in the municipal bond market after other companies were downgraded to lower levels because of exposure to riskier securities. It would be more difficult for an insurer to land new business with a single-A rating.
(Sept 27, 2011) -- San Francisco plans next month to sell roughly $400 million of general obligation bonds. Of course, it will be a refunding to refinance existing debt. Refundings continue to be the main driver of new issuance with interest rates so low. We briefly put this San Francisco deal on our calendar last week, then removed it when we couldn’t confirm the deal. Now, however, it has been rated by both Fitch Ratings (AA-) and Standard & Poor’s (AA). According to Fitch, San Francisco might sell the G.O. bonds during the week of October 24 through a competitive sale. San Francisco also is getting ready in early October to sell $92 million refunding certificates of participation in connection with the Moscone Center. Fitch rates the COPs A+ and S&P, AA-.
(Sept 26, 2011) -- At least a dozen new bond issues will probably grace California’s municipal bond market this week, driven in part by refinancing opportunities. A surge in volume might be the only thing that helps push tax-exempt yields a little higher; most of the upcoming deals, however, continue to be far smaller than $100 million. The Los Angeles Unified School District is planning a $400 million general obligation bond refunding (rated AA-minus by S&P, Aa2 by Moody's). The district’s G.O. bonds benefit from a large tax base. The Livermore – Amador Valley Water Management Agency will take competitive bids Wednesday (Sept. 28) for $105 million sewer revenue refunding bonds; they are rated Aa2 and A+. The next day, Thursday, the Berkeley Unified School District plans to take bids on $60 million of G.O. refunding bonds that are rated AA-minus. The Fresno Unified School District plans to sell as much as $105 million in G.O. bonds with an Aa3 rating. The Lodi Unified School District could offer $50 million of general obligation refunding bonds. The private University of San Diego plans to offer $42 million of revenue refunding bonds (rated A2) through the California Municipal Finance Authority. The Novato Sanitary District on Tuesday will take bids on $22 million wastewater revenue certificates of participation (A+). The Rosedale – Rio Brave Water District plans to sell $15 million of COPs (rated A+). A few sales of $10 million or less also are planned, including a Rosemead School District G.O. issue rated A+; a Petaluma City Elementary School District G.O. bond rated AA; a Redding School District G.O. rated Aa3; a Brea Olinda Unified School District G.O. rated AA-minus, and a Hueneme Elementary School District G.O. graded A+.
(Sept 21, 2011) -- California’s $2.4 billion general obligation bond sale probably said a lot more about market conditions than it did the state’s success at signing an on-time budget this year. Tax-exempt interest rates are stuck at very low levels and that is helping all issuers, regardless of their credit ratings. The state does deserve some credit for making progress on cutting into a structural deficit. To a degree that certainly helped lower its borrowing costs in the latest deal. Institutional investors in particular focus on whether they think the state has turned a corner in imposing added fiscal discipline. Meanwhile, smaller “retail” investors ended up ordering a bit less than 30% of the new bond sale; relatively low tax-exempt yields no doubt played a role in cooling their appetite, along with the fact they couldn’t get as much of a premium on the state’s deal. The final yields on the deal didn’t change much if at all from levels discussed earlier.
(Sept 17, 2011) -- The State of California’s big general obligation bond sale dominates the new issue calendar for the week of September 19. (A quick preview of some other planned new issues is provided here.) In fact, orders from smaller “retail” investors for California’s sale started being taken September 16. Pricing for institutional investors on Tuesday, September 20, will set the final yields. However, the preliminary yields for “retail” investors give a good sense of what the state is paying on the G.O. bonds. A five-year maturity had a preliminary yield of 1.61%. High-quality issuers in recent days sold new tax-exempt bonds with an 0.95% yield on five-year maturities. Of course, the State of California isn’t considered a high-quality issuer since its G.O. bonds are rated A1 and A-minus. Given the slim chance of a default, however, some investors will gladly take the state’s higher yields over those available on the higher-rated issuers. The preliminary 10-year yield on the state’s sale is 3.17%. That is almost a full point higher than what higher-rated issuers, such as the Metropolitan Water District of Southern California, had to offer on 10-year maturities in recent days. California’s 20-year preliminary yield was 4.58% and the 30-year, 4.80%. According to the state treasurer’s office, “retail” orders on the first day totaled almost one-fifth of the overall sale (about $2.5 billion of tax-exempt bonds). While the state is paying quite a bit less than it did on its last G.O. sale in November 2010, tax-exempt rates in general also are lower. On a relative basis, the “premium” the state pays to borrow relative to top-quality municipal bonds has dropped somewhat since last November’s sale, but not by a substantial amount.
(Sept 15, 2011) -- The State of California plans to refund some of its “economic recovery bonds.” The state treasurer’s office hasn’t yet decided on a size or date for the sale. We put these “economic recovery” bonds in quotes above because we call them deficit bonds; the debt was sold after former Governor Schwarzenegger took office. The bonds didn’t do anything for an economic recovery but they did wonders for shielding public unions from much-needed cutbacks. California also has fleshed out plans for selling lease revenue bonds through the State Public Works Board. A tax-exempt sale of $450 million is expected around October 13 and a $300 million tax-exempt offering is also planned around November 1. Another tax-exempt Public Works Board sale is planned around November 22, with $176 million of both tax-exempt and taxable debt. A $100 million taxable lease revenue bond also is planned for November 1.
(Sept 15, 2011) -- We have warned for a long time that certain people in Washington D.C. would love to restrict tax-exemption for municipal bonds. President Obama made that very clear in his new jobs bill proposal; he proposed putting a cap on tax-exempt interest for higher-income investors by limiting the value of deductions to a 28% tax rate. We don’t think the proposed change stands a chance of moving forward. That is the good news. The bad news is that various ideas to restrict tax-exempt bonds keep getting aired in trial balloons. The threat isn’t going to go away, even if local and state government coalitions remain determined to protect tax-exemption in its current form. Obama’s proposal would apply to individuals with more than $200,000 of taxable income and married couples with more than $250,000 of taxable income. The proposal would in effect lower after-tax returns on tax-exempt bonds for the affected investors because the Taxable Equivalent Yield on municipal debt rises based on tax rates that go as high as 35%; a 28% cap would cut the TEY. Obama wants the proposal to take effect with tax year 2013. In another negative twist, existing municipal bonds owned by affected investors wouldn’t be “grandfathered.” The proposal would apply to such income regardless of whether you bought munis in the past or future. This is a sneaky way to get around the “grandfathering” issue. In the past, we have noted that proposals to do away with tax-exemption completely would “grandfather” existing bonds and leave them tax-exempt .Obama’s proposal would chip away at the value of tax-exempt rather than do away with it altogether. Imposing a “cap” in this way on existing municipal bonds is nothing other than an income-tax increase. As we noted, the proposal probably is dead on arrival. What an interesting thing, however, to put in a “jobs bill.”
(Sept 10, 2011) -- New-issue municipal bond sales will pick up in California during the week of September 12th, thanks to several refunding issues that refinance older higher-cost debt and some new-money deals. The Sacramento Municipal Utility District will price $300 million of electric revenue refunding bonds with A1 and A+ ratings. The Orange County Sanitation District is taking bids on Thursday (September 15) for $148 million wastewater revenue refunding bonds; Fitch Ratings grades the debt AAA. Also on Thursday, the Santa Clara Valley Transportation Authority is taking bids on $48 million of sales tax revenue refunding bonds. They are rated Aa2 and AA by Moody’s and Fitch, respectively, and AAA by S&P. The Metropolitan Water District of Southern California plans to price $150 million of water revenue refunding bonds with Aa1 and AA+ ratings from Moody’s and Fitch, respectively, and an AAA from S&P. The City of Huntington Beach expects to sell $35 million of lease revenue refunding bonds with Aa3 and AA ratings. The California State University Trustees plan to sell $245 million of systemwide revenue bonds with Aa2 and A+ ratings. S&P changed its outlook on the state university bonds to “positive” from “stable,” citing consistently good financial performance despite state funding constraints. Smaller general obligation refunding bond sales also could price from Kern Community College and the Ojai Unified School District. A preliminary official statement also is out for the $100 million Chapman University tax-exempt bond sale through the California Educational Facilities Authority. Moody’s rates the bonds A2. The prospectus also is out for California’s $2.6 billion G.O. bond sale, which will occur the week of September 19. Finally, in the short-term market, California will price $5.4 billion of revenue anticipation notes on September 15.
(Sept 8, 2011) -- We haven’t seen many “competitive” sales recently, where the underwriter is selected based on the best bid on the day of sale. This week, however, there are a handful of such sales in California. One of them provides a decent “benchmark” for the current market, despite being a smaller sale. Yesterday the Shoreline Unified School District sold $5 million of general obligation refunding bonds with a double-A rating from Standard & Poor’s. The five-year bond was priced to yield 1.32% and the 10-year, 2.65%. The 15-year maturity yielded 3.64%. The other competitive sales coming today (September 8) are rated even higher so yields won’t get any better. The Shoreline district is based in Tomales in Marin County.
(Sept 6, 2011) -- Some of the triple-A deals we mentioned recently will come to market this week in the form of a handful of competitively-bid bond sales. The Reed Union School District on Thursday is taking bids to sell about $29 million general obligation refunding bonds. Standard & Poor’s rates the debt AAA. The Tiburon-based district has three school sites in southern Marin County, including one that starts at kindergarten and another one for middle school. Also on September 8, the City of Palo Alto is taking bids from underwriters on about $16 million of utility revenue refunding bonds; S&P rates the deal AAA. Moody’s Investors Service rates the Palo Alto issue Aa2. Another competitively-bid sale is planned Wednesday, with the Shoreline Unified School District offering $5 million of general obligation refunding bonds. S&P rates them AA. Amid negotiated sales, the Chaffey Joint Union High School District plans to price $43 million of G.O. bonds with Aa2 and AA-minus ratings. Another school issuer in Marin County, the Dixie Elementary School District, plans to sell $6 million of general obligation refunding bonds. Fitch Ratings grades the Dixie bonds AAA.
(Sept 2, 2011) -- California’s return to the new-issue market could include up to $2.6 billion of general obligation bonds, based on an amount listed by the state treasurer’s office. This would include $1.3 billion of new-money bonds that would pay down the state’s commercial paper. In addition, the state is considering a $1.3 billion G.O. current refunding, subject to market conditions. The sales date is still September 20, as we have discussed before. California postponed its G.O. sales earlier this year during the state’s budget wrangling. Another G.O. sale is planned later this year. On September 14 the Trustees of the California State University plan to offer $245 million of systemwide revenue bonds. The preliminary official statement has been released for that sale. A $5.4 billion revenue anticipation note sale also is planned by California on September 15.
(Sept 1, 2011) -- We have been noting recently that refunding municipal bond sales, which refinance older debt, are keeping the California new-issue market afloat. Here is concrete proof to back up our anecdotal evidence. In August across the U.S., refunding issuance jumped about 59% over the same month in 2010. In contrast, new-money bond sales dropped by about 48% in August compared with the same month a year earlier. Indeed, by dollar volume refunding bond sales only trailed new-money issues by roughly $1.1 billion in August ($9.1 billion versus $10.2 billion), according to figures compiled by Thomson Reuters. Refunding bond sales continue to dominate our calendar of upcoming issues so this trend isn’t over. Meanwhile, new municipal bond sales across the U.S. continue to limp along at a level last seen in the year 2000, based on both August and year-to-date statistics tracked by Thomson Reuters. August 2011 sales across the U.S. dropped by about 29% compared with the same month in 2010; January to August 2011 sales are off about 38% from the same eight-month period in 2010. Total municipal bond issuance year-to-date in California is down an even 40% from the same period last year. Various factors explain the decline. The rush to grab a generous federal subsidy before it expired last year for taxable Build America Bonds stole some volume from 2011. In addition, a stagnant economy has hurt public revenue to the point where new building projects, and the accompanying bond sales, have been shelved. The drop in supply and continuing demand for tax-exempt bonds is helping to keep yields relatively low; it is an issuer’s market even if some of them aren’t participating. California volume also has been affected by the state’s absence during budget wrangling; that will change the rest of the year as the state returns with general obligation and other related bond issuance.
(Aug. 31, 2011) -- There aren’t a lot of triple-A credits in the municipal bond market, but they do pop up from time to time in the new-issue market. The Reed Union School District is getting ready to sell about $29 million general obligation refunding bonds. Standard & Poor’s rates the debt AAA after an upgrade in March 2010. The Tiburon-based district has three school sites in southern Marin County, including one that starts at kindergarten and another one for middle school. Another school issuer in Marin County, the San Rafael-based Dixie Elementary School District, plans soon to sell $6 million of general obligation refunding bonds. Fitch Ratings grades the Dixie bonds AAA. On September 8 the City of Palo Alto is taking bids from underwriters on about $16 million of utility revenue refunding bonds; S&P rates the deal AAA. Even in the muni market, however, a “split” rating often occurs, meaning not all the agencies grade the same issue triple-A. Moody’s Investors Service, for example, rates the Palo Alto issue Aa2, or two notches below triple-A. The same can be said of the Metropolitan Water District of Southern California’s sale of revenue refunding bonds; they are rated AAA by Standard & Poor’s, but AA-plus by Fitch and Aa1 by Moody’s. Yields on such high-rated deals will be relatively low in this “issuer’s” market.
(Aug. 26, 2011) -- We mentioned earlier this week that two high-rated issuers are getting ready to sell water revenue refunding bonds. The San Diego County Water Authority probably will price more than $90 million of such bonds next week (the week of August 29). The bonds are rated Aa2 and AA+. The Metropolitan Water District of Southern California also plans soon to sell more than $140 million of refunding bonds, which have been rated AAA by Standard & Poor’s and AA-plus by Fitch Ratings. However, we haven’t seen a specific sales date. Market conditions often dictate the timing of such refunding sales. Next week we also expect that the West Basin Municipal Water District will offer $35 million of refunding revenue bonds with Aa2 and AA-minus ratings. The preliminary official statement for that deal is available. The West Basin district’s service area includes 17 cities in Los Angeles County. A handful of small school district general obligation bond sales also are on tap next week, including a deal from the Mesa Union School District in Somis.
(Aug. 25, 2011) -- It is an issuer’s market, so where are all the issuers? Low tax-exempt interest rates are certainly luring some issuers off the sidelines with refunding deals. These deals refinance older, higher-cost bonds, and right now refunding issues seem to make up the bulk of new sales on the horizon. But wouldn’t issuers also want to lock in current rates for new construction projects, etc? No doubt they would. However, it is possible the taxable Build America Bond frenzy last year already financed some of these projects, thanks to a generous federal subsidy for interest costs. Also, given current budget pinches, it also possible some construction projects are on the shelves for the time being. Even so, if tax-exempt rates remain attractive from an issuer’s standpoint, we expect some added volume through the end of 2011. Having the State of California back in action also will give new sales a boost. There are several other factors that drive municipal bond issuance; the two ideas above might help explain part of the trend.
(Aug. 22, 2011) -- This week’s expected new municipal bond sales in California aren’t going to match last week’s volume, based on what we see so far. The San Francisco Airport Commission looks to lead the pack with $361 million of tax-exempt revenue refunding bonds (part of those will be subject to the federal alternative minimum tax). The bonds are rated A1 and A+. The Upper Santa Clara Valley Joint Powers Authority plans to price roughly $50 million water revenue refunding bonds with Aa3 and AA ratings. A small Castro Valley school district certificate of participation sale also could price this week. Two high-rated issuers are getting ready to sell water revenue refunding bonds; the San Diego County Water Authority and Metropolitan Water District of Southern California might offer them in late August though we haven’t seen a specific sales date. Market conditions often dictate the timing of such refunding sales.
(Aug. 17, 2011) -- The State of California is lining up several long-term bond sales that had been delayed until a new budget was in place. A general obligation bond offering appears likely in coming weeks, though it isn’t clear yet if it will be late summer or early fall. The state treasurer’s office lists a planned G.O. sale but the size and date is yet to be decided. In fact, at least two G.O. sales are expected before the end of the year. The State Public Works Board also plans to sell lease revenue bonds in coming weeks; again, the size and date aren’t yet set, and at least two such lease revenue deals are expected before year end. California State University systemwide revenue bonds are expected to be offered around September 14. The California Department of Water Resources expects to sell Central Valley Project water revenue bonds around October 6. In the short-term market, California looks to sell roughly $5 billion of revenue anticipation notes around the week of September 12. These notes will pay off a temporary loan from several banks; the interim loan was arranged to avoid market disruption in case the federal debt ceiling hadn’t been raised. All the potential sales dates listed above can be subject to change. However, this provides a preview of state bond deals that tend to draw interest from a wide variety of investors, including smaller “retail” orders.
(Aug. 16, 2011) -- The California Department of Water Resources is offering its power supply revenue bond sale to smaller “retail” buyers on Tuesday. The tentative tax-exempt yield on the longest maturity, due in 2021, was 2.66% (with a 5% coupon). Final yields will be set Wednesday with the institutional pricing on the deal, expected to total almost $1 billion. (August 17 Update: At least one media report suggests the institutional pricing was completed on Tuesday as well. If so, we doubt the yield levels changed much if at all from the “retail” offering.) Bond proceeds will refinance a good chunk of the department’s variable-rate debt into fixed-rate bonds. The department entered the business of power procurement and related power bond sales in the aftermath of California’s energy crisis a decade ago. It still has almost $8 billion of bonds outstanding, with a final maturity in 2022. The bonds are backed by charges on customers of investor-owned utilities; the creditworthiness has improved because the state’s exposure to power market volatility has decreased. Moody’s Investors Service rates the bonds Aa3 and Standard & Poor’s, AA-minus. Fitch Ratings grades them AA.
(Aug. 13, 2011) -- Add the University of California Board of Regents to the list of new municipal bond sales expected next week (the week of August 15th). Our item below mentioned other expected sales in upcoming days. Now the state treasurer’s office lists August 17 and 18 as the pricing date for $500 million general revenue bonds for the University of California. (Only about half the deal will be tax-exempt; another series will be taxable). We assume August 17 will be the retail order date. Standard & Poor’s rates the bonds AA and Fitch Ratings, AA+. According to S&P, the double-A rating “reflects our view of the system’s very strong and growing demand, self-supporting nature of its medical centers and hospitals, and its history of weathering multiple business- and state-funding cycles—which is particularly relevant given the possibility of further reductions in operating appropriations from the state in fiscals 2011-2012.” We haven’t seen a new Moody’s Investors Service rating yet, though in the past it graded such debt Aa1.
(Aug. 12, 2011) -- Next week’s new municipal bond sales will be dominated by the California Department of Water Resources power supply revenue bond sale of close to $1 billion. There will be a narrow maturity range of about nine years, probably from 2012 to 2021. Bond proceeds will refinance a good chunk of the department’s variable-rate debt into fixed-rate bonds. The department entered the business of power procurement and related power bond sales in the aftermath of California’s energy crisis a decade ago. It still has almost $8 billion of bonds outstanding, with a final maturity in 2022. The bonds are backed by charges on customers of investor-owned utilities; the creditworthiness has improved because the state’s exposure to power market volatility has decreased. Moody’s Investors Service rates the bonds Aa3 and Standard & Poor’s, AA-minus. Fitch Ratings grades them AA. The Southern California Public Power Authority plans to sell $159 million of revenue bonds for the Milford Wind Corridor Phase II Project in Utah. The power project features 68 1.5-megawatt wind turbines. S&P and Fitch rate the bonds AA-minus. The Cucamonga Valley Water District expects to price $113 million of water revenue refunding bonds carrying Aa3 and AA-minus ratings. The deal also could include Assured Guaranty Municipal bond insurance. The Pittsburg Infrastructure Financing Authority looks to price $16 million tax-exempt senior reassessment revenue refunding bonds. They are rated single-A, but the deal will also include AGM bond insurance. Several general obligation refunding bond sales also are planned by local school districts. The San Jose Unified School District is looking at a $65 million G.O. sale, rated double-A. The Roseville Joint Union High School District could price $9 million G.O. refunding bonds with an AA-minus grade. Mojave Unified School District S.F.I.D. No. 1 could sell $10 million of G.O. bonds with A+ and AA- grades. The Aromas-San Juan Unified School District might price $8 million single-A G.O. bonds. A Lake County financing authority plans to sell $5 million of Southeast Regional wastewater revenue bonds with a triple-B rating.
(Aug. 9, 2011) -- The Standard & Poor’s downgrade of the United States to AA+ will indeed affect certain municipal bond ratings. Some of those munis formerly rated AAA, based on the level of federal support, have already been cut to AA+ by S&P. Aside from investors holding such specific bond issues, the broadest impact for smaller investors will be on “pre-refunded” municipal bonds. These are municipal bonds that were “refunded” before their call date. An escrow was set up, often with triple-A Treasury securities, to pay off principal and interest until the bonds can be called. These escrows remain safe and investors will continue to be paid as planned. However, pre-refunded bonds might trade off a little in the secondary market because the rating agencies are taking a darker view of the U.S. and its finances. Investors who pursued pre-refunded munis for their safety still can count on them being among the safest securities around. If anything, the pressure on the U.S. to start showing some real fiscal discipline might be a longer-term plus for investors, despite the short-term impacts of these downgrades. This discipline also might reduce funding for some state and local projects and programs, though the impact is still unclear. Still, many local and state municipal bonds are backed by clear and reliable revenue streams and, we would argue, are just as safe or safer than a U.S. promise dependent on a printing press churning out dollars.
(Aug. 8, 2011) -- Late last week we mentioned that the California Department of Water Resources is readying a power supply revenue bond sale of as much as $1 billion. The state treasurer’s office is listing a potential sales date of August 17. It appears that the proceeds will be used to replace a good chunk of the department’s variable-rate debt with fixed-rate bonds. The department entered the business of power procurement and related power bond sales in the aftermath of California’s energy crisis a decade ago. It still has almost $8 billion of bonds outstanding, with a final maturity in 2022. The bonds are backed by charges on customers of investor-owned utilities. We thought these bonds were an opportunity when they were sold; since then the creditworthiness has improved because the state’s exposure to power market volatility has decreased. Most of the department’s remaining power contracts expire in two years, though one will last until 2015. Standard & Poor’s released an AA-minus rating for the upcoming bond sale.
(Aug. 5, 2011) -- We are still waiting to see how the new bond sales calendar shapes up for next week (the week of August 8). A powerful rally in recent days might make some issuers consider refunding bond sales that didn’t make sense at higher rate levels. The Port of Oakland priced a refunding bond yesterday to take advantage of falling tax-exempt yields; that is one less deal on our Upcoming Sales calendar. However, a $300 million bond sale by the Los Angeles Department of Water and Power looks like it could price as soon as next week. We believe the deal involves water system revenue bonds that were approved by the municipal utility’s board in July. Two resolutions approved by the board in July authorized the issuance of up to $350 million of water system revenue bonds to refund some water system 2001 Series A and 2004 Series C Bonds. Standard & Poor’s late yesterday assigned an AA rating to the water system bonds. We will add other looming sales in an update early next week.
(Aug. 4, 2011) -- Lifting the cloud of the federal debt ceiling debate had an immediate impact on tax-exempt bond yields. On Wednesday some general indices dropped one-tenth of a percentage point or more, and rates stand at their lowest level since mid-fall of 2010. Some maturities on higher-grade munis are probably a quarter-point lower than they were a week ago. Now the municipal bond market can go back to looking at the reality of low supply that is helping keep a lid on tax-exempt rates. However, some tax-exempt yields are still somewhat attractive vis-à-vis U.S. Treasury bonds. The question is whether munis still have some room to rally, or whether U.S. Treasury yields will rise relative to tax-exempts.
(Aug. 1, 2011) -- There aren’t a lot of bond sales on tap for California’s municipal bond market this week unless some refundings come out at the last minute. A $78 million revenue bond refunding for the Sacramento Regional County Sanitation District is pending this week. A financing authority will issue the bonds, which carry Aa3, AA, and AA-minus (Fitch) ratings. The Davis Joint Unified School District plans to price $10 million of general obligation refunding bonds with an AA-minus rating. The West Contra Costa Unified School District has released a preliminary official statement for an $85 million general obligation refunding bond sale; pricing could occur this week. The Belmont-Redwood Shores School District is selling $19.7 million tax-exempt general obligation bonds with Aa2 and AA credit ratings. It is also selling $31 million tax-exempt Belmont Elementary Schools Facility Improvement District G.O. bonds with the same double-A ratings. A financing authority’s bond sale for Coast Community College District also might price in coming days. The City of San Buenaventura (commonly known as Ventura) is selling $346 million of revenue bonds on behalf of Community Memorial Health System. As far as we know that deal wasn’t priced last week and now might sell this week. Moody’s Investors Service rates the bonds Ba2 and Standard & Poor’s, BB. Bond denominations will be $100,000 instead of the typical $5,000 for higher-rated deals. A couple unrated Mello-Roos bond sales also might price this week.
(July 29, 2011) -- Moody’s Investors Service yesterday placed 177 public finance credits on a list for potential downgrade due to the possible impact of a downgrade of the United States triple-A rating. The good news? We didn’t see any California issuers on the list. “The ratings of these local governments, particularly those with a high economic dependence on federal activity, would be vulnerable to a downgrade of the U.S. government,” Moody’s said in a release. “In addition to the risk of federal job reductions, Moody’s review following a U.S. government downgrade would focus on a local government's reliance on capital markets, its dependence on federal revenues, its sensitivity to macroeconomic cycles, and its available financial resources to offset these risks.” Of course, there are other implications for state and local issuers if federal spending cuts eventually get implemented, and some California entities will have to deal with them.
(July 25, 2011) -- On Saturday morning we updated our yield table to include a sale we forgot to put in our weekly summary. It was large enough, at $125 million for the tax-exempt portion, to mention here. The Modesto Irrigation District’s electric system revenue bonds were rated A2 and A+. The five-year bond yielded 1.95% and the 10-year, 3.56%. The 15-year maturity yielded 4.37%. Those yields are a half-a-percentage-point higher (actually more) than last week's Aa3 and AA- deals from Los Angeles and the San Francisco utility.
(July 22, 2011) -- Here is a quick preview of next week’s expected new municipal bond sales in California. The San Diego County Water Authority plans to take competitive bids on Wednesday (July 27) on $175 million of water refunding revenue bonds. Look for strong investor interest because of Aa2 and AA+ credit ratings. At the other end of the credit spectrum, the City of San Buenaventura (commonly known as Ventura) is selling $346 million of revenue bonds on behalf of Community Memorial Health System. Moody’s Investors Service rates the bonds Ba2 and Standard & Poor’s, BB. Bond denominations will be $100,000 instead of the typical $5,000 for higher-rated deals. The nonprofit health system is building a replacement hospital to serve the community. It decided to build a new facility rather than try to retrofit an older facility to meet stringent seismic standards for hospitals. The Turlock Irrigation District plans to offer $214 million of first priority subordinated lien revenue refunding bonds. Standard & Poor’s assigned a single-A rating to the issue and Moody’s, A2. Fitch Ratings grades the Turlock deal A+. The Imperial Irrigation District, which has been in the market a handful of times this year, plans to return with $77 million of electric system refunding revenue bonds. Moody’s rates the bonds A1 and S&P, AA-minus. San Diego County is ready to sell $32 million of certificates of participation that have been on our calendar for some time. The COPs are rated Aa3 and AA+. The Poway Unified School District School Facilities Improvement District No. 2007-1 could price $105 million of general obligation bonds with Aa2 and AA-minus ratings. The Needles Unified School District, which had been on our calendar months ago before being dropped when a sale did not occur, is now ready to sell a small issue of general obligation bonds. S&P rates them single-A.
(July 20, 2011) -- The City of Los Angeles doesn’t have to shed any tears over a recent downgrade. Moody’s Investors Service recently lowered the city’s general obligation bonds to Aa3, putting them on the same level as other rating agencies at their AA-minus level. Yesterday the city sold $117 million of G.O. bonds (the city also is selling more G.O. bonds on Thursday, July 21). An investor would have had to go all the way out to a 2029 maturity to get a tax-exempt 4.04% on yesterday’s sale. The 10-year maturity yielded 2.95%. The five-year yielded 1.34%, and the seven-year, 2.06%. The longest maturity in the deal, 20 years, yielded 4.23%.
(July 19, 2011) -- We have been mentioning for some time that the San Francisco Public Utilities Commission was lining up a water bond sale of roughly $700 million. Competitive bids from underwriters will be taken this Thursday, July 21. Yesterday Moody’s Investors Service downgraded the commission’s water bonds by one notch, lowering them to Aa3 from Aa2. The downgrade affects the new sale and the commission’s existing water revenue bonds (totaling $3.7 billion if the new debt is included). The downgrade, according to Moody’s, reflects “SFPUC’s narrow current and projected debt service coverage by net revenues, very high debt load, and the need to implement significant future rate increases in order to maintain adequate coverage.” The water revenue bonds are rated AA-minus by Standard & Poor’s, essentially even with Moody’s new rating. Moody’s said the rating change “also reflects our view that future coverage levels will be managed to lower amounts versus previous expectations of higher coverage performance. Though the current revisions to debt service coverage are only a modest change from the most recent expectations, it is sufficient to result in the current rating change.” The water system’s net revenue has been softer due to various factors, such as increased conservation efforts, the economic downturn, and substantial rainfall in fiscal 2011, Moody’s said. On the positive side, the issuer benefits from a “sound water supply, healthy projected rate increases, and generally strong service area.” The commission doesn’t just serve San Francisco; its Bay Area service area covers about 2.5 million people. San Francisco's 800,000 residents represent the retail segment of the SFPUC’s water sales activity, Moody’s noted. However, almost 70% of the commission’s customers are served by wholesalers, and half of these wholesale customers receive 100% of their water from the SFPUC. This “helps to bring an element of stability and predictability to water sales revenue,” Moody’s said. The outlook is "stable."
(July 15, 2011) -- Competitively-bid sales will take the spotlight during the week of July 18th in California’s municipal bond market. In these sales, underwriters are selected on the day of the offering after submitting competitive bids. We mentioned in past weeks that the San Francisco Public Utilities Commission was lining up a bond sale of roughly $700 million. Competitive bids from underwriters will be taken on Thursday, July 21. The lion’s share of the sale ($634 million) of water revenue bonds will provide money for the water system improvement program. Other water revenue bonds totaling about $66 million (in two series) will pay for water main and Hetch Hetchy improvements. A $76 million water refunding bond sale also is planned on July 21.The water revenue bonds are rated AA-minus by Standard & Poor’s. The City of Los Angeles also is planning two competitively-bid sales next week. The first piece, $117 million of general obligation bonds, will be sold on Tuesday (July 19) for new money. A $380 million Los Angeles G.O. refunding bond sale is planned for Thursday, July 21. The bonds are rated AA-minus and Aa3 after a one-notch downgrade by Moody’s Investors Service. In negotiated sales where the underwriter is picked ahead of time, the Modesto Irrigation District plans to sell $110 million of tax-exempt electric system revenue refunding bonds carrying A2 and A+ ratings. The district also is selling a smaller taxable portion. The Mountain View Shoreline Regional Park Community in Santa Clara Community expects to price $40 million of revenue bonds. They are rated single-A by Standard & Poor’s. The community was created in 1969 to develop 1,547 acres of bayfront land in the northeastern part of Mountain View. Revenue supporting the bonds comes from an allocation of tax revenue paid into a special fund of the community. In fiscal 2011 Google Inc. was the top taxpayer in the community, representing 37.4% of total value. The community’s allocated revenue rose to as high as $29.1 million in fiscal 2010 before dropping to $24.7 million in fiscal 2011, according to the preliminary official statement. The Moreland School District plans to offer $8 million of G.O. bonds with an Aa3 rating. The City of Irvine plans to price $37 million Reassessment District 11-1 refunding limited obligation improvement bonds; they are rated BBB+ by S&P.
(July 11, 2011) -- So far, at least, this week is shaping up as a slower one for new issuance in terms of dollar volume, including a few smaller school bonds. That could change if refunding deals pop up (or are moved up) because of market conditions. The San Diego County Water District expects to price an $88 million deal. However, we believe this piece involves subordinate-lien water revenue notes with a shorter maturity (rated Aa3 and AA). The water authority also is expected soon to price water revenue refunding bonds rated Aa2. That deal could be $90 million-plus. San Jose plans to sell more than $200 million of airport revenue bonds rated A by Standard & Poor’s and A-minus by Fitch Ratings. A portion will be subject to the federal alternative minimum tax. The deal will offer juicier yields thanks to the single-A ratings. A few smaller local school bonds are looming this week. The Glendale Unified School District plans to offer $22 million of double-A general obligation refunding bonds. The Oak Grove School District in Santa Clara County could price $16 million of G.O. bonds (Aa2 and AA-minus). The Windsor Unified School District is selling $9 million G.O. bonds (AA-minus). The Garvey School District has a $5 million general obligation deal ready to go, with A1 and A+ ratings. The Fort Bragg Unified School District is selling $9 million of single-A general obligation bonds.
(July 7, 2011) -- We aren’t putting many updates up this week since it is a slow period in the days after July 4th. The San Diego Community College District did price for “retail” investors its sale of about $370 million of general obligation bonds. The deal appeals to a broad range of buyers thanks to a Moody’s Investors Service grade of Aa1 and a Standard & Poor’s rating of AA+, both of them one notch below triple-A. The bonds are split into various series. A 12-year maturity in one series offered a preliminary tax-exempt yield of 3.55%; a 22-year bond in another series yielded a preliminary 4.68%. Pricing for institutional investors will establish the final yields.
(July 5, 2011) -- New issuance might slow a bit in the days after the July 4th holiday. Still, a few sales loom and they are in the double-A rating category. One sale in particular will dominate the California market. The San Diego Community College District expects to price $350 million of general obligation bonds. A smaller G.O. refunding piece of about $15 million also is set to price. The deal will get the attention of conservative investors thanks to a Moody’s Investors Service grade of Aa1 and a Standard & Poor’s rating of AA+, both of them one notch below triple-A. The rating reflects “the district’s enormous tax base and solid resident wealth levels,” Moody’s said in a report. The Eastern Municipal Water District plans to sell about $50 million of water and sewer refunding revenue bonds. This debt carries double-A ratings (and an AA+ from Fitch). The water district serves an area running from Moreno Valley south to Temecula and eastward to Hemet and San Jacinto. The San Rafael City High School District plans to price $29 million G.O. bonds that are rated Aa2 and AA. The San Rafael City Elementary School District expects to sell $28 million G.O. bonds rated a notch lower (Aa3 and AA-). The San Mateo High School District is ready to price $35 million of general obligation bonds with Aa1 and AA ratings.
(July 1, 2011) -- New municipal bond sales in California have dropped by 58% so far in 2011, compared with the same six-month period in 2010, according to statistics tracked by Thomson Reuters. California sales so far in 2011 totaled about $12.7 billion, down from $30 billion a year ago. Across the U.S., municipal bond sales are down by about 44% in 2011 from the same period in 2010. There was some good news in June, however, because new sales dropped only about 9% in 2011 over 2010, according to Thomson Reuters. The Bond Advisor has noted that refundings (which refinance higher-cost older bonds) have been picking up recently after tax-exempt yields plunged. An issuer’s market thanks to the same low rates also is drawing some new-money bond sales, especially among borrowers with double-A grades and higher. A rush to sell taxable Build America Bonds before a generous federal subsidy expired drove muni bond sales up in 2010, and stole some volume from 2011. The State of California also stayed on the sidelines this year amid its budget debate, though it will add some volume to new sales later in 2011.
(June 29, 2011) -- California’s new budget will let the state proceed with a revenue anticipation note sale this summer, Treasurer Bill Lockyer said in a letter to state leaders. The state’s RANs can be a more attractive place to park short-term money because California often pays a premium over other issuers’ notes. This year, however, the premium might not be as juicy because the state made some progress in reducing its structural deficit. Investors also will be happy some sort of budget is in place before the fiscal year began. The budget plan “eliminates significant litigation risk which accompanied some previous proposals, and includes a strong contingency plan in the event of revenue shortfalls,” Lockyer’s letter said. “I am confident the plan provides sufficient assurance that the state can repay its normal summer cash flow borrowing by the end of the budget year.” Lockyer also noted that California probably can reduce its projected RAN sizing by $2 billion, bringing the sale closer to $5 billion.
(June 28, 2011) -- California has a new fiscal 2012 budget, whether or not it is truly balanced. Governor Jerry Brown and fellow Democrats decided to abandon hope of getting an election on extending tax increases and agreed on a different path to get rid of a remaining $9.6 billion gap in the spending plan for the fiscal year that begins July 1. The biggest question mark is whether $4 billion of projected additional revenue will actually materialize. There are also about $3.4 billion of added spending reductions beyond what the legislature already approved. If the higher revenue estimate doesn’t pan out, about $2.6 billion of added cuts will be triggered. The budget plan also will probably set off a legal fight because the legislature is expected to send bills to Brown that would essentially curtail or end local redevelopment agencies. Brown in January proposed halting redevelopment and redirecting certain tax increment dollars to other purposes; money dedicated to existing tax allocation bond issues would be protected. The state budget, while representing some progress, doesn’t deal with pension reform and doesn’t include a future spending limit. It also means a projected gap of $5 billion already is possible in fiscal 2013. A citizen initiative (“citizen” meaning public unions) to pursue new revenue (“tax increases”) is possible in 2012. Prices on California’s general obligation bonds will be driven more in coming months by a scarcity factor because new issuance will remain muted; the new budget probably is somewhat neutral unless a rating agency decided a downgrade is merited. The “trigger” that requires more spending cuts if the additional revenue doesn’t show up might be one factor that helps avoid any downgrade. In addition, investors will be more focused on the fact a budget means the state can sell revenue anticipation notes and avoid the black eye of another cash crunch, IOUs, etc.
(June 24, 2011) -- If you aren’t thrilled with relatively low tax-exempt yields, you will be disappointed again with one sale lined up for the week of June 27. A preliminary official statement is out for a $128 million Los Angeles County Sanitation Districts Financing Authority revenue bond sale. Moody’s Investors Service grades the bonds Aa1 and Standard & Poor’s, AA+, making the deal one notch below triple-A. The issuer will like its borrowing costs, investors not so much. The high ratings are driven by a requirement that participating districts make installment payments from a property tax allocation. That is why, in parenthesis, the P.O.S. refers to “senior ad valorem obligation bonds.” The sanitation district system provides sewage treatment and disposal to more than 5 million people covering a broad swath of Los Angeles County (though not including the City of Los Angeles). In another high quality sale, the City of Saratoga plans to take bids on June 29 (Wednesday) on $12 million of general obligation bonds carrying a triple-A rating from S&P. There will be some lower-rated alternatives next week. Santa Rosa high school and elementary school districts will take bids June 28 on A+ general obligation bonds. The Pittsburg Unified School District is selling (through a finance authority) $60 million G.O. bonds with Aa3 and A ratings. Though we haven’t seen the details, the San Francisco Airport Commission might sell around $300 million of airport revenue refunding bonds in coming days. That issuer’s debt has been rating in the single-A category in the past. A handful of smaller school bond sales also are possible next week.
(June 23, 2011) -- The Commonwealth of Puerto Rico plans to sell $304 million of public improvement general obligation bonds as soon as next week. A preliminary official statement is circulating for the sale. Interest on the bonds is tax-exempt from both federal and state income-tax levies, making the debt a diversification possibility for California residents. Some investors will shy away from Puerto Rico bonds because of lower ratings (Standard & Poor’s, BBB, Fitch Ratings, BBB+, and Moody’s Investors Service, A3). However, investors who don’t expect a default can pick up some decent yield premiums on the commonwealth’s bond sales. Puerto Rico has been hurt for a decade by persistent budget deficits, which peaked in fiscal 2009. Governor Luis Fortuno has been trying to rein in the problem and in our view has made progress. Among his remaining challenges are unfunded retirement system costs.
(June 22, 2011) -- The City of San Jose’s council agenda this week included authorization for airport revenue bonds of up to $300 million to refund existing commercial paper and also possible refund certain bonds sold in 1998 and 2001. An estimated $150 million part of the tax-exempt sale for San Jose International Airport would be subject to the federal alternative minimum tax. The other part of the sale would be for non-AMT bonds. Rating agencies have just released grades for the new sale. Moody’s Investors Service rates the bonds A2 and Standard & Poor’s, A. Both rating agencies have a “negative” outlook. Enplanements at the San Jose airport declines for four years, but have increased for the first five months of 2011, Moody’s said. Debt levels also have grown in connection with an airport modernization program, Moody’s added.
(June 21, 2011) -- The Los Angeles City Council today (June 21) will consider approving a $125 million sale of general obligation bonds for storm water projects. In addition, the council will consider a Budget and Finance Committee request to approve up to $600 million of G.O. refunding bond sales through June 30, 2012. It appears that more than $250 million of those refunding bonds would be issued in mid-July, along with the new $125 million sale mentioned above. The refunding portion could no doubt rise depending on market conditions. The bonds will be sold by competitive bidding to underwriters. Fitch Ratings has already assigned an AA-minus grade to the general obligation bonds. Fitch also assigned its top grade to the city’s $1.3 billion sale of tax and revenue anticipation notes. While the city has faced budget problems, the broad tax base supporting the G.O. bonds will make the sale attractive to a broad range of investors.
(June 18, 2011) -- Many of the larger bond sales we expect to see priced during the week of June 20th have already been on our Upcoming Sales calendar for some time. Several of them fall in the double-A rating category. For example, it has been awhile since we flagged the San Marcos Unified School District’s $145 million offering of general obligation bonds. They appear ready to price in coming days and will fare well from an issuer’s standpoint thanks to Aa2 and AA- ratings from Moody’s Investors Service and Standard & Poor’s, respectively. The Los Angeles Harbor Department also plans to price $92 million refunding revenue bonds. These bonds are rated double-A across the board from all three rating agencies (including Fitch Ratings) and have a “stable” outlook. About two-thirds of the sale is subject to the federal alternative minimum tax. The Los Angeles Port is the busiest in the nation based on certain measurements, including container traffic and revenue per ton. In this day and age of worldwide trade, the port provides an essential service to the economy. The Contra Costa Water District in coming days could price about $45 million of water revenue refunding bonds. Moody’s rates the debt Aa2; S&P and Fitch, AA+. The San Bernardino Valley Municipal Water District plans to take bids Thursday (July 23) on about $8 million certificates of participation. The small deal is noteworthy in that the COPs are rated AAA by Standard & Poor’s. There will be some other small sales, including a possible Big Bear Lake redevelopment deal and a Malibu Mello-Roos special tax bond. A preliminary official statement also is out for a double-A, $12 million general obligation bond sale by the Manhattan Beach Unified School District.
(June 16, 2011) -- The Los Angeles Department of Water and Power tentatively priced its power system revenue bonds for retail buyers the other day. The longest 11-year maturity was yielding around 3.25% for the Aa3 and AA-minus debt. The State of Utah also priced its triple-A general obligation bonds. An 11-year maturity looked to be yielding a bit above 3% and if a California resident bought it, he or she would pay state income tax on the Utah interest. That is too much to pay, in our view, for owning an out-of-state triple-A credit, but some Californians might buy Utah anyway to get that rating. A State of California G.O. yields roughly 4% on a 10-year maturity in the secondary market.
(June 14, 2011) -- Our summaries below of this week’s planned municipal bond sales in California don’t mention out-of-state sales. That is because, traditionally, California residents want the benefit of federal and state exemption for interest earned on in-state bonds. You’ll pay state income tax on out-of-state municipal bond interest, eating into your actual returns (except for those bonds issued by Puerto Rico, the Virgin Islands, and similar such U.S. commonwealths or territories, which are exempt from state tax). We bring all this up because the State of Utah is selling more than $600 million of general obligation bonds this week. They are rated triple-A. Invariably some investors might look at such a deal and figure they can get some “credit” diversification and safety in exchange for accepting a lower interest rate, along with paying state income tax on interest earned. Last year we looked at these trade-offs and suggested that investors still could find plenty of diversification inside California, even when times are tough. In the end, however, individual investors have their own comfort level and goals for “diversification.” If your other alternative is to let huge chunks of money sit in short-term accounts that pay virtually nothing, then the Utah deal is a step up in generating interest income. We think you’re missing out on better opportunities in California, even if local G.O. bonds or other “essential-purpose” securities aren’t as “diversified” as a statewide issue. That is what makes the municipal market so fascinating. It provides tons of diversity and alternatives.
(June 11, 2011) -- A $675 million power system bond sale by the Los Angeles Department of Water and Power will take center stage for new municipal bonds priced in California during the week of June 13. Moody’s Investors Service rates the bonds Aa3; Standard & Poor’s and Fitch Ratings, AA-minus. The maturity schedule for the sale might be packed into about a decade, from 2012 to 2022. Proceeds from the new sale will refund certain outstanding 2001A power system revenue bonds and certain 2003B power system revenue bonds. Los Angeles DWP is the largest municipal utility in the United States. On June 4 on our Bond Updates page we previewed an interesting bond sale benefiting The Broad museum project. This $150 million sale could price in coming days through the California Infrastructure and Economic Development Bank. Moody’s rates the bonds Aa1, one notch below triple-A. On Tuesday (June 14), the Pomona Unified School District will take competitive bids from underwriters for $46 million of general obligation bonds. These will offer a little extra yield because they are rated single-A. Also expected to price soon, if not this week, is a $44 million sale of water revenue refunding bonds by the Contra Costa Water District. The preliminary official statement is circulating. These bonds are rated Aa2 by Moody’s and AA+ by S&P and Fitch. (The water district also is selling water revenue notes.) The City of Livermore will take bids on June 16 for $17 million certificates of participation with a double-A rating. The Berryessa Union School District is ready to sell $7 million of G.O. bonds with an Aa2 rating. San Juan Capistrano plans on June 14 to offer $3 million of judgment obligation bonds that are rated one notch below triple-A (at AA+). The obligation of the city to cover payments on such judgment obligation bonds is “absolute and unconditional,” even though it doesn’t levy or pledge any form of taxation for the debt. That is why judgment bonds tend to get a high rating as long as the issuer itself is in decent shape. Nevada County plans to sell $9 million of certificates of participation with an A+ rating; the COPs also could feature Assured Guaranty Municipal insurance. The Grand Terrace Community Redevelopment Agency also is ready to sell $15 million of tax allocation bonds with a single-A rating. The Temecula Valley Unified School District expects to sell unrated Mello-Roos special tax bonds for C.F.D. Number 2004-1, Improvement Area B.
(June 9, 2011) -- We have a great addition for your summer reading list, except you better read it late this spring. A preliminary official statement is out for a $675 million power system bond sale by the Los Angeles Department of Water and Power. The bonds could price by next week. After months and months of celebrating any municipal bond deal that approached even $100 million, a sale this size is like watching the good times roll again. Moody’s Investors Service rates the bonds Aa3; Standard & Poor’s and Fitch Ratings, AA-minus. The maturity schedule for the sale might be packed into about a decade, from 2012 to 2022. Proceeds from the new sale will refund certain outstanding 2001A power system revenue bonds and certain 2003B power system revenue bonds. Los Angeles DWP is the largest municipal utility in the United States. While the utility certainly isn’t without its challenges, including new laws on California “climate change” policy and internal city battles over rate increases, this is still an important “essential-purpose” issuer. The deal will be a good test of an issuer’s market, in terms of currently-low interest rates, versus the need to find the right yields to clear all the bonds. We have a feeling there will be ample demand for this bond sale.
(June 8, 2011) -- Bond insurance still has a certain appeal for some investors, as a new deal priced yesterday through competitive bidding proved. The Atascadero Unified School District sold $26 million of general obligation bonds. Moody’s Investors Service rates the school district G.O. debt Aa3. However, we believe Assured Guaranty Municipal insurance also was tacked on to back the bonds. Moody’s rates AGM’s guarantee Aa3, the same as the “underlying” rating on the school district. Standard & Poor’s rates AGM’s financial strength AA+, two notches above Moody’s view, though S&P is reconsidering its bond insurance criteria and might make it harder for AGM to keep a rating that high. The financial guarantee has to be providing some psychic benefit for investors as a back-up security because, from a rating standpoint, they own an Aa3 credit either way. On maturities up through 15 years the Atascadero school bonds yielded just a little bit less than last week’s G.O. deal for the Southwestern Community College District, which is rated a notch higher by Moody’s at Aa2. Sample Atascadero school tax-exempt yields included 3.15% in 10 years and 4.25% in 15 years.
(June 6, 2011) -- In our preview of this week’s expected bond pricings (item below), we initially included the Santa Monica Redevelopment Agency sale of $41 million tax allocation bonds with AA (S&P) and AA-minus (Fitch) ratings. In fact, the bonds were priced at the end of last week, after we put together our market summary. Yields included a 5.05% on a 2032 maturity and 5.36% on a 2042 maturity. As we expected, the double-A rating and “name” credit benefited the borrower. Most redevelopment bonds sold in recent weeks and months paid yield penalties, reflecting general concern over property values and the uncertainty over Governor Jerry Brown’s still-pending proposal to eliminate local redevelopment efforts in the future. The Santa Monica bond proceeds will be used for the city’s Earthquake Recovery Redevelopment Project, which was formed after the 1994 Northridge Earthquake. Also at the end of last week, the Mayers Memorial Hospital District sold $5 million of general obligation bonds with a BBB-minus grade from Fitch Ratings. The district paid 5.05% on a 2013 maturity and 8% in 30 years. The hospital deal also included capital appreciation bonds. Mayers Memorial is located 70 miles northeast of Redding and, needless to say, is a rural hospital.
(June 4, 2011) -- A good variety of offerings will come to market in coming days. Most of the new bond sales we expect could price during the week of June 6th have already been mentioned by us before, or at least been on our Upcoming Sales calendar for awhile. The Metropolitan Water District of Southern California, a key water supplier, plans to price close to $170 million of water revenue refunding bonds. As we noted recently, Fitch Ratings just cut MWD revenue bonds by one notch to AA+ from AAA. Even so, the Bond Advisor views bonds of the Metropolitan Water District as an important source of diversification for investors wanting a “safe” name in their portfolio. This is one of those ultimate “essential-service” providers. MWD provides roughly half of Southern California’s water supply, covering six counties with 19 million residents. The Santa Clara Unified School District has a preliminary official statement out for $172 million of general obligation bonds. Standard & Poor’s rates them AA with a “negative” outlook. The San Mateo Union High School District also is ready to sell higher-rated bonds with a $90 million G.O. offering. Moody’s rates them Aa1, a notch below triple-A, and S&P rates them AA, two notches below triple-A. Attractive interest rates from the standpoint of issuers are driving municipal bond refunding of older deals. As one example, the Sacramento City Unified School District expects to price $110 million of general obligation refunding bonds. The Imperial Irrigation District expects to price $77 million of electric system refunding bonds. Proceeds will refund certain revenue commercial paper warrants tied to the El Centro Unit 3 Repower Project, which is expected to add 100 megawatts of generation capacity. Moody’s Investors Service rates the Imperial deal A1, S&P, AA-minus, and Fitch, A+. The Carlsbad Unified School District is ready to sell more than $50 million of new G.O. bonds with Aa2 and AA ratings. The Mt. Diablo Unified School District plans to sell $42 million general obligation bonds with an Aa3 rating from Moody’s. We recently noted that Standard & Poor’s upgraded the City of Oxnard ahead of a planned $24 million lease-revenue refunding bond sale. The city’s lease-revenue bonds rose to A+ from A and are ready to price. A triple-A bond deal we flagged recently based on Fitch’s rating, from the South Coast Water District, also is expected to price. But the water district’s G.O. sale is less than $3 million; S&P rates it AA+. The Oak Park Unified School District is pricing almost $10 million of G.O. bonds with an A1 rating. The St. Helena Unified School District plans to sell $20 million of G.O. bonds with an AA+ rating from S&P. On June 7, the Atascadero Unified School District will take bids from underwriters on $26 million of G.O. bonds with an Aa3 rating.
(June 3, 2011) -- From time to time we note that “conservative” investors are missing the boat if they ignore high-quality tax-exempt bond sales by private colleges. A triple-A issuer (Pomona College) is readying a sale soon. The bad news is that the bond deal will only be $7 million. The revenue bonds will refinance the college’s existing 2001 bonds. The AAA rating reflects a whopping financial cushion. Pomona College’s unrestricted and temporarily restricted cash and investment stood at almost $1.4 billion at the end of fiscal 2010, Fitch Ratings said. Another triple-A issuer, at least based on Fitch’s rating, also is in the market soon. But the South Coast Water District’s G.O. sale is even smaller, at about $3 million
(June 2, 2011) -- Attractive interest rates from the standpoint of issuers also are driving municipal bond refundings, much as a homeowner might refinance a higher-cost mortgage. We see the Sacramento City Unified School District is jumping into the market with $110 million of general obligation refunding bonds. The preliminary official statement is out. Moody’s rates the Sacramento school’s existing G.O. bonds double-A but has had a “negative” outlook on them. We haven’t seen the new refunding bonds rated yet. Expect to see more refundings from issuers in the weeks ahead. Speaking of school district deals, the Carlsbad Unified School District has been on our calendar for awhile with new G.O. bonds. The deal is noted for its double-A ratings. Stanford Hospital and Clinics, through the California Health Facilities Financing Authority, is remarketing $190 million of variable-rate debt into a long term rate mode. The bonds will no longer be backed by a letter of credit or any other credit enhancement once they are in this long-term mode. S&P just changed its outlook to “positive” from “stable” on Stanford Hospital and rates its long-term hospital revenue bonds A+.
(June 1, 2011) -- Moody’s Investors Service has affirmed its A1 rating on California general obligation bonds and maintained a “stable” outlook, citing the prospects for a constructive new budget in coming weeks. The rating “incorporates the expectation that the state will pass a budget that does not rely heavily on one-time measures, and that it will do so in time to avoid a cash crisis,” Moody’s said. “If through the summer months there is a budget impasse which results in a severely late budget, cash crunch, and the enactment of a structurally imbalanced budget, we may reconsider whether the A1/Stable is still appropriate.” While California has suffered from a wave of “bad press,” the Moody’s report touches on both strengths and weaknesses. “The state benefits from a large, diverse economy, high wealth, a moderate debt burden, and well-funded pension system,” Moody’s said. “A volatile tax revenue structure and governance issues, particularly restrictions placed on the legislature in the budgeting process and a reluctance to build reserves during the last recovery, have made it difficult for the state to address economic and revenue downturns. Financial strength has deteriorated in the past three years and, while it is likely that the worst is over, financial weakness may continue. That said, long-term economic prospects are good, and long-term liabilities (debt, unfunded pension liabilities, and repayment of other obligations captured in negative audited balances) are moderate compared to many other states.” Moody’s also affirmed credit ratings on other debt “notched off” of California’s G.O. rating. Overall the affirmation affects more than $90 billion of net tax-supported debt outstanding, according to Moody’s.
(May 31, 2011) -- The education community will continue to keep new-issue bond activity afloat this week. There will be at least a few pricings, despite the holiday-shortened week because of Memorial Day. The Southwestern Community College District plans to sell $70 million general obligation bonds with an AA-minus rating from Standard & Poor’s. The Chula Vista-based college district has just celebrated its 50th anniversary. The Alvord Unified School District plans to sell more than $50 million of G.O. bonds with A+ and A1 ratings. The Oak Park Unified School District also is looking at pricing almost $10 million of G.O. bonds with an A1 rating. A couple other smaller school deals also could come to market this week. For example, the St. Helena Unified School District plans to sell $9 million of tax-exempt G.O. bonds. The deal, which might price this week, is noteworthy because S&P grades the bonds AA+, or one notch below triple-A. A new redevelopment bond is noteworthy in that it offers double-A credit ratings. The Santa Monica Redevelopment Agency expects soon (perhaps by next week) to price $41 million tax allocation bonds with AA (S&P) and AA-minus (Fitch) ratings. Proceeds will be used for the city’s Earthquake Recovery Redevelopment Project, which was formed after the 1994 Northridge Earthquake. The Inland Valley Development Agency looks to price $170 million of tax allocation bonds that are rated single-A. A good chunk of this deal will be variable-rate and include mandatory tender dates within a few years. The Inland development agency is a joint powers authority made up of San Bernardino County and the cities of San Bernardino, Colton and Loma Linda. It is redeveloping the non-aviation portion of the former Norton Air Force Base and also has a redevelopment project area of about 13,000 acres of surrounding properties.
(May 26, 2011) -- Since we mentioned a one-notch upgrade for Oxnard elsewhere, we suppose we should thrown in a one-notch downgrade to make the municipal bond haters happy. Of course, is this is a “traditional” municipal bond? No. Are the bonds tax-exempt? Yes. Revenue bonds backed by the Loma Linda University Medical Center are now rated Baa3 by Moody’s Investors Service, the lowest investment-grade level, after a one-notch cut from Baa2. Poor operating performance in fiscal year 2010 helped drive the downgrade, along with a sour economy in the Inland Empire “and the failure of the organization to improve cash balances despite an unbudgeted gain under the California State provider fee program,” Moody’s said. The outlook is “stable” because of “the medical center's strong ties to Loma Linda University, the medical center’s strong market position within San Bernardino county, and the stability that we believe is achieved through the organization’s size, breadth of clinical offerings, and reputation,” Moody’s added. The downgrade affects $362 million of debt, including variable-rate bonds.
(May 25, 2011) -- The State of California’s fiscal and credit prospects are still “clouded,” despite “welcome progress” on its fiscal 2012 budget so far, Fitch Ratings said in a new report. About $11 billion of budget adjustments have already been enacted out of a $13.4 billion deficit-reduction package that was already approved, Fitch noted. Most of those adjustments were spending cuts to deal with a projected $27 billion deficit. In addition, the governor’s May budget revision includes almost $7 billion of higher-than-expected revenue that wasn’t projected in January. Overall that leaves a budget gap of $9.6 billion to be solved. The deficit is still “substantial, and achieving agreement on a final budget balancing package is likely to be contentious and protracted given controversial elements of th proposal, the lack of easily achievable alternatives, and the highly partisan decision-making environment of the state’s capital,” Fitch said. The extension of temporary tax increases is just one item of contention still on the table. Fitch noted that the May budget revision is a “clear improvement” over past one-time fixes; the new plan would try to address projected structural imbalances and repay internal borrowing. This week’s U.S. Supreme Court decision ordering California to reduce its prison population is one example of the fiscal challenges that can arise in addition to issues already on the state’s plate, Fitch said. Fitch noted that its A-minus rating on the state’s G.O. bonds is “very low” in light of the breadth and depth of California’s economy, its tax base, and the strength inherent in the state’s sovereign powers.
(May 23, 2011) -- A highly-rated school district will be in the new-issue market this week with general obligation bonds, along with a school that can boast of good name recognition thanks to the city it serves. The Newport-Mesa Unified School District could price close to $100 million of G.O. bonds that carry an Aa1 rating from Moody’s Investors Service, or one notch below triple-A. Standard & Poor’s rates the bonds AA. The school district serves Newport Beach and Costa Mesa and can boast of a tax base of about $48 billion. The median tax base for Aa1 school districts is about $25 billion, according to Moody’s. As compelling, the Newport-Mesa district’s assessed valuation didn’t even decline in fiscal 2010 or 2011, bucking a trend for many school districts (and other issuers). Granted, assessed valuation growth was “anemic,” as Moody’s recently noted, but that is still a credit positive in the current housing and economic environment. The Palm Springs Unified School District, which doesn’t need an introduction thanks to the city it serves, plans to sell $89 million of G.O. refunding bonds this week. S&P rates the bonds AA-minus, or three notches below triple-A. Another G.O. deal rated AA-minus is planned by the Downey Unified School District; the small sale will total about $14 million. There will also be higher-yielding bond sales this week. The Mountain House Public Financing Authority plans to sell utility systems revenue bonds that are rated A-minus by S&P. The deal will finance water, wastewater, and storm drain systems for the Mountain House Community Services District, which serves a 7.5 square-mile area west of Tracy. A $13 million refunding revenue bond sale in Moorpark is tied to the Villa Del Arroyo mobile home park. S&P rates the bonds BBB. The West Sacramento Area Flood Control Agency could price $13 million of special assessment bonds rated A by S&P and AA-minus by Fitch Ratings.
(May 18, 2011) -- A couple more higher-quality bond offerings are on the horizon. The Metropolitan Water District of Southern California, a key water supplier, plans soon to sell $170 million of water revenue refunding bonds. As we note on the Bond Updates page, Fitch Ratings just cut MWD revenue bonds by one notch. Even so, the Bond Advisor views bonds of the Metropolitan Water District as an important source of diversification for investors wanting a “safe” name in their portfolio. This is one of those ultimate “essential-service” providers. MWD provides roughly half of Southern California’s water supply, covering six counties with 19 million residents. The South Coast Water District plans to sell triple-A general obligation bonds soon. This Orange County provider benefits from a strong tax base. Unfortunately the bond offering will be very small.
(May 17, 2011) -- We haven’t gotten to a handful of recent updates because we have been busy wrapping up certain matters (the “wrongdoers”) alluded to on the front page of our April print edition. Among various recent developments, the governing board of the San Joaquin Hills Transportation Corridor Agency was told last week that a proposed debt restructuring plan was approved by bondholders. We had expected that approval was almost certain; such a restructuring wouldn’t be proposed in the first place without a sense the major bondholders would support it. In this instance, one big institutional holder had the most at stake. It held most of the 1997 convertible capital appreciation bonds maturing in 2018, 2020, 2022, 2023 and 2024 and the bondholder was asked to extend maturity dates without changing the current interest rates received. Those bonds will now mature from 2037 through 2042. The toll road agency also had asked bondholders to reduce the debt service coverage ratio from 1.3 times to 1.0 times. The market has long known that something would have to be done because toll road revenue never met past forecasts. Bondholders had an incentive to help the agency find a way to pay off all its bonds in full (and pay off most of them on the scheduled maturity dates, except for those being asked to provide the flexibility).
(May 16, 2011) -- California’s new-issue municipal bond market would be a lot worse off if it wasn’t for school and college district sales coming to the rescue. The week of May 16th is a perfect example to illustrate our point. Almost all of the new sales during this week are tied to the education community. A deal we recently mentioned, the Foothill-De Anza Community College District sale of $184 million G.O. bonds, looks like it will price in coming days. Moody’s Investors Service rates the bonds Aaa. Standard & Poor’s rates the deal two notches lower at AA. Even with that split rating, there will be plenty of investor demand for a higher-quality bond. The Foothill-De Anza district benefits from a large, wealthy, and diverse tax base serves about 105 square miles in Santa Clara County, including cities such as San Jose, Cupertino, Los Altos, Sunnyvale, and Mountain View. That isn’t the only higher-quality college district coming to market. On May 18 the Marin Community College District plans to take bids from underwriters for $53 million of general obligation bonds. Moody’s Investors Service rates the bonds Aa1, one notch below triple-A. Standard & Poor’s rates them AA. Looking for some added yield instead? The Stockton Unified School District plans to offer $76 million of G.O. bonds (including $11 million that will refund existing debt). The debt is rated A2 and single-A. The Stockton school district’s assessed valuation base has dropped recently, with a 10.2% decline in 2010 and 7.8% in 2011. Still, a single-A general obligation credit is worth a look for many investors, especially if the yield premium is juicier. A Tustin Unified School District school facility improvement district will be pricing $25 million of general obligation bonds with Aa2 and AA ratings. Another double-A deal is looming from the Oak Grove Elementary School District; it expects to price $13 million of (Aa2, AA-minus) G.O. bonds. The San Juan Unified School District also is circulating a preliminary official statement for $11 million of G.O. bonds that are rated Aa2. The South Whittier School District also might price $8 million of G.O. bonds this week, rated A1. Want to buy something beside a school G.O. bond? Community Development Properties Los Angeles County could price $43 million of lease-revenue bonds that are rated Aa3. Proceeds will finance a new administration building for the county’s Community Development Commission. In one plus for investors, the lease payments are not subject to abatement, appropriation or completion of the project. On Wednesday, the Soquel Creek Water District will take bids on $17 million of certificates of participation (rated AA). The Folsom Public Financing Authority also is circulating a P.O.S. for $12 million Mello-Roos special tax revenue bonds for C.F.D. No. 7. S&P rates the bonds A-minus.
(May 12, 2011) -- The City of Montebello seems to have taken a step to deal with part of a loan coming due from its redevelopment agency, one of the items that has brought the city attention over a budget crunch. According to the agenda explanation from last night’s city council meeting, the redevelopment agency is going to prepay part of its obligation under a reimbursement agreement with the city. The redevelopment agency, under the 2000 reimbursement agreement, gives the city certain tax-increment revenue for improvements made to benefit the Montebello Hills Redevelopment Project area. The city has used that tax-increment revenue to help make lease payments on a 2000 certificate of participation issue backed by Montebello’s general fund. The redevelopment agency is going to prepay part of its obligation to the tune of $17.5 million, equal to the amortization on the lease payments for the COPs from Nov. 1, 2014 through Nov. 1, 2026. The city will actually receive $13.5 million because the redevelopment agency gets a discount for prepaying the obligation. Why does all this matter? The city last year issued a $19 million tax and revenue anticipation note that was purchased by the redevelopment agency as an investment. The redevelopment agency will credit the $13.5 million toward that note no later than June 30, 2011, when the note is due. As a result, the transaction will help reduce the city’s payment burden on the TRAN. The agenda item for this matter can be viewed here (scroll down to page four of seven on the agenda item). Separately, Montebello will use two officials from Kosmont Companies to fill in for six months as interim city administrator. One of the two, Larry Kosmont, is a well-known consultant in municipal finance circles.
(May 11, 2011) -- It pays to be a highly-rated borrower in the current market. By “pays” we mean the issuer gets an attractive interest rate; investors pay up to buy the bonds. An example was provided yesterday when the City of Arcadia sold $8 million of general obligation bonds with an AA+ rating, one notch below triple-A. The 15-year maturity provided a tax-exempt yield of 3.75%. An investor didn’t even get a tax-exempt 4.00% unless he or she went out 17 years. The 10-year maturity didn’t yield much above 3% (in the neighborhood of 3.10%). The San Leandro Unified School District yesterday sold $30 million of G.O. bonds that are rated Aa3 and A+. (Moody’s Investors Service just upgraded the district by one notch.) The five-year bond yielded 2.40% and the 10-year, 3.75% (the same as Arcadia paid on its 15-year maturity). San Leandro School’s 15-year bond yielded 4.50% and the 20-year maturity, 5.00%. The Berkeley Unified School District priced AA-minus G.O. bonds with Assured Guaranty Municipal insurance. A 20-year maturity yielded 5.00%.
(May 10, 2011) -- The San Leandro Unified School District was upgraded to Aa3 from A1 by Moody’s Investors Service, just ahead of a planned general obligation bond sale this week. “The district’s general fund position is narrow, but the district has set aside funds in a Special Reserve which are unrestricted and fully accessible to supplement the general fund,” Moody’s said. “Including these funds, the district’s fund balance position is consistent with the current rating. Importantly too, the district’s reserve position shows a positive, upward trend over the past four years which is a notable credit strength.” The San Leandro school deal is one of several mentioned in the item below about this week’s planned sales.
(May 9, 2011) -- Several new bond sales planned for the week of May 9th carry double-A credit ratings, a threshold that has tended to generate more investor interest in the current market. Issuers ready to go to market also are benefiting from a strong tax-exempt bond rally that has pushed some yields down to levels last seen in late 2010. Tuesday, May 10, will see three new deals being sold through a competitive-bidding process, meaning underwriters submit proposals on the day of sale. On that day the City of Arcadia is selling $8 million of general obligation bonds with an AA+ rating, one notch below triple-A. The Berkeley Unified School District is selling $10 million tax-exempt G.O. bonds with an AA- rating. The San Leandro Unified School District is taking bids on $30 million of G.O. bonds that are rated Aa3 (after a one-notch upgrade by Moody's) and A+. On Wednesday the Los Gatos Unified School District plans to take bids on $11 million of G.O. bonds with an AA+ rating. In the negotiated sector, where underwriters are selected ahead of time, the Tustin Public Financing Authority is ready to offer $21 million of double-A water revenue bonds. The Grossmont Union High School District plans to sell $15 million tax-exempt G.O. bonds carrying Aa2 and AA- ratings. The Martinez Unified School District has lined up a $14 million general obligation bond sale with Aa3 and AA- grades. There will also be some redevelopment bond sales, which have been paying an interest-rate premium amid a state debate whether to curtail this sector in the future. The Santa Clara Redevelopment Agency plans to sell $30 million of tax allocation bonds (Bayshore North Project) with a single-A rating. Standard & Poor’s recently changed its outlook to “negative” from “stable” on the Bayshore North project bonds, which “reflects our view of the agency’s increased leverage combined with potential continued downward pressure on agency revenue,” the rating agency said. The Alameda Community Improvement Commission also wants to sell $11 million of tax allocation bonds with an A-minus grade. As usual, sales plans can change, but this is a sample of upcoming deals.
(May 6, 2011) -- The other day we noted the City of Montebello’s governing body was meeting to hire a financial adviser, FirstSouthwest, and that in fact has occurred. The other day Moody’s Investors Service also decided to downgrade Montebello’s Series 2000 certificates of participation (original sale amount of $22.9 million) to Ba1 from Baa2. The city’s issuer rating fell to Baa2 from A3. The outlook is now “negative” instead of “stable.” There are some media reports noting the COP downgrade. What they don’t mention is that the Series 2000 COPs also have a financial guarantee from the strongest bond insurer still standing in the municipal market. The bonds were initially insured by FSA. After that insurer got into trouble during the financial crisis, FSA’s safer municipal bond exposure was taken over by Assured Guaranty Municipal Corp. AGM is rated Aa3 by Moody’s. While we expect that Montebello will arrange some sort of financing to deal with its deficit-ridden budget, it should be reassuring to investors that AGM stands behind the 2000 certificates of participation. We don’t, however, expect Montebello to default on that deal or other securities, assuming the city’s leaders follow a wise path out of its mess. The Moody’s downgrade certainly is important because it will make potential lenders want even more of an interest-rate premium for any loans. On the other hand, any potential lenders, whether banks for bond buyers, were already going to penalize Montebello. A FirstSouthwest representative stressed at Wednesday’s city council meeting that time is of the essence if Montebello wants to line up a loan in a matter of months.
(May 4, 2011) -- The City of Montebello, which is struggling with a cash crunch and concerns over possible inaccurate financial accounting in the past, will hear from a financial adviser on potential financing strategies to buy some breathing room. Separately, yesterday Standard & Poor’s said it is reviewing the city’s tax allocation debt (Montebello Hills project area) for possible downgrade while it reviews the redevelopment agency’s “liquidity position,” the rating agency said in a report. FirstSouthwest, which was one of six firms to respond to a request for proposal for financial advisory work, will meet with Montebello’s City Council at a special meeting tonight (May 4). A preliminary draft report on possible alternative financing strategies has been presented to department heads and will be reviewed by councilmembers tonight, according to a meeting agenda. The Bond Advisor continues to believe that Montebello can and should take decisive action to alleviate any pressing liquidity concerns, whether real or perceived. A financing plan would deal with a structural deficit and related “accumulated debt” from past budget gaps. We noted recently that Montebello will be audited by the California Controller’s Office because of concern over a failure to submit timely financial reports to the state. In addition, Montebello is under scrutiny after media reports about potential inaccurate financial accounting in the past. “We placed the [tax allocation bond] ratings on CreditWatch with negative implications based on our need for clarification on the [redevelopment] agency’s special fund account,” S&P said. “We are currently trying to verify if the funds held in the bond special fund are comingled for investment purposes with the city’s investments. We expect to resolve the CreditWatch placement once we have reviewed the redevelopment agency’s liquidity position,” S&P said. For now S&P has affirmed its A-minus rating on the senior-lien tax allocation bonds and BBB-plus rating on subordinate-lien TABs.
(May 3, 2011) -- Here is another upcoming sale to add to your potential list of diversification opportunities. Harvey Mudd College, a private college in the Claremont Consortium, plans to sell $15 million of revenue bonds through the California Educational Facilities Authority. Harvey Mudd’s bonds have just been upgraded to Aa3 from A1 by Moody’s Investors Service thanks to a solid balance sheet and other factors. “The rating upgrade is attributable to HMC’s established national market position, multi-year operating surpluses and cash flow, healthy financial resources including issuance of the current debt, and expectations of continued good debt service coverage from operations,” Moody’s said. While a private university’s tax-exempt bonds might not be viewed as an “essential-purpose” security, such debt from established and well-run institutions have great track records and can diversity all investors’ portfolios. Harvey Mudd College’s reputation is established in fields such as engineering. Proof of that is buttressed by Moody’s list of HMC’s primary competitors: They include the Massachusetts Institute of Technology, Stanford University, and the California Institute of Technology. Moody’s said Harvey Mudd can boast of an “exceptional financial resource cushion, with unrestricted resources of $46.4 million covering proforma debt of $19.3 million 2.4 times, while expendable resources cushion proforma debt a remarkable 7.14 times.”
(May 2, 2011) -- Local school districts will be the main participants in California’s new-issue municipal bond market this week. However, a few other issuers will provide some variety for revenue or lease-revenue bonds. We noted last week that preliminary official statements were circulating for Santa Barbara high school and elementary school district general obligation bond sales, rated Aa2 by Moody’s Investors Service and A+ by Standard & Poor’s. These deals are among those expected to price this week in California’s municipal bond market. The Ross Valley School District also is ready to sell (and has a prospectus out on) $10 million of G.O. bonds with AA-minus and AA-plus ratings. On Thursday, May 5, the Berkeley Unified School District plans to take bids from underwriters on $10 million of G.O. bonds (rated AA-minus). The Placentia-Yorba Linda Unified School District this week also might price $23 million certificates of participation that are rated A+ by S&P. Our April 28 write-up on the Bond Updates page discussed the $57 million Orange County Performing Arts Center bonds expected to price this week. On Tuesday, May 3, a San Francisco financing corporation will take bids from underwriters on $15 million of lease-revenue bonds that are rated A1, AA-minus, and A+ (Fitch). The Buckeye Union School District will take bids on May 4 for $11 million of certificates of participation that will include a guarantee from Assured Guaranty Municipal. The Midpeninsula Regional Open Space District also might price $21 million of revenue bonds with AA and AA-minus ratings. A preliminary official statement also is out for $15 million tax-exempt Grossmont Union High School District G.O. bonds with Aa2 and AA-minus ratings.
(April 28, 2011) -- A couple upcoming local school district general obligation bond sales provide an interesting contrast in how property values are faring. For “conservative” investors, the Newport-Mesa Unified School District’s $100 million G.O. bond sale is difficult to beat. The bonds, rated one notch below triple-A (Aa1) by Moody’s Investors Service, are backed by a gigantic tax base of about $48 billion. The median tax base for Aa1 school districts is about $25 billion, according to Moody’s. As compelling, the assessed valuation didn’t even decline in fiscal 2010 or 2011, bucking a trend for many school districts (and other issuers). Granted, assessed valuation growth was “anemic,” as Moody’s noted, but that is still a credit positive in the current housing and economic environment. The school district serves Newport Beach and Costa Mesa. The Stockton Unified School District, with a $65 million G.O. bond sale rated four notches lower by Moody’s (A2), has faced a tougher real estate market. The City of Stockton has been a poster child of sorts for the real estate downturn. The school district’s assessed valuation base also has dropped, with a 10.2% decline in 2010 and 7.8% in 2011. The Stockton school district’s overall tax base is about $10 billion. A single-A local school G.O. bond is a safer bet than certificates of participation and other obligations relying on narrower revenue streams. Local school district G.O. bond sales are keeping our upcoming sales calendar alive. Another bigger pending deal is the double-A $150 million San Marcos Unified School District G.O. bond. Preliminary official statements also are circulating for Santa Barbara high school and elementary school district G.O. bond sales, rated Aa2 by Moody’s and A+ by Standard & Poor’s.
(April 25, 2011) -- Standard & Poor’s said it anticipates publishing “final criteria” for possible changes in the way it rates bond insurers by the third quarter of 2011. We have previously discussed S&P’s proposed criteria changes because there is concern they would lead to a downgrade of Assured Guaranty Corp., the main player still guaranteeing municipal bonds. S&P took comments on its proposed criteria changes through March 25. The other day it provided a summary of those comments. “A majority of the feedback we received came from investors, although we received several comments from bond insurers and long-term industry professionals,” S&P said. “Readers appreciated the level of detail in the proposed criteria and supported our desire to establish a clear and well-supported analytic framework. The majority of the comments that we received related to the various capital measurements in the proposed criteria. These comments stated that these elements of the proposed criteria would impair bond insurers’ ability to write business on economically viable terms, and, in turn, restrict some municipal issuers’ ability to access the capital markets.” Many of those who commented said a proposed leverage test by S&P was “simplistic.” They also said that S&P’s plan to increase capital charges for insurers was “arbitrary and not based on experience,” S&P said in its summary. S&P said it might react by changing the proposed criteria, leaving certain proposals unchanged, or explaining the original proposals more clearly to remove ambiguity.
(April 22, 2011) -- Tax-exempt yields declined steadily all week as the municipal bond market continued a rally that began toward the end of last week. We aren’t doing our usual weekly summary because of limited new-issue pricings. Tax-exempt yields are now at the lowest level in about a month, based on certain benchmark indices. However, a continuing dearth of new-issue supply explains some of the recent rally. The higher-quality (Aa3, AA+) San Diego County certificates of participation we previously highlighted did price the other day. The deal was packed into earlier maturities; a five-year COP yielded a tax-exempt 2.47% and a 2019 maturity yielded 3.56%. The Long Beach Unified School District priced Aa2 general obligation bonds this week. A huge part of the deal ($65 million) involved taxable Qualified School Construction Bonds. The smaller tax-exempt portion included a 2017 maturity yielding a tax-exempt 2.40% and a 2024 maturity yielding 4.38%. New San Francisco Redevelopment Agency tax allocation bonds (A1) yielded a tax-exempt 6.18% in 15 years. In contrast, BBB+ Twentynine Palms tax allocation bonds paid 7.30% in 15 years for a new sale this week.
(April 21, 2011) -- Assured Guaranty Corp. said it is moving toward providing a direct guarantee on municipal bonds that had been formerly insured by CIFG Assurance North America. More than two years ago, Assured Guaranty agreed to reinsure the public finance portfolio of CIFG. A process known as “novation” will make Assured Guaranty the direct insurer of the municipal bonds. Why does this matter? Once the novation occurs, Assured Guaranty will request that its current double-A rating be assigned to the bonds as the “insured” rating. As things stand now, the bonds only show an “underlying” rating assuming they have one. The novation process won’t happen all at once, but will occur as individual policies are adjusted. Assured Guaranty said bond trustees and others are being notified about the novation process, with the offer open through July 15, 2011.
(April 18, 2011) -- A higher-quality sale by San Diego County is one highlight of this week’s upcoming sales calendar. Unfortunately the planned sale is relatively small, a $20 million certificate of participation issue. Standard & Poor’s rates the COPs AA+, or one notch below triple-A. Moody’s Investors Service grades the deal Aa3, its fourth-highest rating. Several other new issues we haven’t discussed yet are looming in either April or coming weeks. Last week Anaheim approved moving forward on an electric system revenue bond sale of at least $90 million for Anaheim Public Utilities. A city financing authority will issue the bonds, which are rated AA-minus by both S&P and Fitch Ratings. The Newport-Mesa Unified School District’s board this month approved a $100 million sale of general obligation bonds. S&P rates the bonds AA. The Wiseburn School District is lining up a $47 million G.O. sale, with the bonds rated Aa3 and A+.
(April 13, 2011) -- The City of Montebello has lost a breath of fresh air in its fight against a budget crisis. Peter Cosentini, the interim city administrator, told the city council he is resigning effective May 12. Cosentini cited concern the city isn’t moving fast enough to deal with budget deficits and a looming cash crunch. “I am no longer comfortable with our progress toward a balanced budget,” Cosentini said in a resignation letter. The city council needs to appoint someone “who is more in tune with your approach to municipal finance.” The council hasn’t taken action on cuts previously recommended by Cosentini. On March 31 (below), we said Cosentini “is doing Montebello a favor by identifying the problems the city faces, including providing a 33-page release” pinpointing various issues. Montebello could face a cash crunch by this fall if it doesn’t take definitive action. A city council meeting tonight will look ways to increase user fees. The Bond Advisor has said Montebello can address its short-term cash needs without throwing around the “B” word (bankruptcy). However, we will check on the city regularly to see what steps it is taking in coming weeks and months to restore fiscal balance. The city is expected to hire a permanent city administrator soon.
(April 11, 2011) -- A couple utility bond sales in the single-A category will provide decent yield opportunities in this week’s new-issue California municipal market. The Madera Irrigation District, through a financing authority, plans to sell $32 million of water revenue bonds with an A-minus rating from Standard & Poor’s. An A-minus rating ensures added yield in today’s market, and S&P also has a “negative” outlook on the Madera Irrigation debt because of “inconsistent” financial performance in the past. Madera is located a little northwest of Fresno. The M-S-R Public Power Agency this week expects to sell the $35 million subordinate-lien electric revenue refunding bonds to refund certain outstanding debt. Fitch Ratings and S&P grade the new bonds single-A. The M-S-R agency has three members: the Modesto Irrigation District, Silicon Valley Power (Santa Clara), and the City of Redding. The bond sale is tied to M-S-R’s stake in the San Juan Project, a coal-fired power plant in New Mexico. The Government of Guam plans to sell the $86 million of hotel occupancy tax revenue bonds that we flagged a month ago here. The bonds are rated BBB+ by S&P. The sale was delayed a bit, apparently because a change in the bond trustee was made. Guam bonds’ interest is exempt from federal and state income tax for California residents.
(April 5, 2011) -- Yes, we know the new-issue market is slow when a planned $35 million bond sale gets mentioned. In any event, the M-S-R Public Power Agency expects to sell the subordinate-lien electric revenue refunding bonds soon to refund certain outstanding debt. Fitch Ratings grades the new bonds single-A. The M-S-R agency has three members: the Modesto Irrigation District, Silicon Valley Power (Santa Clara), and the City of Redding. The bond sale is tied to M-S-R's stake in the San Juan Project, a coal-fired power plant in New Mexico
(April 4, 2011) -- General obligation bond sales by local school districts are expected to dominate this week’s new-issue calendar in California. We expect that about $100 million of local G.O. bond sales could price this week, and almost all of the volume is coming from school districts. The San Lorenzo Unified School District will take competitive bids from underwriters on Wednesday, April 6, for about $28 million of G.O. bonds (rated A+). This district has schools in cities such as San Lorenzo, San Leandro, and Hayward. Other possible deals this week include a $25 million G.O. sale by the Emery Unified School District, which recently received credit for a financial comeback with a two-notch upgrade from Standard & Poor’s to A+ from A-. Our March 23 article under Bond Updates discusses Emery Unified’s upgrade. Moody’s Investors Service rates the bonds Aa3. The Emery district serves Emeryville, between Berkeley and Oakland. The San Jose-based Franklin-Mckinley School District might price $15 million of G.O. bonds this week. The bonds are rated A1 and A+. The Cypress Elementary School District has lined up $22 million of tax-exempt general obligation bonds that are rated A+ by S&P and AA by Fitch Ratings. The Burlingame Elementary School District could price $3 million of tax-exempt G.O. bonds with Aa2 and AA+ ratings. It plans a larger issue of taxable Qualified School Construction Bonds. The Town of San Anselmo also plans to price $6 million of double-A G.O. bonds.
(April 1, 2011) -- New municipal bond sales in California plunged during the first quarter of 2011, dropping to $4.3 billion from $16.5 billion in the same quarter of 2010, according to statistics compiled by Thomson Reuters. That is a decline of almost 75%. Across the U.S., muni bond sales dropped by 55% in the first quarter to the lowest level in 11 years. A few reasons explain the decline. First, a surge in taxable Build America Bond sales at the end of 2010, before that federal giveaway program expired, essentially stole volume from 2011. Second, a wave of “negative” press about municipal bonds sent rates higher for a time and sidelined issuers who could wait out the sour market. Finally, the State of California has a “moratorium” on new bond sales until its budget is in place. The state’s absence will keep affecting overall sales volume since it is a multibillion-dollar issuer. While the decline in sales also helped tax-exempt yields drop for a time, rates have been inching back up recently. Concern about eventual interest-rate hikes is one factor behind the rate waffling, and buying interest waned amid all the bad press. Across the U.S., muni bond sales in March dropped 59% compared with March 2010, Thomson Reuters said.
(March 31, 2011) -- As usual, when a city runs into financial stress, there is an unfortunate trend for headlines or comments to pop up with the city’s name and “bankruptcy” in the same breath. This has occurred with the City of Montebello, which certainly faces some tough decisions. We don’t believe, however, that “bankruptcy” is something Montebello faces or needs, despite its financial crunch. In fact, the city in February issued a request for proposals (RFP) from financial advisers to look at financing options for its short-term cash-flow needs. Interim city administrator Peter Cosentini also is doing Montebello a favor by identifying the problems the city faces, including providing a 33-page release we discussed yesterday.
(March 30, 2011) -- Montebello’s interim city administrator called for the city council to arrange a special meeting to discuss the city’s budget problems. In a statement released March 29, Peter Cosentini, the interim administrator, said it has been difficult to assess Montebello’s actual financial standing because money has been shifted to address past deficits in various funds. At least part of that money came from restricted funds, such as special revenue and debt service funds, that shouldn’t have been used in this way, according to Cosentini. The city needs to take immediate action to address its cash situation, and also needs a longer-term recovery plan in place, the administrator said.
(March 28, 2011) -- San Jose, the nation’s 10th-largest city, takes the spotlight this week with a new issue that will probably offer decent tax-exempt yields. We already mentioned this sale because of the size, $100 million. It used to be that wasn’t such a “big” deal. In the current market, however, we aren’t seeing many deals at or above $100 million. The San Jose deal involves special hotel tax revenue bonds. We expect yields to be “decent,” relative to the low risk of default, because the bonds are rated single-A. In fact, Standard & Poor’s rates them A-minus, which is just low enough to help investors pay extra attention. Moody’s Investors Service rates the bonds A2. Bond proceeds will help with convention center expansion and upgrades. The tax backing the bonds applies to all of San Jose’s hotels. There are two “zones” for this tax, with hotels closer to the convention center at a rate of 4%. The tax rate for hotels further away from the convention center began at 1% and is rising to 4% by fiscal 2012. Maximum annual debt service coverage begins somewhat low based on fiscal 2011 tax revenue, but will quickly improve as the full 4% tax rate for all hotels kicks in by next year. The biggest plus we see in the deal’s structure is a rate stabilization fund that will provide added bondholder security in case hotel tax revenue unexpectedly plunged in an off year. San Jose’s hotel-tax revenue has generally been steady. However, there were steep drop-offs when the current recession began and also after the September 11, 2001, terrorist attacks (combined with a “dot-com” technology bust a decade ago). Investors wanting a higher-quality San Jose offering also can look at this week’s $31 million lease-revenue bond by San Jose, also for convention center improvements. These bonds are rated Aa2 by Moody’s and AA+ by Standard & Poor’s. Fitch Ratings this month downgraded San Jose by one notch, citing several years of pinched budgets and rising retiree costs. San Jose’s general obligation bonds had been triple-A before the Fitch downgrade to AA+. Still, not many issuers can boast of such high credit ratings. The South Placer Wastewater Authority plans to price $97 million of wastewater revenue bonds this week, with Aa3 ratings from Moody’s and A+ from S&P. Only part of the deal will be fixed-rate, with the rest of the debt variable-rate. The sale will refund all of the authority’s existing debt. The authority serves almost 60% of Placer County’s population, including the City of Roseville. A large rate stabilization fund also is a plus for this bond deal, especially because construction activity has slowed markedly in the area (which translates into less connection-fee revenue). A few school district G.O. sales also are expected this week, including a $30 million Anaheim City School District deal. The Anaheim school bonds were recently upgraded one notch by S&P to A+. Moody’s rates the bonds Aa3.
(March 24, 2011) -- An entity connected with, yet also legally separate from, the bankrupt City of Vallejo was in the market this week following a two-notch upgrade. We say “connected” with because most of the governing members of the Vallejo Sanitation and Flood Control District happen to sit on Vallejo’s City Council. We stress the “legally separate from” because none of the sanitation district’s revenue or assets were included in the City of Vallejo’s bankruptcy estate. The Bond Advisor took great pains to make this distinction because Vallejo’s 2008 bankruptcy filing didn’t affect separate “enterprises” serving the city, including these separate enterprises’ bonds. This week’s $3.3 million new bond sale on behalf of the district was issued through the WateReuse Finance Authority. The Vallejo district previously borrowed through the authority (the 2001 obligations) and then refinanced a good chunk of that 2001 deal in 2006. This week’s sale refinances and prepays what is still outstanding from the 2001 obligation. Earlier this month Standard & Poor’s raised its rating and underlying rating two notches, to AA-minus from A, on the Vallejo sanitation district’s existing 2006 certificates of obligation. The AA-minus rating also applies to this week’s sale. The upgrade reflected good financial performance, S&P said, “in particular the district’s consistent maintenance of extremely strong liquidity totaling at least one year’s worth of operating costs, with no plan to significantly reduce reserve levels.” The bonds were priced the other day and a 2014 maturity yielded a tax-exempt 2.00%. The five-year bond yielded 2.83%. The 10-year bond yielded 4.33% and the longest maturity in the deal, 14 years, yielded 5.00%. The obvious question is whether this issuer was “penalized” for having Vallejo in its name, even if it was unaffected by the bankruptcy. Perhaps there was a premium, though hard to quantify. A week ago a new AA-minus general obligation bond from the Lemon Grove School District paid 2.36% in five years and 3.60% in 10 years. The Vallejo sanitation district deal would be expected to yield more because it is a somewhat weaker revenue bond security (than a G.O.) because it involves installment payments. On the plus side, however, page 17 of the prospectus noted these installment payments are “unconditional,” meaning they have to be made regardless of damage occurring to the district’s facilities. This type of “abatement” risk can lead to higher yields on some COP deals, but the Vallejo district’s bonds aren’t subject to this risk. We say it is “hard to quantify” any premium paid on this deal given the shortage of new deals in general. The Vallejo district did pay a bit more than a Claremont University new sale, rated Aa3 and priced earlier this week. By the way, seeing the WateReuse Finance Authority took us on a trip down memory lane. The authority sold $200 million of bonds in 1998; this debt later required special legislation to “validate” the bonds. The special legislation was needed because of a state Attorney General opinion that arose over bond “pools” at the time. That has nothing to do with this week’s sale, but who can forget the various 1990s debates over certain ways the Marks-Roos bond pooling law was put to use?
(March 23, 2011) -- Maybe it seems like we are scraping the bottom of the barrel for yield “benchmark” examples in new-deal pricings, but here goes. Yesterday the Liberty Union High School District priced $28 million of general obligation bonds that are rated Aa2 by Moody’s Investors Service. Yes, it is a smaller deal. Yes, the issuer isn’t well known to some. (The district is in Contra Costa County and serves the cities of Brentwood, Oakey, and certain unincorporated communities.) But guess what? You take what you can get in the current new-issue market, especially with sales volume off by so much this year. We also like this deal because it was sold through “competitive” bidding, meaning underwriters submitted bids on the day of the sale to try to win the bonds. These deals are now very rare in California’s new-issue market. Most new issues are sold through a “negotiated” basis, whereby the underwriter is selected beforehand. So how did the Liberty Union High School District do? Wells Fargo Securities won the bonds. A five-year maturity with a 3% coupon was priced to yield a tax-exempt 2.07%. The 10-year 4% coupon bond was priced to yield 3.43%. The 15-year bond yielded 4.30%. The longest maturity in the deal, 17 years, yielded 4.50%. These are probably the lowest new-issue yields we have seen in California in about a month, since the Cupertino Union School District sold Aa1 general obligation bonds. There is still plenty of demand for higher-quality “traditional” municipal bonds, and for that the Liberty Union district can be thankful.
(March 22, 2011) -- Some California redevelopment bonds will face continued pressure from assessed valuation declines for awhile, even into fiscal 2013 if not beyond, Fitch Ratings noted in a report. Project areas that were highly leveraged, or where new construction was especially prevalent during the housing boom, are among those vulnerable in coming years. Areas where the foreclosure rate also is elevated have another potential red flag, Fitch said. This risk will remain whether or not Governor Jerry Brown succeeds in dissolving redevelopment agencies, Fitch said. Brown’s proposal could have a positive angle in that it would stop future leveraging of the tax-increment tax base supporting redevelopment bonds, Fitch said. However, it also could lead to credit quality deterioration if cities lost the flexibility to use non-pledged revenue to shore up weaker project area's debt service. Fitch did note that many redevelopment project areas also are remaining relatively stable even amid the current downturn.
(March 18, 2011) -- New-issue pricings in California municipal bond market still won’t be anything to write home about during the week of March 21, but at least there is a little more activity to preview. The Liberty Union High School District is taking bids from underwriters on March 22 for $28 million of general obligation bonds. The debt is rated Aa2 by Moody’s Investors Service. The Midpeninsula Regional Open Space District plans to sell $55 million of lease revenue bonds that are rated AA-minus by Standard & Poor’s following a one-notch upgrade last November. S&P cited the district’s financial flexibility and history of maintaining “strong financial reserves.” Fitch Ratings grades the bonds AA. The open space district covers about 550 square miles in Santa Clara and San Mateo Counties. About 95% of the district’s general fund revenue comes from property taxes. Buena Park’s Redevelopment Agency plans to offer $60 million of tax allocation bonds split between tax-exempt and taxable. The City of Whittier might price $40 million of health facility revenue bonds on behalf of Presbyterian Intercommunity Hospital. This debt is rated A+. The Quartz Hill Water District plans to price $9 million of certificates of participation carrying an AA-minus rating. The Governor of Guam has released the preliminary official statement for the hotel occupancy tax revenue bonds we discussed the other day. We noted the deal received a BBB+ rating, which is higher than some Guam bonds. The territory’s municipal bonds are exempt from state and federal income tax for California residents. A Puerto Rico financing authority also might price $103 million of tax-exempt bonds (rated A-minus) on behalf of Hospital Auxilio Mutuo obligated group.
(March 16, 2011) -- Want to see the latest version of the bill that would do away with California’s local redevelopment agencies? A Senate-amended version of Assembly Bill 101 can be viewed by clicking here. Around page 15 of the bill you will see all the restrictions that would be imposed on redevelopment agencies until they are dissolved on July 1, 2011. The only debt they could approve once the bill took effect would be “Emergency Refunding Bonds” that were needed to avoid a default on existing agency bonds. The county treasurer and state treasurer would have to approve such emergency bonds. As we have noted, existing bonds would have to be honored even if the bill passes. A “successor” entity would be put in place to replace the redevelopment agency. Governor Jerry Brown wants to use excess redevelopment tax dollars for other purposes, such as schools and counties.
(March 15, 2011) -- The City of Benicia has lined up a $13 million certificate of participation sale that will finance solar power components at various city locations. The goal is to provide most of the power for city government facilities and even generate a surplus at times. Standard & Poor’s rates the COPs A+, based on support from the city’s general fund. Spending cuts and “very strong” general fund balances help support the rating, S&P said. The COPs will be sold through the Public Property Financing Corp. of California. We flag this deal mainly because there will be many more like it in coming years as solar infrastructure gains a bigger following. An upcoming sale of general obligation bonds by the Mount Diablo Unified School District also includes money for solar panels at school sites. Despite its expense, solar power isn’t going to lose any momentum given the publicity over the nuclear power problems in Japan.
(March 14, 2011) -- New-issue municipal bond volume in California, which still remains slim, might be led this week by Riverside County Redevelopment Agency deals, including an A-minus offering for its Jurupa Valley project. The Quartz Hill Water District has a preliminary official statement out for a $9 million sale of certificates of participation, rated AA-minus by S&P. The water district is located north of Palmdale. Whittier also had a prospectus out for $40 million of health facility revenue bonds on behalf of Presbyterian Intercommunity Hospital (A+). The Lemon Grove School District plans a small sale of general obligation bonds (AA-minus), as does the double-A Burlingame Elementary School District. A handful of other smaller deals also might price this week.
(March 11, 2011) -- Governor Jerry Brown’s proposal to shift some government services to counties will either be credit neutral or possibly negative, depending on proposed funding for the realignment, Moody’s Investors Service noted. One question mark is whether voters will approve a five-year extension of temporary tax increases. “If they are not approved, counties run the risk that state budget cuts will be greater than anticipated or realignment takes place without assurances of funding, or both,” a Moody’s report said. “Under those circumstances, some counties might experience material financial pressure resulting in negative rating outlooks or downgrades.” However, if the proposed funding is in place for five years with approved tax extensions, counties will have more time to prepare for when the tax hikes drop off again. “The counties’ long experience with the vagaries of state funding will mitigate the initial risk and negative credit pressure as they incur set-up costs in the transition,” Moody’s said. “Assuming that the counties’ realigned responsibilities are carefully defined, the credit impact should be neutral.”
(March 10, 2011) -- Want to know what a triple-A state pays to borrow on municipal bonds? The State of Maryland just sold $485 million of general obligation bonds. The retail portion included a five-year maturity that yielded a tax-exempt 1.76%. The 10-year bond yielded 3.00%. The 15-year maturity yielded 3.86%. (A separate deal for bigger institutional buyers tended to yield a bit more, including 3.10% in 10 years.) In comparison, California general obligation bonds yield a full percentage point more plus change depending on the maturity. For example, a 10-year California G.O. probably yields closer to 4.25% and a 15-year, around 5%. California’s Bennett Valley Union School District sold double-A tax-exempt debt this week with yields of 2.51% in five years, 3.80% in 10 years, and 4.83% in 15 years. Some financial advisers tell California residents to “diversify” and buy out-of-state municipal bonds, which means you will pay state income tax on interest earned. We would suggest diversifying in-state and getting more yield in your portfolio. By the way, Puerto Rico paid about 5.40% to sell 15-year G.O. bonds this week and 6.00% on a 21-year maturity.
(March 9, 2011) -- General obligation bonds supported by the Sierra Kings Health Care District have been upgraded to Baa3 from Ba2 by Moody’s Investors Service after a bankruptcy court gave such debt a strong signal of support. The rating “primarily reflects a recent ruling by the U.S. Bankruptcy Court in the Eastern District of Fresno County holding that a California local government’s general obligation bond debt service cannot be interrupted due to the government’s chapter 9 bankruptcy,” Moody’s said in a report. “This ruling combined with the strong administrative procedures for the levying, collection, and repayment of these general obligation bonds underpins the rating upgrade. We also note that were the hospital to cease operations, the District would still be obligated to cause the county to levy ad valorem property taxes sufficient for repayment of the bonds, thus maintaining their security, which is a key component of the rating given the narrow fiscal operations of the hospital.” The Bond Advisor, after the health care district’s bankruptcy filing, noted that the property tax levy wouldn’t go away even if the hospital did. The bankruptcy court ruled that the property tax pledge for the 2007 and 2009 G.O. bonds “qualifies as both a ‘special revenue pledge’ and ‘statutory lien,’” Moody’s said. “As such, the property tax levy, collections, and payments for the District's general obligation bond debt service cannot be disrupted by the District's Chapter 9 bankruptcy proceedings.” The Sierra Kings district is working on a longer-term plan that would bring in help from the Adventist Health System. A possible 15-year agreement with Adventist is under negotiation. “The District has remained current on all of its debt obligations throughout the bankruptcy process and we do not anticipate any interruption of the general obligation bond debt service,” Moody’s said in its upgrade report.
(March 8, 2011) -- A new report by the California State Controller’s Office questioned various practices at redevelopment agencies. It also, as an aside, notes that the Hercules Redevelopment Agency faces stress in meeting bond payments on certain debt issues. The problems in Hercules are spelled out in the redevelopment agency’s continuing disclosure annual report, which was released the other week for the fiscal year ended June 30, 2010. (Hercules is located halfway between San Francisco and Napa.) According to the agency’s disclosure report, “projected Pledged Tax Revenue will be insufficient to cover debt service on the non-housing Tax Allocation Bonds Series 2005A and Series 2007A. The Agency is currently evaluating various options to minimize the shortfall.” One of the options includes loaning “excess housing set-aside revenues” to help the non-housing 2005A and 2007A bonds, the Hercules report said. However, this loan could only be put together “after the senior obligations and Housing Tax Allocation Bonds Series 2007A and Series 2007B debt service are paid maintaining a 1.00x debt service coverage for the Housing Tax Allocation Bonds Series 2007A and Series 2007B,” the redevelopment agency said. The agency also would consider exercising its right to “subordinate” tax-sharing payments to other public entities. These actions combined “would increase the debt service coverage of the non-Housing Tax Allocation Bonds Series 2005A and Series 2007A to a 0.95x debt coverage ratio but would not provide enough proceeds to result in 1.00x coverage,” the disclosure report said. The Hercules Redevelopment Agency faces some of the same problems affecting other agencies in the state after the real estate downturn. There has been “a significant drop in assessed values in the Agency’s Merged Project Area,” the agency’s disclosure report said. However, the state controller’s report also added it was brought to the controller’s attention there are “numerous concerns” over the “financial dealings of several former key employees” of both the city and the redevelopment agency. An inter-dealer trade on $50,000 of the Hercules redevelopment 2005 bonds due in 2035 occurred March 7 at about 63 cents on the dollar. It appears that these bond issues were guaranteed by Ambac, which has had its own troubles since the financial crisis. However, there is still a possibility that Ambac will cover debt service shortfalls after a Wisconsin rehabilitation plan helped preserve claims-paying resources for municipal bonds. Longer-maturity bonds tend to trade at bigger discounts when financial stress arises because of uncertainty about long-term prospects, including Ambac’s status in the distant future.
(March 7, 2011) -- Have Puerto Rico general obligation bonds been upgraded by Standard & Poor’s? Yes, based on information the rating agency released at 11:01 Eastern Standard Time on Sunday night. Puerto Rico’s new G.O. bond sale is rated BBB instead of the old BBB-minus. (We are noting this at 5:55 a.m. Pacific Standard Time on Monday morning.) S&P also changed its rating to BBB on older G.O. deals. The outlook is now “stable” at the BBB level after being “positive” at the old BBB-minus level. S&P changed its outlook to positive last November because of Puerto Rico’s efforts at restoring budget balance in future years. (UPDATE: We were right; the upgrade did occur.)
(March 4, 2011) -- A joint budget committee in the state Legislature approved Governor Jerry Brown’s budget proposal, although with some tinkering. The committee supported his proposal to do away with local redevelopment agencies in the future. Officials representing the League of California Cities said Brown’s redevelopment proposal violates Proposition 22, which was approved by state voters in November to protect local money from state raids. Brown wants to direct redevelopment tax-increment money to schools, counties, and other local agencies. His proposal can’t take tax dollars already committed to repaying bonds and other contractual obligations. As we note elsewhere, redevelopment agencies are rushing to market amid uncertainty over whether Brown’s plan will move forward. If it does pass this year, new redevelopment bond sales will grind to a halt pending the outcome of a legal fight.
(March 2, 2011) -- The good news about the latest default prediction for municipal bonds? People are starting to “round down” their estimates. Meredith Whitney, an analyst who appeared on 60 Minutes, talked about “hundreds of billions” of dollars in muni bond defaults. A new default prediction pegs potential muni defaults at almost $100 billion over the next five years. We didn’t think much about Whitney’s “analysis,” in fact we didn’t think much about it at all. On a bright note, such wild-eyed speculation sends lemmings for the exit, providing bargains for sophisticated investors. What do we think about the latest report? The problem is, we haven’t seen it. All we can go on is a brief summary in The Wall Street Journal. According to the Journal, a report issued by Roubini Global Economics says municipal bond defaults “will continue to be isolated events.” Any problems for state and local debt are not “systemic,” and they won’t “infect the financial system,” the Roubini report says, based on the Journal’s story. That raises a question. Where will almost $100 billion of municipal bond defaults come from? According to the Journal’s summary of the report, the defaults “will occur among special government projects and revenue-generating entities that aren’t considered viable.” Without seeing the report, we aren’t sure just what these terms mean. We can guess, however, that “revenue-generating” entities could include some recent toll road projects in other states that are facing problems. We also assume that “traditional” tax- and revenue-backed municipal bonds for essential purposes aren’t seen as the problem by this newest report. This is the problem with all this “default” speculation. The municipal bond world is very large and diverse, including everything from “safer” securities to rural nonprofit hospitals with more risk. Generalizations don’t work. This latest report would have value if it wants to name names, and tell us exactly which bonds will default. The Journal story said this consulting firm was founded by Nouriel Roubini, who is “known for his prescient warnings about the 2008 financial crisis.” According to the Journal, the Roubini report does try to provide some balance. It noted, for example, that recovery rates on defaulted municipal bonds are far higher than on corporate debt. Bondholders also have strong protection under the municipal Chapter 9 bankruptcy process. So there you have it. Another day, another prediction for municipal bond defaults. Rounding down to $100 billion still ensures you will get plenty of media attention for yet the latest round of speculation. The other week, the chief economist for Moody’s Analytics Inc. told state governors that the risk of a major default or round of defaults for municipal bonds is “close to zero.” Mark Zandi, the economist, said the “very loud hand-wringing” about major muni bond defaults is “entirely misplaced,” based on comments reported on a Businessweek site. Zandi spoke at the National Governor Association’s winter meeting. Zandi might come in for criticism for being at the other end of the extreme. But again, which “kind” of municipal bonds is Zandi discussing? Perhaps the risk is “close to zero” for many municipal bonds, but this market defies generalizations.
(March 1, 2011) -- Agencies rushing to sell tax allocation bonds in case the governor succeeds in curtailing local redevelopment might want to make sure they are dotting their “i’s” and crossing their “t’s.” Draft language in the governor’s bill to stop redevelopment also provides a three-year period in which bonds sold on or after Jan. 1, 2011, can be reviewed. Such an action “to determine the validity or legality of any issue, document, or action described in subdivision (a) may be brought within three years after the date of the triggering event,” the draft legislation said. Subdivision (a) refers to a provision in the civil code for determining “the validity of bonds and the redevelopment plan to be financed or refinanced, in whole or in part, by the bonds.” (In contrast, the window for bringing a challenge was only 90 days for bonds sold before the first day of 2011.) It is clear the state is trying to send a message that it doesn’t want any hanky-panky going on in case the governor succeeds in ending local redevelopment efforts. His plan couldn’t impair existing debt obligations, including diverting revenue needed to repay bonds. As a result, the draft legislation sends a message that new bond issues being rushed to market now (and the related redevelopment plans) better be on the up-and-up. Governor Brown is seeking to curtail redevelopment and divert any “excess” tax dollars to schools and other local entities. In response, agencies are jump-starting new tax allocation bond sales in case the governor’s proposal moves forward. The legislation notes that, for “the purposes of protecting the interests of the state,” the Attorney General and the Department of Finance are “interested persons” if they decide to challenge any bond deals or redevelopment plans. The Finance Department’s draft legislation, dated as of Feb. 23, also spells out how the dissolution of redevelopment agencies would occur if the governor’s plan moved forward, including the creation of “successor” agencies to oversee existing obligations. To see the draft language, go here. Our February print edition discusses our current view of redevelopment bonds.
(Feb. 28, 2011) -- Puerto Rico is lining up a $250 million sale of general obligation bonds. These bonds are federal and state tax-exempt for investors across the U.S., including residents of California. While we are a long-time fan of the commonwealth’s bonds, many “conservative” investors won’t touch the G.O. debt because of lower credit ratings. After last year’s “recalibration” Moody’s Investors Service rates Puerto Rico A3 (with a “negative” outlook). Puerto Rico’s credit rating is hurt by high debt levels relative to U.S. states and high unfunded pension liabilities. Standard & Poor’s rates Puerto Rico G.O. bonds BBB-minus and Fitch Ratings, BBB+. The commonwealth also has used debt to finance operating deficits (never a good sign, as California learned the hard way). Still, Puerto Rico has been headed in the right direction thanks to deficit-cutting efforts by Governor Luis Fortuño ever since he took office in 2009. The governor plans this year to outline a plan for dealing with the pension liabilities. Yield spreads also have been attractive on Puerto Rico bonds. Puerto Rico recently paid about 5.5% tax-exempt on a 13-year bond carrying a financial guarantee from Assured Guaranty Municipal. Investors looking for higher yields also will get a chance in California’s new-issue bond market, thanks to a continuing supply of redevelopment bonds. Our February print edition looks at this sector in light of recent developments.
(Feb. 25, 2011) -- We often make the point that there is a “lag” between the time the economy recovers and a rebound occurs for many local and state governments. This lag occurs because tax revenue tends to be a “trailing” indicator. By that we mean tax revenue doesn’t pick up right away, even if the economy is showing signs of strength. A new report by Moody’s Investors Service basically confirms this point, and cautions that “credit stress” in the municipal market is expected to continue through 2011. Municipal bond rating downgrades exceeded upgrades for the eighth consecutive quarter at the end of 2010, Moody’s said in an annual report on rating changes for 2010. Moody’s said the trend last year “provides further evidence that the municipal market faces credit pressure not seen since the Great Depression.” Even so, Moody’s also noted that “most issuers managed to maintain a stable credit profile in 2010.” About 5.5% of muni issuers rated by Moody’s saw a rating change last year, with the “vast majority” a one-notch move up or down. For the full year, the overall ratio of municipal upgrades to downgrades decreased to 0.5-to-1 in 2010 from 0.7-to-1 in 2009, Moody’s said. This resulted in the lowest annual ratio of municipal upgrades to downgrades in more than 20 years. The “majority” of the rating revisions in 2010 echoed a reason driving such changes in 2009: “Broad economic rather than issuer-specific credit stress,” Moody’s said. Indeed, “while many issuers in the municipal sector will continue to face pressure in 2011, we anticipate most will make the difficult choices necessary to continue to service their debt,” Moody’s said. “While we expect payment defaults to rise, we believe that they will be isolated and not widespread.” During the fourth quarter of 2010, the ratio of municipal rating upgrades to downgrades decreased to 0.2-to-1 from the third quarter ratio of 0.5-to-1. The fourth quarter ratio remains one of the lowest recorded for this measure in at least the last five years, and is significantly lower than the 1.1-to-1 ratio experienced in the first quarter of 2003, the year after the last national economic recession, according to Moody’s.
(Feb. 24, 2011) -- We mentioned that redevelopment bonds are worth watching in the new-issue market, thanks to a yield “premium” because of Governor Jerry Brown’s proposal to curtail future local redevelopment efforts. Cities are putting new bond deals together so they are “grandfathered” ahead of time in case Brown’s proposal moves forward. However, some redevelopment bonds would pay a decent yield anyway just because of their credit rating. This week the March Joint Powers Redevelopment Agency priced $33 million of tax allocation bonds for the March Air Force Base Redevelopment Project. Standard & Poor’s rates the bonds BBB+. Anything below single-A is red meat for yield-hungry investors, at least for those with a higher risk tolerance. The March Agency bonds yielded 5.40% on a five-year maturity. Yes, 5.40% tax-exempt on a five-year bond, which means the Taxable Equivalent Yield is above 8% or 9% for higher tax brackets. The 10-year bond yielded 6.75% and the 15-year, 7.25%. A 30-year bond yielded 7.75% tax-exempt.
(Feb. 23, 2011) -- U.S. Treasury bonds rallied yesterday amid signs they might strengthen even more because of turmoil in Libya and the Middle East. We have noted before that investors seeking a “safe haven” are more likely to buy short-term instruments, not dump money into longer-term bonds of anyone, including the U.S. In reality, however, there are plenty of investors across the world that now shift money in and out of all sorts of instruments at a moment’s notice, so we won’t discount the “safe haven” theory as helping U.S. Treasury bonds. Municipal bond yields also dropped again yesterday, although “technical” factors such as low new-issue supply are helping tax-exempt debt more than a rush to a “safe haven.” While turmoil in Libya and elsewhere might help U.S. securities look better, let’s not ignore a couple longer-term risks. It is being noted, for example, that Libya is an important oil supplier. This is going to have an impact on oil prices for a time, and that always leads to renewed concern about future inflation risk (never a friend of bonds). That is one concern, though perhaps not our main concern. There is still plenty of oil supply. The bigger concern we have is that turmoil in one part of the world might also help dampen economic recoveries that are still fragile. Nothing would help the municipal bond market more now than a steady uptick in economic growth that, in turn, pushed state and local tax revenue higher. That would do a lot to calm nerves about muni bonds, along with continuing efforts by states and localities to fix “structural” budget deficits. Middle East turmoil that spread to other even bigger oil producers would be a threat to this economic growth. Of course, whenever stocks lose their luster, bonds can benefit. At this point, however, we would rather see municipal bonds gain because of an economic recovery, not because stocks are getting hammered over renewed economic concerns. Still, existing holders of “traditional” municipal bonds, including California state general obligation debt, can take great comfort that they are getting paid in full and time. The Chicken Little analysts and “negative” headlines miss that point, time and again.
(Feb. 22, 2011) -- Awhile back we mentioned the “upside” of all the hand-wringing over funding levels for public pension plans. We predicted it would lead to a new level of scrutiny that forced state and local governments to start addressing any problems, or at least discussing them more openly. Here is another sign of this added scrutiny. Last week Fitch Ratings came out with a special report on “enhancing the analysis” of state and local government pension obligations. Among other things, Fitch plans to “create standardized investment return and asset valuation scenarios” to help compare pension plans and their funding ratios, the rating agency said. Fitch also plans to seek added information that often isn’t readily disclosed. For example, shared “multiemployer” pension systems can cover both state and local governments. Fitch wants a breakdown of which participants are actually responsible for “unfunded” obligations of the system so it can better evaluate the burdens for the individual participants in these retirement plans. It would be unfair to allocate an unfunded liability entirely to a state that runs the pension system if, in fact, local governments are the one responsible for the funding gap, Fitch said. The rating agency said it “expects that limited negative rating action is possible as a result of this enhanced framework but does not expect such action to be widespread. To the extent that there is negative rating action, it is more likely to be for local governments than for state governments, because labor costs represent a larger share of local governments’ budgets.”
The rating agency added that “there is cause for near-term concern about a number of public sector defined benefit pension plans and recognizes the considerable pressure that these obligations will place on many government budgets in the coming years. However, Fitch believes that the vast majority of governments will withstand the substantial pressures they face from their pension obligations.” Pension plans that “consistently have underfunded their contributions” face more severe pressure, Fitch added. The rating agency also discussed some of the “more challenged” state pension systems with defined benefits. Illinois is getting the most media coverage but seven other states also are discussed. California isn’t included in this “more challenged” list because its big public employee and teacher pension systems have healthier funding ratios (even if the “unfunded” liabilities are large when stated in dollar amounts). Moody’s Investors Service recently announced it would combine tax-supported debt levels and unfunded pension liabilities when evaluating state ratings. In contrast, Fitch “continues to believe that reported pension obligations, although long-term liabilities, are meaningfully less comparable than bonded debt and subject to numerous and changing variables that render them more volatile. As such, Fitch will continue to calculate a debt ratio that includes only bonded debt and analogous obligations,” the rating agency’s report said.
(Feb. 17, 2011) -- After a couple days of bullish secondary market trading, tax-exempt yields have dropped by close to one-tenth of a percentage point on some securities. The lack of new supply isn’t hurting and, with next Monday being a holiday, new sales might stay relatively slow. U.S. Treasury bonds keep treading water because of concern over an economic recovery; as we have noted, tax-exempt bonds had room to rally vis-à-vis Treasuries. New-issue sales so far this week included an AA-minus offering of $19 million water revenue bonds by the Woodland Finance Authority. A five-year bond yielded 3.20% and a 10-year, 4.65%. The 15-year maturity yielded 5.5% and the 30-year, 6.15%. The Imperial Irrigation District also has priced the electric system revenue bonds we previewed last week (A1, AA-minus). (Note: we have updated final yields, removed reference to AGMuni insurance.) Based on the final scales, a five-year maturity yielded 2.81% and a 10-year, 4.33%. A 15-year bond yielded 5.2%.
(Feb. 16, 2011) -- Here is one sign of a relatively slow new-issue municipal bond market. We are “previewing” new sales that aren’t “story” bonds or large deals. Still, every once in awhile we like to call attention to a sale that will entice conservative buyers. The Fremont Union High School District fits this bill. The district in coming weeks expects to sell $55 million of tax-exempt general obligation bonds. Moody’s Investors Service rates the bonds Aa1, or one notch below a triple-A level. The district’s $44.4 billion tax base “is exceptionally large for a California school district,” Moody’s noted in a report. This district enrolls students from Cupertino, Sunnyvale, and part of San Jose. There are other strengths we could highlight for this issuer, including its proximity to Silicon Valley’s job market. For now, however, investors looking for higher-quality municipal bonds should flag this deal. It is a good one to add diversity to just about any portfolio. The Fremont district also plans to issue $25 million of Qualified School Construction Bonds. These QSCBs stem from another federal “stimulus” program that needs to disappear. This federal giveaway provides tax credits instead of tax-exemption on the bonds.
(Feb. 15, 2011) -- We didn’t put this in our bond updates the other day but it is still worth a mention. Oakland Unified School District general obligation bonds were downgraded to BBB- from BBB+ by Standard & Poor’s. It isn’t news that this school district has had financial troubles. However, S&P also went a step further and withdrew its ratings (including underlying ratings) on the district’s bonds. S&P withdrew the ratings because of “our view of the district’s lack of financial audits for the three most recently completed fiscal years, due in part to what we believe are deficiencies in internal financial controls and accounting,” a report said. S&P might eventually restate the ratings after other steps are taken, including an independent auditor’s review. The school district plans to use internal fund transfers to cover a $23.7 million cash shortfall on June 30, 2011, S&P said. “The district reports that it has been borrowing from its G.O. bond proceeds to cover seasonal cash shortfalls,” the rating agency added. Borrowing from G.O. bond proceeds? The state needs to do even more than it has in the past to figure out this school district’s budget and accounting mess.
(Feb. 11, 2011) -- We don’t see any signs that new-issue municipal bond sales are going to pick up in California next week. As always, however, there will be a handful of smaller deals with a variety of bonds to consider. Some local school district general obligation bonds we previously mentioned that were tentatively on tap this week might price next week instead. Other school district deals also are looming. The Monterey Peninsula Unified School District might price $35 million of G.O. next week (Aa3, A+). Investors of many stripes will want to consider an $80 million bond offering by the Imperial Irrigation District. The electric system refunding bonds involve an “essential purpose” and are rated A1 and AA-minus based on their own credit. However, the bonds also will be guaranteed by Assured Guaranty Municipal, which is currently rated Aa3 and AA+. As we noted in items last week, Assured Guaranty and Standard & Poor’s aren’t on the same page regarding a potential “criteria” change for bond insurers by the rating agency. The guarantee will still be there regardless of how that debate plays out, but AG Muni has a big stake in keeping its current double-A status. The Imperial Irrigation District bond proceeds will refinance certain revenue commercial paper warrants. The district’s electric system customer base includes residents in the Imperial Valley and Coachella Valley. Recent coverage on debt service was 3.05 times in fiscal 2008 and 2.43 times in fiscal 2009. However, the fiscal 2009 coverage was 4.18 times if a rate stabilization fund is taken into account, according to the preliminary official statement. The district might put aside as much as $100 million aside in the rate stabilization fund. Last year the district’s board put $53.5 million of deferred electric system revenue into the rate stabilization fund.
(Feb. 10, 2011) -- The final pricing of the San Joaquin County Transportation Authority sale gives a decent read on tax-exempt rates for a "solid" muni bond in today's market. The sales tax revenue bonds are rated Aa3 by Moody’s Investors Service and AA by Standard & Poor’s. The Bond Advisor tends to like sales tax revenue bonds because they generally include a strong enough cushion to weather downturns. The San Joaquin Authority priced a five-year maturity with a 3% coupon to yield a tax-exempt 2.39%, a bit lower than the initial “retail” rate. A 10-year maturity with a 5% coupon was priced to yield 4.10%. A 15-year bond with a 5.25% coupon was priced to yield a tax-exempt 5.04%. The 20-year maturity ended up yielding 5.52%, a bit higher than where it stood during the initial “retail” pricing. The 30-year maturity yielded 5.75%. This deal is helpful in pegging new-issue yields because many new sales often don’t include a broad maturity range from five to 30 years. The Taxable Equivalent Yield on the 10- and 15-year maturities ranges from above 6% to above 8% for federal income tax brackets of 28% or 33%.
(Feb. 9, 2011) -- A deal we highlighted in recent previews provided tentative pricing for smaller “retail” investors yesterday. The San Joaquin County Transportation Authority priced a five-year maturity with a 3% coupon to yield 2.42%. A 20-year bond with a 5.375% coupon was priced to yield a tax-exempt 5.46%. The sales tax revenue bonds are rated Aa3 by Moody’s Investors Service and AA by Standard & Poor’s. The Bond Advisor tends to like sales tax revenue bonds because they generally include a strong enough cushion to weather downturns; the San Joaquin Authority expects net revenue to rebound slightly this fiscal year after a multiyear decline during the recession. Based on that five-year yield, which is at the lower end of the spectrum among recent new-issue sales in California, it appears investors recognize the strength of the sales tax base and debt service coverage. A lower-rated credit we previewed the other day also has priced for retail. Puerto Rico general obligation bonds are rated A3, BBB-minus, and BBB-plus. A 13-year maturity in the new deal was priced to yield 5.50% and includes bond insurance from Assured Guaranty Municipal. That yield is in the ballpark of what the San Joaquin Authority had to pay on an uninsured 20-year maturity. In general, tax-exempt rates have been creeping higher in recent days because U.S. Treasury bond yields are rising. Munis have been “outperforming” Treasuries since relatively attractive tax-exempt rates are luring buyers. A slow new-issue calendar also has helped muni rates stabilize after investor sell-offs hit mutual bond funds.
(Feb. 8, 2011) -- The above headline might seem a bit unusual in light of the typical item we explore under municipal bond “research.” It might be an unusual topic but it actually has a rating agency angle (and also affects whether you get your interest and principal payments on the day they are due or possibly a day late). The other day Moody’s Investors Service came out with a report discussing its approach “for Assessing the Rating Impact of Debt Payments That Are Missed for Operational or Technical Reasons.”
We will boil down the six-page report to a few sentences to make our point. Moody’s is trying to get a handle on how to approach “temporary” missed bond payments that don’t occur because of credit or liquidity problems. Rather, an interest or principal payment might be late “due to administrative or operational issues,” Moody’s said. The rating agency decided to provide guidance on whether there will be any rating impact from such temporary glitches, especially if a payment is just a day or two late. (The Bond Advisor over the years has come across such “administrative or operational issues” quite a few times, leading to some infamous rants of ours directed at bond trustees.)
Why is this becoming enough of an issue for Moody’s to discuss it at length? Depository Trust Company (DTC), which serves as an important middleman for processing debt service payments, has made a procedural change that could lead to a “higher incidence of payment delays to bondholders,” Moody’s said. Here is what is happening. DTC collects money for bond payments from paying agents, issuers, etc. It then traditionally has paid bondholders on the day the debt service payment was due, even in cases where the paying agent or issuer didn’t comply with certain technical or timing details requested by DTC. That is now changing effective February 7. DTC is no longer going to allocate payments on the due date if, by 3:00 p.m., it has not received a “fully compliant payment submission” from the paying agent or issuer. DTC will wait until at least the following morning to allocate the bondholder payment and might wait even longer until the payment submission is “compliant” (meaning, for example, that the amount sent in is actually correct and the CUSIPs, an identifying number for specific bonds, are fixed if they were incorrect). DTC warned in a report that such non-compliance has been “surprisingly high” in recent years, ranging from 4% to 8% of the millions of payments it processes each year. In essence issuer payments either missed the 3:00 p.m. deadline or didn’t have accurate CUSIP-level details. DTC also told Moody’s that “municipal debt issuers” were a “meaningful proportion” of the past non-compliant payments, according to the rating agency’s report.
All this brings us back to our headline. To avoid a new round of confusion in the municipal market over bond payments showing up a day late or more in investors’ accounts, issuers and others should ensure they meet the 3:00 cut-off time with accurate payment details. It isn’t too much to ask given modern technology and computers. Now to the other side of the equation: what will Moody’s do about late payments that do pop up? If it is a “one-time” thing that gets cured within one or two business days, “most likely” a bond’s rating or outlook won’t change. If, after a one-time late payment, Moody’s concludes the problem “may reoccur,” rating agency committees might take an extra step and assign a “negative” outlook to the bonds, Moody’s said. Downgrades would still be unusual unless Moody’s had cause to question “management competence” or other administrative weaknesses that led to operational late payment risk. Downgrade risk will rise for issuers with a history of such late payments or delays in curing them, Moody’s said. Any rating action “will be likely to lag” a missed payment, Moody’s said, because the rating agency wants to make sure a trend is clear beyond just a one-time operational glitch. Finally, as long as any missed payments are cured quickly, Moody’s will view these situations as “impairments” rather than an actual “default” for its statistical history. This is an important point; treating such missed payments as “defaults” would skew future default studies that try to focus on actual credit risk for various types of bonds. We end up where we began. “Hey Issuers and Others: Get Your DTC Payments in by 3:00 p.m.” Also, make sure all the details are accurate.
(Feb. 7, 2011) -- Two of our tables that reflect ongoing municipal bond market trends have been updated. They hadn't been updated during a recent "hiatus." One table provides examples of yields on recent tax-exempt sales in California’s municipal bond market. We don’t catch every deal but try to provide a wide range of examples of yields on recent sales. (The examples given are current-interest bonds; we don’t list capital-appreciation bond yields, though we discuss them from time to time elsewhere). For the 2011 deals we list, we still have to add whether a bond insurer backs the bonds (in most cases probably not). Our table of Upcoming Sales, which is always a work of progress, also has been updated. This table also doesn’t catch every imminent deal, in part because underwriters and financial advisers need to let us know if fast-moving “refinancing” is coming off the shelf. We are working, however, to update this table as fast as we can in February to make it more “complete.” Right now it is still a bit "incomplete." Some deals remain on this list for a handful of days after they have been priced. We expect to refine these charts and other material on this Web site as we get ready soon to add a subscriber-only section (“subscriber-only” means people who get the print edition).
(Feb. 4, 2011) -- We have been writing the last couple days on this page about bond insurer Assured Guaranty and its prospects in the municipal market if Standard & Poor’s changes the criteria for financial guarantors. Here is another interesting tidbit about a “new” bond insurer that has never written any business. In the past the Bond Advisor devoted a small amount of space to this new insurer, called Municipal and Infrastructure Assurance Corp. (MIAC). The company obtained licenses in 36 states and at one time had planned to jump into the void created when MBIA, Ambac, and other triple-A insurers were downgraded during the financial crisis. In a release accompanying full-year 2010 financial results, Radian Asset Assurance Inc. announced it signed an agreement on February 1 to purchase MIAC. The expected purchase price was $82 million, just a little above the funded capital base of MIAC. Buying the MIAC insurance company shell provides flexibility for Radian Asset “to pursue strategic alternatives in the public finance market, including possibly partnering with third-party investors to write new public finance insurance and/or reinsuring all or a portion of Radian Asset’s existing public finance business,” the company said. Investors holding municipal bonds backed by Radian would no doubt welcome anything that improved the company’s financial standing. Radian Asset’s financial guarantee is rated Ba1 by Moody’s Investors Service and BB-minus by S&P. At one time it was a double-A insurer. MIAC’s future role no doubt will hinge in part on what S&P does in the future with more rigorous requirements for bond insurers. Still, with all the renewed attention on “negative” headlines for muni bonds, maybe there will be renewed interest in resurrecting bond insurance efforts. We believe it will be an uphill fight and would be thrilled to see the municipal market stand on its own without any crutches.
(Feb. 3, 2011) -- Standard & Poor’s is standing by its proposed criteria changes for bond insurers, while adding that the plan is still up for “serious” consideration as the rating agency weighs comments received through March 25. Two analysts at S&P appeared on a conference call yesterday to discuss the proposal and take questions. Earlier in the week bond insurer Assured Guaranty held a call to express serious reservations about the proposal (see our February 2 item below). Assured Guaranty is concerned that S&P’s proposed changes will impose unrealistic requirements on bond insurers and perhaps even bring future new guarantees to a halt. Two of Assured Guaranty’s subsidiaries are the last players active in generating new insurance for the municipal bond market. We’ll boil down the S&P presentation to a handful of points. The S&P analysts seemed to stand by a new leverage test that in essence could put a cap on the amount of munis an insurer could guarantee. Assured Guaranty argues the leverage proposal doesn’t give enough weight to the credit quality of bonds insured. It sounds as if S&P might stick with the leverage test, though we’ll see if it gets modified. Another big issue raised was the timing of S&P’s plans and how fast a bond insurer would have to react to new criteria. One of the analysts didn’t seem open to a “multi-year” adjustment period; it appears any changes would be imposed much faster (giving a bond insurer less time to raise new capital, etc.) S&P analysts also discussed the way unearned premium reserves would be treated vis-à-vis the leverage test; once again, S&P stood by its proposed criteria change in this area because it would be consistent with regulatory approaches. There were several other points discussed yesterday. In essence, however, it is clear some sort of S&P criteria change is coming down the pike. It is also clear the rating agency isn’t eager to dole out triple-A ratings to bond insurers again after the debacle that occurred during the financial crisis. The thresholds will be set incredibly high for a bond insurer to get or hold on to a triple-A rating, even in the muni market.
(Feb. 2, 2011) -- The one active bond insurer still guaranteeing new municipal bonds took a stand yesterday against a Standard & Poor’s proposal that could impede the insurer’s ability to land future business. Assured Guaranty Municipal and Assured Guaranty Corp. are worried that new bond insurance criteria floated by S&P would make it more difficult to hold on to existing financial enhancement ratings. Three months ago S&P changed the two companies’ ratings to AA+ from AAA. In late January S&P issued a new report on the proposed criteria change for bond insurers. According to S&P, its proposed criteria change could lead to investment-grade insurers being downgraded a full rating level unless they raise more capital or reduce risk. In materials accompanying a conference call yesterday, Assured Guaranty warned that the adoption of the new criteria could mean “even possibly eliminating the bond insurance product” on future deals if it becomes too expensive for the companies to provide or issuers to buy. It is believed Assured Guaranty would have to raise almost $2 billion to keep its current ratings if the proposed criteria change took effect. Most of the major bond insurers lost triple-A ratings and ability to guarantee new deals during the financial crisis. Assured Guaranty is hanging on despite being a double-A insurer now. In 2010 AGM and AGC insured 135 transactions in California. Most of the insured deals are smaller ($50 million or less) and a majority of them, on their own, would carry single-A or BBB+ ratings. Investors need to realize that even if the companies were downgraded again, the guarantees themselves aren’t going away. However, the bonds would lose a bit of value on paper because they would move toward trading prices based only on the “underlying” credit. There doesn’t seem to be any point for investors with AGM- or AGC-backed munis to sell their holdings (assuming you’re a buy-and-hold investor focused on generating interest income). Remember, too, that the S&P criteria change is still only a proposal; the rating agency is taking comments on the potential modifications through March 25.
(Feb. 1, 2011) -- In June 2008 the Bond Advisor provided a rather lengthy overview of what it expected to happen for various bonds tied to Vallejo after that city filed for bankruptcy. Our analysis was especially important at the time because certain pundits and commentators provided their usual doom-and-gloom predictions that confused investors. Vallejo recently filed its plan for exiting bankruptcy and what we expected to happen for so-called “protected” bonds panned out (of course, this has been evident for some time now since the bond payments always were made in full). As telling, our June 2008 prediction for which type of obligations might face problems also panned out. Our latest print edition looks more in-depth at lessons smaller and bigger investors should ponder from Vallejo’s experience. As always, we stress again that smaller investors in particular need to understand just what they hold in their portfolio. Otherwise, when panic sets in as it has recently, you might end up running with the lemmings.
(Jan. 26, 2011) -- In previous updates and in a letter to subscribers, The Bond Advisor noted it had acted against certain individuals who have either misused our content or otherwise distributed it without permission. A new letter going to subscribers on Jan. 29 provides updates on several steps we have taken to deal with such issues and our print publishing schedule, including the plan for resuming "limited" free updates here in February. In the future most updates will be provided only to existing subscribers to the print edition. More to say on this beginning next week.
The older archived material below will be removed soon for new content.
(August 12) -- The supply drought of new-issue sales is causing yields on high-quality tax-exempt bonds to keep dropping. One “generic” scale of triple-A tax-exempt rates keeps testing record lows, with a 10-year yield around 2.50%. This same scale puts a 30-year AAA bond at less than 4%, closer to 3.90%. While real-world pricing examples might not match “generic” scales, high-quality issuers won’t pay much in this seller’s market. The same “generic” scale puts double-A munis below 2.70% in 10 years and only tops 4% once a 25-year maturity comes into play. Next week the Los Angeles Department of Water and Power plans to sell revenue bonds. The bad news? The whole deal might involve taxable Build America Bonds, not tax-exempt debt.
(August 11) -- Moody’s Investors Service has changed its rating outlook for Puerto Rico general obligation bonds to negative from stable, “reflecting the weak funding status of the employees retirement system,” the rating agency said. The outlook change isn‘t as strong as an actual downgrade warning, but indicates the rating could drop based on current trends. The outlook change also applies to other Puerto Rico debt tied to the G.O. pledge, affecting $29 billion in bonds overall. Puerto Rico G.O. bonds are rated A3 by Moody’s after a “recalibration” that assesses municipal bonds on a “global” scale with corporate debt, etc. Prior to the recalibration Puerto Rico bonds were at the lowest investment-grade level. The Commonwealth has “very low pension funded ratios” relative to U.S. states, Moody‘s said. “While we acknowledge that the commonwealth is working on a plan to address the retirement system problems, and that the current management has proactively and successfully addressed many difficult financial decisions in the past 18 months, we believe that at this time there are a limited number of options the commonwealth has to improve the funded ratio given the commonwealth's relatively weak finances and economy and high debt.”
(August 9) -- The dog days of August are here, at least for new sales of tax-exempt bonds. A Sacramento County airport bond and a Goleta water district certificate of participation sale are expected to price this week. A handful of other deals also might price, but in general this seems like another slow week for new tax-exempt bond sales.
(August 2) -- At this point the new-issue calendar looks relatively light in the week ahead. The San Diego Unified School District plans to sell $164 million of Aa1 and AA tax-exempt general obligation bonds this week. The district also will sell a smaller chunk of taxable bonds. The Los Angeles Community College District plans to sell $125 million of revenue bonds. The Grossmont Union High School District is lining up $80 million of general obligation bonds rated Aa2 and AA-minus. A handful of other smaller deals will price, including unrated Mello-Roos sales.
(July 29) -- If at first you don’t succeed, try a new bill in the House instead of the Senate. That might be the rallying cry for local and state governments eager to keep the federal giveaway known as taxable Build America Bonds. House Ways and Means Committee Chairman Sander Levin just introduced a bill to extend taxable BABs for two years through 2012. The U.S., which now pays 35% of the interest cost of these “stimulus” bonds, would drop the subsidy to 32% next year and 30% in 2012. Investors in traditional tax-exempt bonds have a stake in the taxable BAB extension. Why? Taxable BABs have cut into tax-exempt volume and helped to keep a lid on tax-exempt rates due to supply and demand factors. More than $120 billion of taxable BABs have been sold in little more than a year since their authorization. Among other things, the new legislation also would extend for a year a provision that has let private-activity issuers sell new municipal bonds exempt from the federal alternative minimum tax.
(July 28) -- California Controller John Chiang projects that his office might have to start issuing IOUs in August or September “to get us through the fall” in the absence of a new budget. Issuing IOUs would ensure that California meets payments protected by the constitution, including bond obligations. As we have explained before, IOUs are used to protect bondholders. The use of IOUs obviously generates tons of bad publicity for our mismanaged state, but bondholders need to remember the strategy conserves cash for higher-priority purposes. Controller Chiang said in a release that the state’s cash “will go into the red” by the end of October without a budget for the current fiscal year that began July 1. Using IOUs would help to stretch the state’s resources. Other strategies looming this fall include a $2.5 billion payment deferral for K-12 schools if a budget isn’t passed. The controller also noted that more credit downgrades are possible over an extended standoff over the budget. Chiang also urged state leaders not to follow through on threats to delay approving a budget until after the November election. Gov. Arnold Schwarzenegger recently said he might let his successor deal with the matter unless he gets budgetary and pension reform. While the budget discussion usually involves such political posturing, you just never know what might happen in coming months. At the least it appears there won’t be a new budget until very late this summer.
(July 26) -- This week’s expected new-issue activity will include a mix of credits, including single-A San Francisco airport revenue bonds. The California Municipal Finance Authority plans to sell more than $100 million of tax-exempt debt on behalf of the Eisenhower Medical Center in Rancho Mirage. As we noted on our Bond Updates page last week, this medical center has been downgraded ahead of the sale. Also, a double-A Sacramento County sanitation district deal probably will be priced this week, though it appears the issue will be structured as taxable Build America Bonds. On Tuesday the Oxnard Union High School District plans to price $50 million general obligation bonds with an A+ rating. Another interesting deal in terms of yields will be a $67 million superior-lien bond sale by the Jurupa Public Financing Authority. Bond proceeds will refinance eight existing series of bonds for community facilities districts (Mello-Roos), and also raise money for capital improvements. On its own “underlying” credit the issue is rated A-minus by Standard & Poor’s. However, the superior-lien bonds also feature bond insurance from Assured Guaranty Municipal. Another $19 million of subordinate-lien bonds in the deal aren’t rated.
(July 22) -- A couple well-known double-A credits are lining up new bond sales. The Beverly Hills Public Financing Authority plans to sell $63 million of lease-revenue bonds with an AA+ rating from Fitch. Part of the deal will include taxable Build America Bonds. The City of Los Angeles plans to sell $136 million of tax-exempt subordinate wastewater system bonds carrying an AA rating from Fitch. The majority of the sale will involve senior wastewater bonds rated AA+; however, those will be sold as taxable BABs or another form of taxable municipal debt.
(July 21) -- Bond insurer Syncora Guarantee Inc. issued a release saying that it “has completed its remediation plan” to enough of a degree to meet minimum surplus requirements. The action will let Syncora make claim payments on regularly scheduled payments dates on or after July 21, 2010. The insurer was previously known as XL Capital Assurance. Accrued and unpaid claims from April 26, 2009, will be caught up over a six-month period. The New York Insurance Department on that April 2009 date ordered Syncora to suspend claims payments until it was in compliance with minimum statutory capital. About a year ago, New York’s insurance department said a “well-capitalized” subsidiary known as Syncora Capital Assurance Inc. had also been established to provide reinsurance for Syncora’s municipal bond business. While many municipal bonds backed by the former XL Capital won’t tap the guarantee anyway, there are issuers to watch. The City of Chowchilla, citing tough economic times, recently decided not to appropriate fiscal 2011 lease payments that back a $5.89 million Chowchilla P.F.A. refunding lease-revenue 2005 bond issue (Civic Center Project). A reserve fund draw covered the July 1, 2010, bond payment. Chowchilla’s council said in a resolution that this is a “deferral,” not a repudiation of its lease obligations. Let’s hope the city makes it a priority to cover lease payments and remedies the situation; if it doesn’t and the reserve fund is drained, Syncora will be on the hook to make up any shortfalls in future debt service payments on the date they are due. There is still about $120,000 in the reserve fund.
(July 19) -- We mentioned in a recent item that taxable Build America Bonds continue to be sapping supply from the tax-exempt market. Yields on these taxable BABs have actually jumped (relative to U.S. Treasuries) in recent weeks, but issuers are still finding they can save money over tax-exempts because the U.S. provides a 35% interest-cost subsidy. What we haven’t discussed a lot is the growth in Qualified School Construction Bonds (QSCBs). Like taxable BABs, these Qualified School Construction Bonds were approved under the 2009 federal stimulus act. However, at first QSCBs were only approved as a tax-credit bond. These tax-credit bonds, as the Bond Advisor noted in the past, are more complex than a simpler tax-exempt bond. This year Congress agreed to let QSCBs be sold as “direct-pay” taxable bonds instead, similar to taxable BABs. That means a school can sell a “regular” taxable bond and then get a federal interest subsidy payment for interest costs, rather than go through the hoops of structuring a tax-credit bond. This change has opened the spigot for QSCB sales. Just recently in California the Salinas City Elementary School District, the North Monterey County Unified School District, the Hemet Unified School District, the Porterville Unified School District, and the Lodi Unified School District all put together QSCB sales in one form or another. The taxable school bonds can qualify for as much as a 100% federal interest subsidy instead of the 35% for taxable BABs. That is why the issuers are willing to sell taxable instead of tax-exempt debt. There isn’t an unlimited spigot available because the U.S. allocated $22 billion of QSCB authority for 2009 and 2010. However, the recent surge in QSCB sales has to be taking a cut out of future tax-exempt volume, often in $25 million issue-by-issue chunks. In addition, some schools that didn’t get a QSCB allocation are selling taxable BABs instead. Yields can be all over the place. The Lodi Unified School District’s QSCB certificates of participation carried an A2 rating and yielded a taxable 5.86% in seven years. A higher-rated school district with higher-quality G.O. bonds recently sold taxable BABs to yield 5.80% in 15 years. While the Lodi school’s taxable yield might appear attractive, you have to do an apples-to-apples comparison with a tax-exempt COP (rated single-A) to see which one looks more attractive.
(July 15) -- The Los Angeles Community College District is in the market now with $900 million G.O. taxable Build America Bonds, with another $175 million of general obligation bond “crumbs” for tax-exempt investors. But other issuers also are abandoning the tax-exempt market to slurp up the federal 35% subsidy for taxable BABs. The San Francisco Public Utilities Commission soon might sell as much as $400 million water revenue bonds as taxable BABs, with only $55 million as tax-exempt. The Sacramento Municipal Utility District also is selling $250 million of electric system revenue bonds taxable BABs. Many school districts also are selling Qualified School Construction Bonds, another form of taxable debt receiving heavy federal subsidies. The other day the Palo Alto Unified School District priced $25 million of general obligation bonds as taxable QSCBs, with taxable yields including 4.66% in ten years and 5.52% in 14 years.
(July 13) -- On Friday, after we ran our weekly summary, the Laguna Beach Unified School District priced $30 million of general obligation bonds. We mentioned the 10-year yield in an item yesterday. However, we thought we would remind readers again about the yield trade-off they accept for high-quality sales in today’s market. The school’s bonds are rated Aa1 and AAA. The five-year bond carried a 4% coupon and was priced to yield 1.47%. The 10-year maturity with a 5% coupon was priced to yield 2.79%. The 15-year bond yielded 3.68% and the 18-year, 3.95%. Those are all tax-exempt yields so you have to calculate the Taxable Equivalent Yield to compare the deal with taxable alternatives. (The TEY for 2.79% can range from about 4.1% to 4.75%, based on federal income tax brackets ranging from 25% to 35%.) For comparison’s sake, around the same time California’s infrastructure bank priced $37 million of revenue bonds for a health sciences building tied to the University of Southern California. USC’s credit is the ultimate security for the bonds and the deal was rated Aa1. The five-year bond yielded 1.75% and the 10-year, 3.07%. The 15-year bond yielded 3.93% and the 18-year, 4.21%. Granted, the USC deal involved a lease structure rather than a G.O. pledge such as Laguna Beach’s school sale. That helps explain the roughly quarter-point yield differential.
(July 12) -- Our July print edition includes an essay that travels back in time, to 1990 and 1991, when some in the general media were in a frenzy over their predictions for a municipal bond “disaster.” As it turns out, such coverage from two decades ago can help to put some of the current “sky is falling” muni bond stories in perspective. We called it “Chicken Little” journalism in 1990 and still call it that in 2010. These “scary” stories also are helping fuel a questionable strategy: Some California residents are putting sizable chunks of their municipal bond investments outside our state’s border. Our July edition looks at the tax-related cost of this strategy and what it takes in added yield for an out-of-state muni to be competitive with in-state California tax-exempt bonds. We also look at the topic of “debt service reserve funds,” which usually don’t get a lot of attention. There is a reason we bring the topic up now. This is a good time to subscribe and benefit from real in-depth discussion about California’s municipal bond market.
(July 9) -- The Metropolitan Water District of Southern California plans to price up to $100 million of revenue bonds next week. This prominent water wholesaler provides a key “essential-purpose” service and its bonds are favored by “conservative” investors seeking safety. The district’s bonds tend to get triple-A ratings, though we believe Moody’s has rated revenue debt Aa1 in the past (a notch below triple-A). In any event, the district will benefit from a “flight to quality” that provides relatively low borrowing rates in today’s market.
(July 8) -- Almost a month ago we mentioned that the Los Angeles Community College District had approved selling up to $1.2 billion of general obligation bonds. Most of the debt might come as taxable Build America Bonds. However, a tax-exempt G.O. sale is getting lined up for as soon as next week. The size will probably be less than $200 million. The deal will attract a lot of buyers because it is rated Aa1 and AA.
(July 6) -- There won’t be a lot of new municipal bond sales in the holiday-shortened week. The Virgin Islands Public Finance Authority plans to sell more than $300 million of matching fund revenue bonds later this week. The “matching fund” refers to the way the U.S. sets aside money for debt service. Payment on the bonds ultimately depends on rum production in the Virgin Islands. The senior bonds are rated Baa2 and BBB by Moody’s and S&P. Fitch rates them BBB+. A smaller subordinate issue is rated a notch lower by S&P and Fitch. We have written about these “rum” bonds before because they are federal and state tax-exempt for California residents. In one sale last year, the Virgin Islands yields weren’t all that different than a California G.O. sale at the time. California’s infrastructure bank plans a $37 million offering. We believe the Aa1 deal is for a USC Health Science Building project. The rating on the lease structure is ultimately based on the University of Southern California’s credit. On Thursday the Tahoe Forest Hospital District is taking bids on $43 million of general obligation bonds that are rated Aa3 by Moody’s.
(July 1) -- Sales of new tax-exempt bonds across the U.S. plunged by almost 45% in June compared with the same month a year earlier. However, issuance of taxable municipal bonds jumped by about 26%, largely thanks to those pesky Build America Bonds, according to statistics compiled by Thomson Reuters. Overall municipal bond issuance totaled $30.5 billion in June, down almost one-third from the same month in 2009. It was the slowest June for new issuance in 10 years. Blame the drop in part on worldwide credit concerns over problems in Europe. That issue, and concern over a still-sluggish economy, is causing renewed volatility and prompting a “flight-to-quality,” one reason U.S. Treasury bond yields have dropped again. Our June print edition also discusses a barrage of “negative” media stories about municipal bonds. While we believe some of this coverage is inaccurate, it can have an effect on the marketing of newer bonds. For the first half of the year new municipal bond sales passed $200 billion across the U.S., up 1.8% from the same period in 2009, according to Thomson Reuters. We still think 2010 is shaping up as a good year for new volume, despite the blip in June.
(June 30) -- One of the new upcoming deals we mentioned among this week’s sales involved a $55 million offering by the San Juan Unified School District. The deal was priced yesterday. One interesting note: the bonds are rated Aa2 by Moody’s Investors Service, but still carried a financial guarantee from Assured Guaranty Municipal. Moody’s rates the AG Muni bond insurance Aa3, a notch lower than the school district’s rating. Standard & Poor’s still rates AG Muni triple-A but with a “negative” outlook.” The bond insurance still must have provided enough value (lower interest rates) for the issuer to add it to the sale. The five-year maturity yielded 2.20% and the 10-year, 3.65%. The 15-year bond yielded 4.20% and the 20-year, 4.50%
(June 30) -- Governor Arnold Schwarzenegger said he wants to delay an $11 billion general obligation bond scheduled for a vote in November. The bond, to finance water-related improvements, might face a tough time passing in the current economic environment, Schwarzenegger said. He prefers waiting until 2012. The Bond Advisor opposes this bond on principle because we believe many of the improvements should be financed with user charges instead of burdening the state’s G.O. pledge with even more debt. Other critics say the water bond package had to be loaded with too much “pork” to line up enough votes to get on the ballot. We would be happy to see the bond stay on this year’s ballot in the hope it would get defeated.
(June 28) -- The San Juan Unified School District plans to sell $55 million of general obligation bonds on June 29, one of several deals expected to price before the July 4 holiday week. The school bonds carry Aa2 and A+ ratings. The Alameda Public Financing Authority plans to sell bonds backed by special tax (Mello-Roos) payments. The issues are rated either A-minus or BBB-minus. The Chino Basin Regional Financing Authority plans to price $64 million of wastewater revenue bonds with Aa2 ratings. The ABAG Finance Authority for Nonprofit Corporations plans to issue $63 million of bonds on behalf of Channing House. The bonds are rated A-minus based on backing from California’s Health Facilities Construction Loan Insurance Program (Cal-Mortgage). Channing House is a retirement care community located in Palo Alto and it is building a new health-care center. Riverside County is selling three separate redevelopment bonds for various project areas, with credit ratings in either the single-A or triple-B range.
(June 24) -- The Bay Area Toll Authority priced $1.5 billion of taxable Build America Bonds today. A 20-year maturity yielded a taxable 6.79%. An investor in a lower federal tax bracket of, say, 28%, could match that return with a tax-free yield of roughly 4.50%. It only takes a tax-exempt yield of roughly 4.10% for a 33% bracket investor to match that return. San Diego’s water revenue bonds from last week could exceed those thresholds with shorter maturities than 20 years, and the San Diego deal was rated higher.
(June 23) -- The Santa Monica - Malibu Unified School District sells tax-exempt general obligation bonds that are sought after by conservative investors. Not only are they rated Aa1, just one notch below triple-A, but the issuer benefits from name recognition tied to two affluent communities. What a pity, then, that an imminent $65 million G.O. bond sale will only include $1.5 million of tax-exempt bonds. The rest will be structured as taxable Build America Bonds. On a brighter note, the San Juan Unified School District plans soon to sell $55 million of G.O. bonds with Aa2 ratings. We assume a bigger chunk of that sale will be tax-exempt. The San Juan district serves cities such as Carmichael and Folsom in Sacramento County, and its finances remain sound despite the economic downturn hitting the economy and property values in the region.
(June 21) -- One type of State of California general obligation bonds, those that finance home purchase loans for military veterans, will help lead new sales this week. The veterans G.O. bonds benefit from upgrades we discussed here on June 18. Puerto Rico also is selling tax-exempt sales tax revenue bonds with "high" single-A ratings. A triple-B Guam Power Authority sale also is on deck. This week's $1.8 billion new bond sale by the Bay Area Toll Authority disappeared from our calendar because it involves all taxable Build America Bonds. Manhattan Beach and Ceres school districts plan G.O. bond issues this week.
(June 17) -- Our June 16 entry below shows how a triple-B redevelopment bond had to pay the piper. Now Riverside County's Redevelopment Agency is going to sell $52 million of tax allocation bonds that are rated Baa2. In addition, Moody's Investors Service just downgraded the specific project area (Interstate 215 Corridor Redevelopment Project Area) by two notches to Baa2 from A3, a move that affects debt sold in 2004, 2005, and 2006. "The downgrade reflects the substantial decline in debt service coverage attendant upon the current issue in combination with the high concentration in the single largest taxpayer in the project area," Moody's said. A stricter "additional bonds test" is a positive factor. The Inland Empire Energy Center, a newly constructed power plant, represents 39% of incremental assessed value in the project area.
(June 16) -- As we said in our preview of deals that will price this week, a Lompoc Redevelopment Agency sale would offer more yield because of a BBB+ rating. A bond due in four years yielded a tax-exempt 3.25%. A bond due in nine years yielded 4.875%.
(June 15) -- Last week's announcement by Ambac Assurance that it has removed about $19 billion of "some of its most toxic exposures" is a plus for other policyholders, Moody's Investors Service said. Ambac settled the claims on riskier derivatives for about $4 billion in cash and surplus notes. "For remaining policyholders, tearing up contracts at a discount to future claims enhances their capital position," Moody's said. Wisconsin's insurance regulator already has essentially walled off the riskier securities from municipal bonds backed by Ambac. The bond insurer is rated Caa2 by Moody's and is under review for an upgrade. Moody's also said that a potential bankruptcy filing by Ambac's parent shouldn't affect the insurance company. Ambac backs $219 billion of municipal bonds so any effort to protect its guarantee is important. Most of the "traditional" muni bonds it backed won't default in any event.
(June 14) -- It will be a week of variety in the new-issue market. Sunnyvale has triple-A (S&P) water revenue bonds set to price. Moody's rates it Aa1. Such essential-purpose debt is a safe bet for many investors. The Northern California Power Agency will sell more bonds for the Lodi Center Energy Project. This part of the sale is rated a "low" single-A based on backing by several utilities. The Modesto Irrigation District also plans to price about $100 million of single-A electric system revenue bonds. Several smaller deals also will price this week, including a Lompoc Redevelopment Agency sale that will offer more yield because of a BBB+ rating. The Los Angeles Community College District could sell $1.2 billion of double-A general obligation bonds this month (and Los Angeles County has the accompanying tax levy on its June 15 board agenda). The Contra Costa Water District plans to sell $132 million of water revenue notes this week, featuring AA+ (S&P) and AA (Fitch) ratings.
(June 10) -- The Los Angeles Community College District could price $1.2 billion of general obligation bonds very soon. The district's board approved the sale at a May 26 meeting and The sale will include tax-exempt and taxable Build America Bonds. This is a double-A credit that will attract plenty of buyers.
(June 9) -- Standard & Poor's has affirmed California G.O. bonds at A-minus. "We believe that gradual, albeit fragile, improvement of the state economy (evidenced by job growth of more than 56,000 for the first four months of 2010) and improved financial liquidity are a benefit to its credit quality," S&P said. A political impasse over a new budget could be the problem again in coming months. "Because of the budget politics, we believe the state's credit is more at risk from a stalemated negotiation process with primarily political origins than from other, more fundamental economic and revenue factors," S&P added. In addition, "the state has what we consider to be strong cash flow coverage of GO and lease revenue bond debt service payments." The Bond Advisor emphasized this point in an essay we posted here.
(June 8) -- Los Angeles is getting ready to sell $50 million of judgment obligation bonds. Some investors might not be familiar with these securities. Some municipalities sell such bonds from time to time to finance legal settlements. A big city such as L.A. has the resources to pay such settlements, but a bond issue helps spread the cost (in this case over 10 years). On occasion smaller cities have needed judgment obligation bonds to avoid dire budget consequences. The security for such debt is solid. In the L.A. sale, for example, "the city's obligation to make these debt service payments is absolute and unconditional," Moody's Investors Service notes. However, these bonds are not backed by a general obligation pledge. That is why Moody's rates the Los Angeles judgment obligation bonds Aa3, or one notch lower than it rates the city's G.O. debt. The city is on the hook for these settlements one way or another, so a bond sale this size "has no material implications" for its debt burden or credit quality, Moody's said.
(June 7) -- This week Palo Alto will sell triple-A general obligation bonds and San Francisco will offer double-A revenue bonds. The Northern California Power Agency will sell bonds for the Lodi Center Energy Project; this portion of the sale is backed by the California Department of Water Resources and is rated Aa2 and AAA. The City of Los Angeles will offer judgment obligation bonds. Los Angeles County will sell $1.5 billion of tax and revenue anticipation notes.
(June 3) -- Warren Buffett helped stoke a few more scary headlines with his testimony before a federal "financial crisis" commission yesterday. He was there to discuss rating agencies. However, Buffett also talked about a "terrible problem" for some municipal bonds at some point, making it sound as if even triple-A muni ratings are contingent on an assumption the federal government will bail out local and state governments. We found his comments to be vague, alarmist, and backed with zero facts on the financial cushions backing many municipal bonds. Of course there are troubled municipalities, such as Detroit, but so what? Detroit is in trouble and that's a surprise? Add Buffett's comments to the "scary talk" that can translate into a yield bonus at times.
(June 2) -- The tax and revenue anticipation note season is in full swing for issuers managing their cash-flow needs in the fiscal year beginning July 1. Yesterday the Santa Clara Unified School District sold $15 million of one-year TRANs to yield 0.4028%. Still better than putting cash in your mattress, but not by much. Some note deals will yield more than this; not many will yield less unless the maturity is shorter. The City of Monrovia is selling TRANs rated MIG2 by Moody's, a notch below a top grade. These will offer some added yield premium.
(June 1) -- A general revenue bond sale by the University of California Regents will probably take the crown for lowest yields this week among new issues. The deal is rated one notch below triple-A. If you want higher yields, an A-minus sale of tax allocation bonds by Compton's Redevelopment Agency will provide some decent returns. The Stanford Hospital and Clinics sale of healthcare revenue bonds also could price this week through CHFFA. On June 2 the Ceres Unified School District will sell general obligation bonds rated A+. Within a few days the San Francisco Public Utilities Commission plans to sell more than $500 million of water revenue bonds rated Aa2 and AA-, but four-fifths of the deal could be taxable Build America debt.
(June 1) -- We can already predict the issuer that will land some of the lowest yields next week: the City of Palo Alto. Moody's rates the city's general obligation bonds Aaa and Palo Alto plans to sell $58.5 million of this debt on June 9. It is a seller's market for high-quality issues.
(May 26) -- How many more end-of-the-world stories can the media generate about municipal bonds? Thousands, the way things are going. Time jumped on the bandwagon, with a headline about munis as the "next financial land mine." All the buzz words are there, such as "danger" and local governments "frantically scrambling." All the usual misleading conclusions are in there, too. It never ends.
(May 24) -- The San Francisco Public Utilities Commission on Wednesday will sell wastewater revenue bonds, though a good chunk will be taxable Built America Bonds. The Stanford Hospital and Clinics deal is expected soon; it carries three credit ratings and is all tax-exempt. Our Upcoming Sales page has been updated to remove various entries that were priced recently.
(May 20) -- The Puerto Rico Electric Power Authority revenue bonds were priced to yield a tax-exempt 4.32% in 11 years (the shortest maturity in the sale), while the longest maturity of 18 years yielded 4.80%. This A3 / BBB+ issuer is one of our favorite lower-rated municipal utilities because of its monopoly position. The Los Angeles Department of Water and Power also priced its bonds, and a 12-year tax-exempt maturity yielded 3.52% for a deal rated Aa3 and AA-minus. Most of the L.A. issue came as taxable Build America Bonds. Yesterday another deal we mentioned before, a $62 million sale for the Sanford Consortium Project (a stem-cell research project), priced through the state's infrastructure bank. The bonds are ultimately backed by the University of California and carry Aa1 and AA ratings. The five-year bond yielded 2.09% and the 10-year, 3.42%. The 11-year paid 3.62%, or 70 basis points less than the Puerto Rico power deal. The Sanford deal didn't pay 4.00% until a 15-year maturity, not a surprise in today's market for a high-quality rating.
(May 18) -- Our preview of this week's sales neglected to mention a Puerto Rico Electric Power Authority sale of $325 million power revenue bonds. We saw this deal get rated awhile back but never got an update on the pricing date. A JPMorgan message indicates the retail pricing period will occur today. This BBB+ / A3 issuer has a monopoly to provide essential services, and its bonds are federal and state tax-exempt in California.
(May 17) -- A San Francisco Unified School District G.O. bond sale will help lead this week's new issues, along with a deal by the Turlock Irrigation District. The Los Angeles Department of Water and Power is selling a far bigger issue but most of it will be taxable Build America Bonds, with maybe about $65 million of tax-exempt crumbs.
(May 13) -- Another "Sigh!" in our headline (also see entry below). The Los Angeles Department of Water and Power is reviving its $720 million sale of revenue bonds; this issue was delayed when the city and utility fought over a rate increase. We are sighing because more than $600 million will be structured as taxable Build America Bonds. Fitch Ratings grades the bonds AA-minus. Fitch previously withdrew its rating for this new sale when the city in-fighting broke out.
(May 12) -- The Bay Area Toll Authority is lining up a $3 billion municipal bond sale. The bad news: the subordinate-lien revenue debt will be sold as taxable Build America Bonds to lap up a 35% federal subsidy of interest costs. The authority has changed its financing plan "to take advantage of lower interest rates afforded by BABs," Moody's Investors Service noted in a report. The A1-rated bonds will help pay for the new East Span of the San Francisco-Oakland Bay Bridge.
(May 11) -- Securities and Exchange Commission Chairman Mary Schapiro said in a prepared speech last week that "I find it surprising that such an important and omnipresent sector of the capital markets is subject to such limited regulatory oversight." She was speaking, of course, about the municipal bond market. Schapiro apparently missed some of our classic rants about the lack of muni oversight, going back to the 1980s. We are glad to say the SEC wants to address this situation and our May print edition looks at ways to accomplish change.
(May 10) -- We have revamped May's print edition to include a redevelopment court ruling and certain other worthy "news." It is now being mailed this week instead.
(May 6) -- The California Department of Water Resources ended up selling almost $3 billion of power supply revenue bonds, up about 50% from the initial size, thanks to good demand for its "low" double-A debt. The 12-year maturity yield of 3.8% compared this way with other new sales: Glendale Unified School District paid 3.66% in 12 years on Aa2 G.O. bonds and the San Francisco Bay Area Rapid Transit District yielded 3.35% on 12-year debt backed by sales tax revenue.
(May 5) -- The California Department of Water Resources $2 billion sale of power supply revenue bonds is priced for the biggest investors next, which will set the final yields. Small investors ended up ordering around $1.3 billion in a two-day "retail" period. See examples of tentative yields in the May 4 item below.
(May 4) -- Retail investors yesterday placed orders for about half of California's Department of Water Resources $2 billion sale of power supply revenue bonds. The tentative tax-exempt yield is 3.80% in 12 years (other examples: 2.32% in five years, 3.59% in 10 years). With tax-exempt muni bond volume down and big billion-dollar-plus sales still somewhat rare, it isn't surprising to see quality-conscious investors flock to this sale like bees to honey. Income-oriented investors prefer good old California general obligation bonds.
(May 3) -- California's Department of Water Resources will dominate the new-issue market this week with $2 billion of power supply revenue bonds. They will mature from 2011 to 2022. San Francisco's Bay Area Rapid Transit District takes bids on May 5 for $131 million of sales tax-backed bonds. Childrens Hospital Los Angeles plans to price $135 million of bonds through the California Health Facilities Financing Authority. The hospital deal is triple-B on its own credit but will include AG Municipal bond insurance; yields should be enticing in any event.
(Apr. 28) -- The Diablo Water District took competitive bids yesterday on water revenue certificates of participation (rated AA- by S&P). A 2022 maturity yielded a tax-exempt 4% and the 10-year COP, 3.60%. A five-year COP yielded 2.10%. The 20-year maturity yielded 4.68%.
(Apr. 27) -- As we noted yesterday on our home page, the California Department of Water Resources plans to sell $2 billion of power supply revenue bonds next week, according to the state treasurer's office. The bonds will refinance existing debt that was sold during the state's energy crisis. (Portions of the Series 2002A bonds will be refinanced, along with some variable-rate debt.) The new bonds will be sold on May 5, but typically there will be a "retail" period at least a day before when smaller investors can place orders. Standard & Poor's rates the bonds AA-minus. The rating reflects "the ongoing trend of declining power program responsibilities that we believe has greatly reduced the program's exposure to power market volatility," S&P said. Fitch Ratings now rates them AA-minus as well after a one-notch downgrade on April 27. Moody's Investors Service rates them Aa3. There are about $9 billion of these power bonds still outstanding, a legacy of when the state stepped in to purchase energy supplies on behalf of private utilities.
(Apr. 26) -- After we published our weekly review early on Friday morning, there was one notable new pricing later in the day. Stanford University priced $215 million of triple-A revenue bonds highlighted on this page previously. The entire deal was packed in a 30-year maturity with a 5.25% coupon and was priced to yield 4.25%. A Lancaster redevelopment bond priced last week yielded more than that on a seven-year maturity. Our March print edition discussed the merits of long-term bonds no matter what your age, but Stanford's 30-year rate wouldn't entice too many yield-hungry investors.
(Apr. 23) -- California Treasurer Bill Lockyer said the credit default swaps market isn't having enough of an impact on the state's bonds "to cause concern at this time." Lockyer made the comment after digesting letters from six of the state's bond underwriters who make markets in credit default swaps. Big investors aren't expecting California to default when they participate in this swap market, Lockyer said. "Instead, investors buy or sell them to bet on how perceived credit risk will be reflected in market prices," his statement said. He does want all underwriters in the state's pool to file quarterly reports on their activity in the default swaps market. The Bond Advisor noted the irony of all this in its April print edition because California gladly participated in the bond insurance market when it was to the state's advantage to take yield out of the pockets of mom-and-pop investors.
(Apr. 22) -- The Puerto Rico Electric Power Authority deal we flagged as an interesting BBB+ sale had its final pricing yesterday. The 18-year maturity yielded 4.91%; almost a month ago the authority paid 4.92% on a 17-year bond.
(Apr. 21) -- The Palm Drive Health Care District, which we have written about previously because of a bankruptcy filing three years ago, plans a $10 million certificate of participation sale to exit bankruptcy. The district had talked about this financing previously, but the 2008 and 2009 market-wide credit crisis made the sale more difficult. The Northern California Health Care Authority plans to issues the COPs. They are rated BB by Standard & Poor's based partly on the leveraging of surplus parcel tax revenue that isn't already used for a 2005 bond issue. The district's other existing debt continues to be paid though it now carries lower credit ratings. The COPs sale will repay a Sonoma County bridge loan, fund improvements, and pay off unsecured creditors at reduced levels.
(Apr. 20) -- One of the great things about tax-exempt "conduit" bonds sold on behalf of nonprofit organizations is that we learn about institutions we weren't familiar with in the past. The California Educational Facilities Authority plans to sell $22 million of municipal bonds on behalf of the Southern California Institute of Architecture. S&P rates the bonds BBB. "The rating is based on our view of the school's strong operating performance and budgetary flexibility," S&P said. Proceeds will let the institute buy the building it is leasing. It is located in a quarter-mile-long former freight depot. (You can see a picture of the SCI-Arc building by clicking on this link.) The institute is located on East Third Street in Los Angeles, east of downtown past Alameda Street. SCI-Arc, as the institute is known, is credited with breathing new life into this section of the city's Art District when it relocated here almost a decade ago. SCI-Arc has more than 500 students and identifies itself as one of the few independent architecture schools in the U.S.
(Apr. 19) -- The Los Angeles Unified School District will sell tax-exempt general obligation bonds this week, though it will sell an even bigger chunk of taxable debt. (These aren't taxable Build America Bonds, but rather a different type of subsidized federal giveaway bonds tailored for schools.) The The debt is rated a "low" double-A. More compelling from a yield standpoint will be two deals in the triple-B category. The BBB+ Puerto Rico power revenue bonds we have highlighted before because of the utility's monopoly and provision of an "essential" service. Childrens Hospital Los Angeles also plans to sell triple-B debt that now has a "stable" outlook from S&P instead of "negative." California Health Facilities Financing Authority will issue the hospital bonds.
(Apr. 16) -- The Los Angeles Department of Water and Power's governing board has approved a rate increase it recently rejected (see some background in item below). The action will give the city some financial help for a budget deficit, but utility officials say they won't meet the mayor's proposed renewable-energy goals without even higher rates. The ending of the rate increase impasse also should help the utility re-schedule a $700 million power-revenue bond sale that was delayed.
(Apr. 15) -- In our April 7 item below we said we are "quiet" about the political in-fighting going on in Los Angeles. That is because we expected the sausage-making process to produce something that can be wrapped in a casing, even if it didn't look very appetizing. Yesterday the City Council approved a 4.5% rate increase for the Los Angeles Department of Water and Power in a renewed bid to overcome an impasse. A rate increase might let the utility free up added money to help the city fill a budget hole. Now the ball is back in the utility's court. The utility had to delay a bond sale because of this stand-off, and Los Angeles has hurt its credit ratings. This might be a good time for the sausage-makers at the city to compromise. We remind you again of the irony: Some city leaders are riding on a "renewable energy" bandwagon but there is resistance to the higher rates needed for this campaign, especially in the current economic environment.
(Apr. 13) -- Competitively-bid bond sales, where the underwriter is selected on the day of the sale based on the best bid for an issuer, have become an endangered species in our view. Most sales are "negotiated," where the lead underwriters get picked ahead of time. So it is unusual to see three "competitive" sales of local general obligation bonds on today's slate in California. The Ceres and Shoreline school districts are taking bids on G.O. bonds today, along with San Francisco Community College District.
(Apr. 12) -- California's State Public Works Board plans to sell $400 million of tax-exempt lease-revenue bonds this week, which will rank among the larger new deals in coming days. Our April 8 item below points out that the deal is split to benefit two entities, resulting in different credit ratings.
(Apr. 9) -- We have often stressed essential-purpose bonds for "conservative" investors. Water and sewer bonds are a classic example of this category. Fitch Ratings recently discussed its water and sewer 2010 medians used to measure financial strength, including debt levels, capital costs, and liquidity. "The medians continue to point to ongoing capital pressures, but perhaps more importantly in the current economic climate, they highlight the sector's sustained fiscal health," Fitch said. Despite some pressure, "water and sewer utilities overall appeal well positioned to continue generating solid financial performance to bondholders throughout the current economic cycle." Utilities in the Far West region produce "the strongest financial results." Medians only play one part in the rating process, with factors such as management and policies also key.
(Apr. 8) -- California's State Public Works Board plans to sell $400 million of tax-exempt lease-revenue bonds next week. More than half will benefit University of California projects and carry Aa2 and AA- minus ratings. The balance, for California State University improvements, will be rated A1 and BBB+. There will also be $50 million of taxable Build America Bonds at the higher rating level above. Fitch rated the CSU bonds BBB- initially, then changed them to BBB+ after its April 5 "recalibration."
(Apr. 7) -- We remain silent on the political infighting in Los Angeles and warn investors that some of the hyperbole doesn't match actual credit risk. The city's "sausage-making" is on full public display and some of the ingredients aren't very appetizing when it comes to finding budget balance. Moody's Investors Service just cut Los Angeles general obligation bonds to Aa3 from Aa2 and kept a "negative" outlook on the city. Other Los Angeles general-fund debt fell by one notch and, depending on the security, are now rated from A1 to A3. Moody's said the downgrade "primarily reflects the continued erosion of the city's historically better-than-average willingness and ability to quickly rebalance its budget mid-year." The downgrade affects $3.2 billion of municipal bonds. Some general comments by us: It is interesting that everyone wants to push for "renewable" energy but no one wants to pay the higher cost. That is part of the battle going on over the city's proposed electricity rate increases. There is another fight over the city's long-standing practice of using utility money to help subsidize its general fund. Sometimes this in-fighting can be a good thing if it forces an issuer to become more fiscally responsible. "The loss of these [utility] funds would, at a minimum, make the city's planned rebuilding of its budgetary reserves over the next few years more difficult, if only because it would likely be starting from a weaker position," Moody's said in a report. A proposed $73 million reduction in utility help "would pose a material, though not unmanageable, challenge for the city's general fund," Moody's said. However, "the increased political contention around it is a negative credit development." In the Bond Advisor's view, the public unions remain the biggest threat in Los Angeles and elsewhere.
(Apr. 6) -- Our April print edition that was just mailed discusses "The Great Capitulation," though some refer to it as credit ratings "recalibration." Fitch Ratings started its adjustments yesterday with a focus mainly on state-related issuers. Fitch changed California general obligation bonds to A-minus from BBB. These aren't upgrades, the rating agencies say, but a move to put municipal bonds on a "global scale" that recognizes the same risk measures for all fixed-income securities, including corporate bonds. Muni bonds were previously underrated, especially for default risk. But we've said that for 26 years. We didn't need the "old" rating scale jettisoned to fend off political pressure. Fitch will change water and sewer bond ratings on April 30. Fitch raised Puerto Rico's sales tax bonds to AA-minus from A+, and certain sewer authority debt backed by the Commonwealth to BBB+ from BBB-minus.
(Apr. 5) -- Stanford University will bring triple-A bonds to market this week through the California Educational Facilities Authority. Income-oriented investors will probably be more interested in single-A San Diego water and sewer revenue bonds (Fitch actually rates them AA-). A triple-A Irvine Ranch Water District bond sale will be taxable, not tax-exempt. The City of Industry plans to sell $45 million of taxable sales tax revenue bonds.
(Apr. 1) -- Almost $100 billion of new municipal bonds were sold across the U.S. during the first quarter. That is a 17% jump over the same year-earlier period, Thomson Reuters reports. However, the tax-exempt portion of sales actually fell 19.3% the first quarter over the year-earlier period. Why? Because taxable Build America Bonds helped push taxable sales to almost $33 billion, or about one-third of overall issuance. This trend continues to help keep a lid on tax-exempt yields, especially for higher-quality issuers. In March there was almost 28% less tax-exempt debt sold than in March 2009.
(Mar. 31) -- The California State Public Works Board bond sale we have highlighted in upcoming issues ended up yielding a little more than 6% tax-exempt on a 25-year maturity. That is awfully tempting. The yield penalty reflects both the low credit rating and the lease-revenue nature of the structure. Of course, on April 5 the Fitch Ratings "recalibration" means these bonds will be rated BBB+ instead of BBB-. That isn't going to change how investors view a poorly-managed state budget.
(Mar. 29) -- On March 24 (below) we highlighted an interesting story bond from Aspire Public Schools. It since has priced $93 million of revenue bonds through the California Statewide Communities Development Authority. Aspire has developed charter schools across California and demonstrated good academic outcomes. A triple-B sale isn't for everyone, but the tax-exempt yields were eye-catching: 5% in 10 years, 6% in 20 years, and 6.45% in 35 years. We'd guess some high-yield muni bond funds helped digest this offering.
(Mar. 26) -- Municipal general obligation bonds now rated BBB-minus to A will be adjusted two notches higher in April after Fitch Ratings decided to put its public finance ratings on a "global" scale. A G.O. rated A+ or better will rise by one notch. Water and sewer bonds will experience similar changes, which certain other munis will rise by a notch. Fitch said the change reflects the low default risk for many muni bonds. State and local governments possess "inherent strengths that allow them to maintain fiscal balance," Fitch said. Taxing power, the ability to enforce revenue collection, expense flexibility, and the right to tap reserves help the public finance sector, Fitch added.
(Mar. 25) -- The Los Angeles Airport Department priced $930 million of senior revenue bonds with yields ranging from 1.50% for a 2014 maturity to 4.89% for a 30-year bond. If you scroll down to our March 12 item previewing this deal you will see that we said this after looking at what the airport paid on new bonds last fall: "Tax-exempt rates are lower now than in November and we wouldn't be surprised to see the airport borrow at lower yields with the upcoming sale." Indeed, last November a 30-year L.A. Airport bond paid 5.34%. A lot of other deals priced this week and tomorrow's weekly review will look at yield trends.
(Mar. 24) -- We didn't even put this deal on our sales calendar, but this week Aspire Public Schools is selling $91 million of revenue bonds through the California Statewide Communities Development Authority. Aspire has developed charter schools across California and demonstrated good academic outcomes. A triple-B sale isn't for everyone, but this is an interesting "story" bond.
(Mar. 23) -- Just a reminder, the roughly $900 million Los Angeles Department of Airports revenue bond sale is the centerpiece of this week's new-issue tax-exempt bonds. We flagged this upcoming sale the other week. The $850 million Puerto Rico Electric Power Authority bond sale also is being priced and we discussed it below on March 12. The $100 million East Side Union High School District G.O. sale on Wednesday was flagged by us recently because of a downgrade. Income-oriented investors sometimes buy on such "negative" news to get a little more yield on a new sale. A triple-A deal also is pending from a prominent university.
(Mar. 22) -- California's infrastructure bank on Friday priced $208 million of revenue bonds for a University of California San Francisco neurosciences building. A tax-exempt 2021 maturity with a 5% coupon was priced to yield 3.71%. The 15-year 5% coupon bond yielded 4.09%. The deal was rated Aa2. A huge chunk of the deal, $188 million, came as taxable Build America Bonds and yielded 6.49% on a 39-year maturity. That isn't competitive with Taxable Equivalent Yields on many shorter-maturity tax-exempt muni bonds for many income tax brackets. The Contra Costa Community College District sold taxable BABs last week (double-A rating) with a 5.88% taxable yield in 15 years. On that one certain lower tax bracket investors might do some TEY calculating, though we bet the UCSF deal yielding a tax-exempt 4.09% in 15 years still will look far better for most. On Friday the Alum Rock Elementary Union School District priced G.O. bonds that yielded a tax-exempt 4.19% in 15 years. They are rated AA-minus and featured AGMuni bond insurance. On Friday a Huntington Beach high school district priced certificates of participation with a single-A rating and AGMuni bond insurance. They yielded a tax-exempt 4.13% in 10 years.
(Mar. 18) -- California plans to sell about $2 billion of taxable general obligation bonds next week, including a good chunk of taxable BABs. There will be a "retail" order period giving priority to smaller investors on March 24. We noticed a comment by a state treasurer's spokesman that said smaller investors haven't been big buyers of taxable BABs so far, at least on the state's offerings. As the Bond Advisor has pointed out several times in recent months, why buy a taxable BAB when the Taxable Equivalent Yield on a tax-exempt bond from the same issuer is higher? And the TEY is often higher even for those in "lower" federal income tax brackets. Just remember to do your TEY math when comparing tax-exempt and taxable municipal bonds.
(Mar. 17) -- California State University today will sell taxable Build America Bonds a day after pricing $124 million tax-exempt systemwide revenue bonds (rated Aa3 and A+). The 10-year tax-exempt CSU bond yielded a shade above 3.5%, well below the 4.18% the State of California paid last week on a nine-year G.O. bond. The 20-year CSU tax-exempt bond yielded a bit less than 4.6%, while the lower-rated state G.O. deal last week yielded 5.4% in 20 years. The San Francisco Airport Commission today will price for institutions its $448 million of single-A second series revenue bonds. Preliminary yields ranged from 1.57% for a four-year bond to more than 4.3% on bonds due in 2027.
(Mar. 16) -- Moody's Investors Service announced today that it will "recalibrate" its municipal bond ratings to a "global rating scale." According to a Moody's statement, "Our benchmarking analysis of municipal credits against global scale ratings across the Moody’s rated universe will result in an upward shift for most state and local government long-term municipal ratings by up to three notches." Issues that are already higher-rated might move up less, while those rated at lower levels might rise by two or three notches. On average, state and local G.O. bonds will rise by two notches, Moody's said. (So California G.O. bonds would rise to the single-A category at least). Moody's says these changes, which will begin in April and take about four weeks, will bring muni ratings in line with its scale for corporate bonds and other securities. The Bond Advisor has commented on this before and lamented losing a century of special guidance for municipal bonds (with "relative" strength being an important factor). We always have noted that muni bonds faced lower default risk than their ratings indicated. The new global scale will reflect this fact, but we believe smaller investors in particular will lose out in evaluating new deals when the change is made. Moody's says the change isn't an "upgrade" for existing issues, but rather a move to a new scale. It will be interesting to see what happens to the limping bond insurance business after this change. If you're already double-A why do you need a financial guarantee? It will also make bond trading fascinating because certain useful distinctions will be gone. (Your portfolio might gain in value on paper.) Moody's postponed this change amid the credit crisis. Fitch Ratings will probably follow suit. Standard & Poor's already is raising ratings right and left, as we noted the other day.
(Mar. 16) -- We talk a little more about Vallejo and its bond payments during bankruptcy on this page (also see March 15 item below).
(Mar. 15) -- Standard & Poor's today downgraded its underlying rating on $4.815 Vallejo Series 1999 certificates of participation to C from B, citing the city's proposed bankruptcy workout plan to suspend payments on these COPs for three years. You better keep your facts straight because this downgrade applies to the underlying rating. MBIA, the bond insurer, helped cover the January 2010 payment on these COPs when the city reduced its interest payments. We said on the front page that we would say more about this. Actually, paid subscribers got our update on Vallejo's proposed workout plan in January's print edition. What we will add is that Vallejo bonds we expected to stay safe are in fact staying safe, based on payments we are tracking.
(Mar. 15) -- After we ran our weekly update early Friday, an Imperial County $9 million certificate of participation new issue priced. The deal is interesting because it came on the heels of California's big G.O. offering, and Imperial County's issue carried a financial guarantee from Assured Guaranty Municipal. Without bond insurance, the Imperial COPs are rated single-A by S&P with a stable outlook. Having said all that, we wonder what the county's deal would have yielded without the AGMuni guarantee. A five-year COP yielded 2.60% and a 10-year, 4.35%. The county's 15-year COP yielded 4.90%. Those yields weren't much different than those on the state's sale. Imperial County is muddling through the current downturn, even though it doesn't help publicity-wise that its unemployment rate was 27.3% in January. Still, the county's budget remains in somewhat decent shape considering all the statewide trends. The yields on the sale reflect a market penalty for COPs during an economic downturn. We also aren't sure who should be insulted the most. Should AGMuni be mad its insurance only lowered yields similar to those on the State of California sale, or should the state be mad its G.O. bonds are yielding what a smaller county's COPs return? You can never go wrong insulting the state amid its self-inflicted budgeting debacles.
(Mar. 12) -- The Los Angeles Department of Airports plans to sell more than $850 million of senior revenue bonds by early April. This double-A issuer priced similar bonds last November with tax-exempt yields of 2.41% in five years, 3.90% in 10 years, 4.50% in 15 years, and 5.00% in 20 years. The airport's 30-year bond yielded 5.34% when issued in November. Tax-exempt rates are lower now than in November and we wouldn't be surprised to see the airport borrow at lower yields with the upcoming sale.
(Mar. 12) -- Even though municipal bonds sold by various issuers in Puerto Rico are federal and state tax-exempt for California residents, some investors will snub them automatically because of lower credit ratings. That is why we recently highlighted a sales tax deal from the commonwealth because it carried higher grades than Puerto Rico G.O. bonds. An imminent $850 million power revenue bond by Puerto Rico's Electric Power Authority also is worth a gander. Yes, it is rated A3 by Moody's and BBB+ by Fitch. But the authority is the only game in town because it is a "monopoly" and it provides an "essential" service (electricity) to Puerto Rico. We love seeing those two words in the same sentence because they suggest a lot of security for a municipal bond, regardless of the credit ratings. For those of you who can look at such a lower-rated deal, do so. It is a diversification opportunity outside of our state, yet still tax-exempt. Speaking of that topic, Tom Petruno in the Los Angeles Times recently wrote about California investors willing to pay a tax penalty in exchange for diversifying into muni bonds from issuers in the other 49 states. We have written about this topic plenty in the past and don't like the strategy in general, so maybe it is time to revisit it in our print edition. Tom did a good job of pointing out the "cons" of the tax penalty and also gave us a very nice mention. (He wrote this: "Want some objective advice on munis? Consider a subscription to the independent California Municipal Bond Advisor newsletter, which focuses solely on in-state bonds.") Before you think about such an "out-of-state" strategy, read what we have to say about it very soon.
(Mar. 11) -- California lowered tax-exempt yields on its $2.5 billion general obligation bond sale in today's final pricing, compared with preliminary levels during the retail order period. The 2015 maturity yields 2.57% and the 2019 maturity, 4.18%. The 15-year was at 4.97% and the 20-year, 5.40%. The 30-year bond yielded 5.65%. Most retail purchasers will stick with their orders because the Taxable Equivalent Yields remain juicy.
(Mar. 11) -- California's general fund receipts have now beaten budget projections for three months in a row, with February revenue beating a fiscal 2011 budget estimate by 8.7%. So far in the current fiscal year (2010), which began last July 1, general fund revenue is almost $2 billion ahead of estimates. This positive trend shows California "is on the road to recovering from the recession," State Controller John Chiang said in a statement. "While the worst may be behind us, we still face cash challenges later in the summer absent enactment of further credible and sustainable budget and cash solutions." Some bond investors also may have jumped on this week's state G.O. sale in case credit spreads start to narrow for California relative to other municipal bonds when the economy rebounds.
(Mar. 11) -- Helped by a two-day "retail" period that generated $1.38 billion of requests, California is now selling a total of $2.5 billion of general obligation bonds as bigger institutional buyers place their orders today. (The original size was $2 billion.) A 30-year maturity was offered at a yield of 5.68% today. Some yields are dropping by small amounts from the preliminary retail levels because of the good demand.
(Mar. 11) -- Since we recently mentioned the Moody's update of its municipal bond default statistics, we also want to mention a similar Standard & Poor's update of its data from 1986 to 1989. Based on muni bonds it rates, the "median annual number of defaults on non-housing entities is one" since 1986, S&P said. That is one as in "1," and just about all of the public finance defaults involved deals that had fallen below investment-grade and were often riskier to begin with. As we always note, safety-oriented investors have to go out of their way to end up holding a defaulted muni. Remember, the S&P statistics focus on rated deals; there have been plenty of defaults on non-rated munis, such as land-secured financings (Mello-Roos and assessments, etc.). The public finance sector "remains significantly stable in nature and of sound credit quality," S&P said, though the recent economic downturn will have a "lagged effect" on municipal revenue. That "lagged effect" might be why S&P recorded zero defaults in 2009 on rated muni bonds outside of housing debt. That "zero" probably won't hold over the next year or two, but the Bond Advisor stressed in its March print edition ("They Are Back! Headlines from Hell") that investors might want to be careful about ingesting some of the current media hysteria about potential municipal bankruptcies and defaults. We will probably discuss the S&P study a little more in an upcoming edition for some other observations.
(Mar. 10) -- The two-day "retail" period for California's G.O. bond sale didn't quite reach the $1.5 billion we referenced below, but orders did total a healthy $1.38 billion.
(Mar. 10) -- We have been mentioning that some higher-rated alternatives to the state's G.O. sale would price this week. The Mill Valley School District, fresh off an upgrade to AAA by Standard & Poor's, priced $29 million of G.O. bonds yesterday. A nine-year maturity yielded 2.84%. The state's preliminary yield on a nine-year maturity is 4.24%. Of course, the state is essentially a "high" triple-B credit, and it had to entice a lot more investors for a huge sale. Based on at least one "generic" scale of tax-exempt yields, the spread between the Mill Valley and California offerings is about what you would expect between a triple-A issue and an A-/Baa1 deal such as the state's. Readers of our March print edition know what we think an income-oriented investor would want to buy because an extra 140 basis points in the bank never hurts, and there is a big difference between "headline" risk and actual default risk. The 15-year Mill Valley G.O. yielded 3.56% and the state's similar maturity preliminarily yields 4.98% (the "final" yields on the state sale will be set when big investors place orders on Thursday).
(Mar. 9) -- The preliminary yields for the California G.O. bond sale include 4.24% tax-exempt in nine years. Even if you're in a lower 28% federal income tax bracket that's a Taxable Equivalent Yield of roughly 6.5%. San Francisco priced double-A G.O. bonds today and a nine-year maturity yielded a tax-exempt 2.89%.The Carmichael Water District sold double-A COPs last week that yielded a tax-exempt 3.28% in 10 years. The two-day "retail" period for smaller investors began today on the state's sale. A preliminary tax-exempt five-year yield is 2.60% and a seven-year, 3.60%. A 15-year bond offers 4.98% and a 20-year, 5.44%. The 25-year yield is 5.72%. When big investors order on Thursday, some of these yields could decline. A "retail" buyer can then walk away or still buy the bond if he or she chooses. The Taxable Equivalent Yield for the 4.98% rate is above 8% for an investor in the 33% federal bracket.
(Mar. 9) -- Since we've been mentioning a few higher-rated new issues for quality-conscious investors, let's flag a double-A $72 million G.O. bond issue by the Contra Costa Community College District. However, only about $26 million will be tax-exempt, with the balance sold as taxable Build America Bonds. An "exceptionally large tax base" is a plus for this district, especially amid a slower economy and potential state funding cuts, Moody's Investors Service said. We don't think this deal has priced yet but it could occur soon. Of course, investors give up some yield on double-A and above deals.
(Mar. 5) -- We mentioned on March 2 (below) that there will be higher-rated deals as an alternative to California's sale this week. Here are more options. The Menlo Park City School District plans to sell $23 million of general obligation bonds with Aa2 and AAA credit ratings. The City of Malibu expects to sell $7 million certificates of participation with an AA+ rating. See our week in review page for recent yields on new issues.
(Mar. 4) -- A reader unfamiliar with certain terminology asked about the State of California's "retail order" period for its general obligation bond sale next week. All that means is that individual investors get to place their order before big investors, such as mutual bond funds. You also must have an account with one of the brokerage firms participating in the bond sale; you can't buy the bonds directly from the state. Many bigger municipal bond sales by various issuers have a one- or two-day retail order period.
(Mar. 2) -- Our March print edition offers a compelling reason why even "conservative" investors can consider next week's State of California general obligation bond sale. If you can't buy bonds with the state's low credit ratings, or simply don't want to, other higher-rated alternatives are coming to market on March 9 through competitive bids to underwriters. The Mill Valley School District just landed a three-notch upgrade to AAA from AA by Standard & Poor's. Strong fund balances and a diverse revenue stream help the Mill Valley district, and it benefits from being in an affluent community near San Francisco, S&P said. As we noted below on Feb. 25, San Francisco is selling double-A G.O. bonds on March 9. A good chunk of the San Francisco deal will be offered as taxable Build America Bonds, but there will be some tax-exempt crumbs. The other week Moody's Investors Service assigned an Aaa rating to a $34 million California Educational Facilities Authority nonprofit revenue bond offering on behalf of the Carnegie Institution of Washington. Industrialist Andrew Carnegie provided money for this institution more than a century ago and its Stanford departments research plant biology and global ecology. It also founded the Mount Wilson Observatory in Pasadena.
(Mar. 1) -- The chairman's letter from Warren Buffett in the Berkshire Hathaway Inc. annual report always has some gems. This one had a couple we saw Saturday morning, and we liked them so much we managed to jam a little insert into March's print edition before it was mailed. Buffett notes that the last two years of chaos have actually been an "ideal period" for investors, explaining that a "climate of fear" can be a friend of investors, not a foe. This is a point the Bond Advisor has been making since late 2008 for income-oriented investors: the panic along with scary (or even inaccurate) headlines about municipal bonds provides opportunity when you evaluate the real risk of default on certain credits. Buffett didn't take our advice in late 2008 to buy as many municipal bonds as possible. He says in his letter that "I should have done far more" in buying munis and corporate bonds when they were so cheap relative to U.S. Treasuries. We will stop here or else we will have discussed the short insert completely. Our March print edition also notes that non-subscribers won't have access to certain "new" and more extensive commentary at this site come early spring. That is another good reason to subscribe now.
(Feb. 26) -- California plans to sell a delayed $2 billion tax-exempt general obligation bond on March 11 after the state Assembly yesterday passed a cash management bill intended to help the debt sale. The bill, numbered as ABX8 5, lets the state temporarily delay certain general fund payments for some education and local government purposes. At times these deferrals can run for 30 or 60 days. The idea is to avoid certain cash-flow crunches for the state through fiscal 2011 and provide an even bigger cushion for priority payments, such as debt service. The state G.O. sale had been planned for March 4, but was postponed when the cash management bill stalled for a time this week. A retail order period for the sale is expected on March 9 and 10. The state also plans to sell a $2 billion taxable G.O. later in March, including Build America Bonds.
(Feb. 25) -- Yesterday our Upcoming Sales calendar added a looming general obligation bond sale by the City and County of San Francisco. (The sale is expected in March, perhaps on the 9th.) Almost $300 million will be sold for San Francisco General Hospital improvements, and of that total only about $108 million might be tax-exempt. The rest would be taxable Build America Bonds. More than $50 million of G.O. parks bonds also will be offered, split between tax-exempts and taxable BABs. Standard & Poor's rates the bonds AA and Moody's Aa2 with a "stable" outlook. Fitch Ratings grades them AA-minus and has changed the outlook on the city's existing debt to "negative" from "stable. In part the outlook revision reflects "San Francisco's sizable future years' projected budget gaps and projected low reserves by the end of fiscal 2010," Fitch said in a report. "The reduced financial flexibility results in part from the city's reliance on one time solutions to its structural imbalance, including use of reserves." San Francisco's "large and diverse economy" remains a plus for investors, Fitch added.
(Feb. 24) -- California postponed its $2 billion general obligation bond sale after the legislature stalled on a cash management bill the state treasurer wants in place. The Senate passed the bill but it is still bottled up in the Assembly. The legislation would give California more flexibility in the timing of payments for some state programs through fiscal 2011, helping it manage expected cash crunches. A date for the bond sale hasn't been set, though the delay might be short if the legislation gets approved.
(Feb. 23) -- The recession has raised the risk of more municipal bankruptcies and defaults compared to the historical norm, but in reality such events for local governments will remain rare, Moody's Investors Service said in report on its outlook for 2010. It also said it will keep a "negative" outlook on the local and state government sector because tax revenue won't rebound as fast as an economic recovery.
(Feb. 22) -- The State of California also expects to sell about $2 billion of taxable general obligation bonds, including taxable BABs, late in March. As we note in the item below, next week's sale is set so far as an issue of tax-exempt debt. The retail order period for next week's issue should occur on March 2 and March 3. Our March print edition will be mailed in time to give subscribers a bit of interesting perspective ahead of the bond sale.
(Feb. 19) -- The State of California has scheduled a general obligation bond sale of "up to" $2 billion on March 4. So far we see no sign it will include taxable BABs (that could always change). On March 11 the California State University system plans to sell $350 million systemwide revenue bonds, including taxable BABs. On March 23 the State Public Works Board expects to sell $270 million lease revenue bonds for multiple departments, according to the state treasurer's office.
(Feb. 19) -- In our February print edition story about states and "bankruptcy" hype we were going to mention as an aside that Chapter 9 filings will still pop up on rare occasions among localities, with the latest fear centering on Harrisburg, Pennsylvania. That city is in a bind over a bond-financed incinerator. What we should have known is that Harrisburg would be seized upon by the media to launch a new series of hyped-up stories about the supposed collapse of the municipal bond market. Recent problems with certain risky "speculative" projects, from toll roads to a monorail in Las Vegas, get tossed into all these stories. The Wall Street Journal raised the hype to new heights in a story the other days, quoting some guy about the "assumptions" behind municipal debt. Apparently it is a whole new ballgame, these "experts" say, citing the risk of Chapter 9 filings, etc. The Bond Advisor has recently noted that past isn't always prologue and there are certain "general" risks facing the muni market in the next 30 years that weren't as prominent in the last 30 years. But these stories that have popped up in recent days are really just the same sort of hyped-up "analysis" that have led us many times to warn investors about confusing "headline risk" with actual credit or default risk. We suppose we will waste a little valuable space in March's print edition to point out our concern about the way these stories get assembled. They go from "specific" examples to generalized conclusions in a way that makes us puke.
(Feb. 17) -- While "smaller" bond sales are a linchpin of the municipal market, we never gripe about those of $100 million and up. A few of those are popping up by early March. Some investors like tax-exempt bonds from private universities for diversification. Loyola Marymount University plans a $106 million sale through the California Educational Facilities Authority (though about $40 million will be variable-rate). These are single-A rated (Moody's A2). Moody's just changed the outlook to "stable" from "positive" because of investment losses affecting the balance sheet, but Loyola Marymount's "strong fiscal management" also generates "healthy operating margins." For a higher credit rating, a $200 million sale of double-A revenue bonds is looming for a neurosciences project building at the Mission Bay campus of the University of California San Francisco. California's infrastructure bank is the issuer. A variety of lease and sublease agreements back the revenue bonds. While the term "lease" can spook some investors, this deal has a strong Aa2 ratings from Moody's Investors Service for several reasons. Among them, "the University has no ability to terminate the lease prior to providing for full payment on the bonds, including in circumstances of delayed completion, or damage or destruction to the facility," Moody's said. "In other words, there is no abatement of base rental payments under any circumstances." In another bigger sale worth noting, the San Francisco Airport Commission plans to sell almost $400 million of second series revenue bonds to refund other debt. This airport has bucked some of the difficulties facing other airports during the recession and even earned a Fitch Ratings upgrade last year.
(Feb. 16) -- Our table on the Yield Trends page excludes capital appreciation bond (CAB) pricings. That is because the yields posted for such "compound interest" bonds would be confusing if they are posted next to yields on current-interest debt. Once in awhile, however, we flag some recent zero-coupon pricings just to give a sense of the market. Late last week, for example, a Val Verde school district general obligation deal included CABs with a 6.5% yield in 2032 and a 6.125% yield on convertible CABs due in 2034. These Val Verde bonds are insured by AG Municipal. The San Mateo - Foster School District sold a far bigger issue of CABs, including a five-year yield of 2.95%, a 10-year of 4.57%, and a 15-year at 5.45%. There were several CABs convertible in 2023, including a 2032 maturity yielding 6.18%. A 2042 maturity CAB convertible in 2026 was offered at 6.57%. After a convertible CAB "converts" it pays interest on a semiannual basis.
(Feb. 12) -- The East Bay Municipal Utility District sold the $400 million of taxable BABs we flagged last month. They yielded a taxable 5.87% in 30 years. California investors in the 33% and higher federal income tax brackets could have bought East Bay MUD tax-exempt bonds in late January and matched that yield (after-tax) by purchasing a 15-year maturity. If you're in 25% or 28% tax brackets you could match the taxable BAB by purchasing last month's 20-year tax-exempt bonds. You can see why "traditional" tax-exempt investors find some taxable BABs so unappealing. Thanks to the 35% federal giveaway (er, subsidy) to pay interest costs, the utility district is paying the equivalent of 3.82%. No wonder issuers are flocking to this federal "stimulus."
(Feb. 11) -- Yesterday California's Attorney General and San Bernardino County's District Attorney filed criminal charges against two former county officials. The conspiracy, corruption, and bribery charges stem from a $102 million settlement the county paid a developer. The charges name William Postmus, former chairman of San Bernardino's Board of Supervisors, and James Erwin, former chief of staff to another county supervisor. The men took bribes to help approve the settlement, according to the allegations. Defendants also get their day in court; these are just allegations. We mention all this because San Bernardino County Flood Control District sold $103.78 million of judgment obligation bonds in 2007 to fund the settlement. (It appears some were since refinanced or put in fixed-rate mode.) Even if the settlement is now under a cloud, the bonds themselves are valid obligations and can't be undone at this point. The county might try to get money back through other means, depending on whether other charges are filed. But the bondholders knew nothing about any of this and aren't going to be penalized. Of course, that wouldn't prevent an angry taxpayer from filing some sort of action against the bonds, but it would be a waste of time. The Board of Supervisors approved the settlement on a three-to-two vote, against the advice of county counsel. "This is one of the most appalling corruption cases ever seen in California," Attorney General Jerry Brown said in a statement. Years ago some other officials in San Bernardino County were caught up in a corruption case. This is getting rather tiresome.
(Feb. 10) -- Yesterday the Pacific Grove Unified School District took competitive bids from underwriters on a $9 million general obligation bond issue. The double-A (S&P) bonds show the trade-off investors make to buy higher-rated sales. To get a 4% yield an investor had to go out on the yield curve to 2027. The 10-year bond yielded a tax-exempt 3.30%, the five-year,1.96%. Of course, even that 1.96% tax-exempt yield translates into a Taxable Equivalent Yield of about 3% for a California resident in the 28% federal income tax bracket. The 10-year TEY is above 5% for a 28% bracket investor, and obviously even sweeter for tax higher-brackets. So keep doing your TEY math. A 10-year Treasury bond yielded 3.64% the other day. That makes a TEY of 5%-plus look pretty good.
(Feb. 9) -- At time we like to step back and look at statistics and trends. Last year, for example, California local and state issuers accounted for 17.7% of all municipal bond sales across the U.S., according to Thomson Reuters. (In terms of population we represent about 12% of the U.S.) California's new-issue volume reached $72.3 billion, up 36.8% from 2008. Volume across the U.S. was only up 5.1% last year to $409.6 billion. The State of California was one reason for our surge, and took five of the top 10 spots for largest general-purpose issues in 2009. Of course, the state also sold billions of dollars of taxable Build America Bonds that show up in these totals. Across the country taxable BABs siphoned off $64.1 billion of volume in 2009. That affects tax-exempt volume and keeps tax-exempt yields lower.
(Feb. 8) -- Our February print edition, in passing, mentions a money manager who sees the municipal bond market as the next "bubble" due to burst. Really? How will that work? How will the public get out of existing contractual obligations? Some of the underlying concerns of this person about easy credit are always a legitimate concern. We're all for ending taxable Build America Bonds to choke off an easy credit subsidy by the federal government. We might even argue for getting rid of certificates of participation that encumber general fund spending (and can make investors sweat during a municipal bankruptcy). If you want to talk about "bubbles" and public budgets, look at employee retirement costs and giveaways to the unions as a "bubble" taxpayers should burst. Debt payments are a tiny part of the budget. Labor costs aren't.
(Feb. 5) -- Standard & Poor's just assigned a triple-A rating to $99 million of Calleguas - Las Virgenes P.F.A. water revenue bonds. Only about $21 million will be sold on a tax-exempt basis, with the rest structured as taxable Build America Bonds. Get used to this trend in 2010. Issuers will rush to eat slop from the federal government's trough before the federal subsidy for taxable BAB interest costs drops after Dec. 31, 2010. The Jurupa Community Services District plans next week to sell $68 million water and sewer certificates of participation as taxable BABs.
(Feb. 3) -- The Virgin Islands Water and Power Authority plans to sell about $60 million tax-exempt electric system bonds this month. The bonds are tax-exempt for California investors. They also are lower-rated (triple-B levels), though the authority benefits from having close to a monopoly on providing power and water. The authority also plans to sell about $25 million taxable Build America Bonds.
(Feb. 2) -- President Obama's proposed budget for 2011 would let the two top federal income tax rates rise to 39.6% from 35% now and 36% from 33% now. Whenever income tax rates rise, the Taxable Equivalent Yield (TEY) on your municipal bond portfolio also goes up. In essence a tax increase makes tax-exempt income more "valuable" and increases demand for municipal bonds. Someone in the very top rung of federal and state brackets would see the TEY jump by a whopping seven-tenths of a percentage point on a tax-exempt bond yielding 5.5%. The TEY jumps a half-point on a tax-exempt muni yielding 4%. This is important to know because, even though the proposed tax increase wouldn't kick in until 2011 (for income tax returns filed in 2012), the muni bond you purchase now will see its TEY jump if you're in those top brackets. Of course, absorbing a tax increase to get this added TEY should also make you grit your teeth.
(Feb. 1) -- Just to confirm the trend we noted in the last two items below, taxable Build America Bonds were one of the big factors driving new sales volume in January. Overall municipal bond sales across the U.S. actually set a record for January by reaching $31.8 billion, according to Thomson Reuters. That is a bit deceiving because tax-exempt issuance actually fell about 8% from last January's level. Meanwhile, taxable sales jumped to more than $11 billion last month from less than $1 billion in January 2009. Taxable BABs represented almost $7 billion of that taxable total. President Obama will propose making taxable BABs permanent in his new budget, though with less generous terms for the federal subsidy of local and state interest costs.
(Jan. 28) -- Keeping in mind the headline below about what taxable Build America Bonds are costing the federal government, here is another example of what 2010 portends. The Santa Monica Community College District sold $111 million of double-A G.O. bonds this week. About $67 million were offered as taxable BABs. This trend is turning into a raging flood and we're still in January. The San Mateo Union High School District plans soon to sell $70 million of G.O. bonds and $65 million will be taxable BABs.
(Jan. 27) -- The overly generous federal giveaway of taxpayer funds to subsidize taxable municipal Build America Bonds is already costing $26 billion more than expected over the next decade. The Congressional Budget Office provided that estimate in a new report yesterday. Since local and state governments will rush to sell such bonds in 2010, before the current terms expire, the cost is sure to soar. Last week we noticed three issuers in California priced about $140 million of such taxable debt in just two days. The taxable yields remain uncompetitive with tax-exempts on an after-tax basis, especially for higher income tax brackets.
(Jan. 26) -- Some smaller investors looking for diversification often fail to include certain stronger "non-traditional" issuers in their search. For example, Pepperdine University soon plans to sell $16 million of tax-exempt revenue refunding bonds with an Aa3 rating from Moody's Investors Service. While a private university doesn't benefit from "tax-backed" revenue, the track record of enrollment and financial performance offers a good level of comfort for investors. The bonds will be issued by the California Statewide Communities Development Authority.
(Jan. 25) -- After our weekly review was posted Friday, the San Jacinto Unified School District priced $43 million certificates of participation. The COPs would be rated A- on their own, but AGmuni also included a financial guarantee. AGmuni, the "old" FSA, is only insuring municipal bonds now in a throwback to the old bond insurance model. The San Jacinto school COPs yielded 2.78% in five years and 4.43% in 2020. A 14-year COP yielded 4.89% and a 20-year, 5.22%. The 2040 maturity yielded 5.45%. Last week the San Diego County Water Authority sold double-A water revenue bonds that included a 3.59% yield in 2020. The school district paid a higher yield over the lower rating, the penalty usually applied to COPs, and continuing reluctance by investors to give bond insurance the same faith it received in the past.
(Jan. 22) -- Since our Upcoming Sales chart is in the process of being updated to sift outdated entries, we will mention some of next week's (week of Jan. 25th) planned new issues in a quick summary. The higher-quality deals (double-A and above) will walk away with lower yields, meaning you might not see a tax-exempt 4% until 15 years or longer. The Santa Monica Community College District expects to price $111 million of general obligation bonds with an Aa2 rating from Moody's Investors Service. The East Bay Municipal Utility District plans to offer $193 million of tax-exempt water revenue bonds. Its existing water debt is rated either double-A or triple-A. San Mateo Union High School District will price $70 million of double-A general obligation bonds, though part will be offered as taxable Build America Bonds. The Southern California Public Power Authority is lining up a $236 million revenue bond sale for a wind power project we mentioned here the other day. Moody's rates the SCPPA bonds A1 and Standard & Poor's, AA-. The Milpitas Unified School District plans next week to sell $15 million of general obligation bonds by taking competitive bids from underwriters. Truckee expects to sell tax allocation bonds through a financing authority. Puerto Rico plans to sell $1.4 billion of single-A sales tax revenue bonds we highlighted previously.
(Jan. 21) -- The overly generous federal giveaway of taxpayer dollars to subsidize taxable municipal bonds is draining supply all across the tax-exempt market. Add the Napa Valley Unified School District and San Francisco's Port Commission to the list of issuers selling a majority of taxable debt instead of tax-exempt bonds in new sales. You can look forward to this trend for at least another 11 months, and then the question will be whether the Feds renew the program with such generous terms.
(Jan. 19) -- The East Bay Municipal Utility District plans to sell $400 million of taxable bonds by early February. We don't know yet if they're taxable Build America Bonds, but if they are it is another sign such taxable debt will haunt the tax-exempt municipal market in 2010. The district also plans to sell almost $200 million of tax-exempt water revenue refunding bonds this month.
(Jan. 18) -- The January "bonus" edition was mailed last week and will arrive for most of you after the Martin Luther King holiday. The January 2010 "regular" edition will follow in about a week, we've had a glitch with our annual Taxable Equivalent Yield tables. The "free" updates will resume on a regular basis beginning January 19.
(Jan. 15) -- The San Diego County Water Authority next week plans to sell $500 million of water revenue bonds with various double-A ratings. Sorry, they will be taxable Build America Bonds. The water authority also had lined up a smaller tax-exempt issue. Fresno plans to sell $55 million of water system revenue bonds next week. It, too, will sell more than $100 million of taxable BABs.
(Dec. 24) -- Yesterday $15.2 billion of municipal bonds changed hands in the secondary market. Customers bought about $8.9 billion and sold $4.4 billion. Inter-dealer trades made up the rest of the activity. While that is a slower day compared with average volume in recent years, it's still not a shabby amount. So why do we say in a holiday week that activity has slowed to a crawl? We mainly mean new-issue volume is non-existent, and many offices are operating on smaller crews.
(Dec. 23) -- For a change we can mention someone other than a California state issuer selling billion-dollar-plus new issues. It is a federal and state tax-exempt deal but from Puerto Rico, not someone in-state. The first subordinate sales tax revenue bonds are expected to be priced in early January 2010. The sale could be as large as $2.2 billion. Moody's Investors Service rates the bonds A2. Puerto Rico's G.O. bonds are rated Baa3, so this deal will appeal to even more buyers.
(Dec. 21) -- Late Friday afternoon Moody's Investors Service confirmed the Aa3 rating for bond insurer Assured Guaranty Corp. While the action was anticipated by the market after AGC's parent raised $575 million in a new stock sale, it was nonetheless a needed step to show some stability. Moody's kept a "negative" outlook on the rating until it is clearer how many more mortgage-related losses AGC might face. Moody's also said it isn't clear how AGC will fare as the municipal bond market continues to return to normal. Moody's also affirmed its Aa3 and "negative" outlook on Assured Guaranty Municipal Corp. (the former FSA). The two insurers are about the only game in town for municipal issuers seeking guarantees for bond deals. A "negative" outlook isn't as strong of a red flag as an actual downgrade warning.
(Dec. 16) -- It is that time of year when certain television programs pop up for annual specials. The Grinch also has invaded the municipal bond market. This week a Belmont financing authority priced sewer treatment revenue bonds (S&P: AA-). The 10-year maturity didn't even yield 3% (it was 2.90%). You had to go out to the 2027 maturity to get 4%. Ouch.
(Dec. 15) -- California's taxable general obligation bonds and the late comedian Rodney Dangerfield share one thing in common: They don't get respect. The state treasurer this week provided a status report on California's debt for an Assembly Budget Committee. One item compared the "spread" of California's interest rates over U.S. Treasuries for 25- to 30-year benchmark bonds (using taxable state G.O.s for the comparison). California's credit spread was 310 basis points, or three full percentage points plus one-tenth of a point. That's even worse than junk-rated Indonesia and the Philippines. The spread is a full percentage point and change wider than Mexico and Brazil pay. This is an accurate measurement of what the world thinks about California's legislature and its fiscal irresponsibility. No respect, indeed! The state, for $1 billion of tax-exempt G.O. bonds, also pays $380 million in extra costs over 30 years compared with triple-A municipal debt, the report noted.
(Dec. 14) -- The U.S. House of Representatives passed its gigantic financial regulatory reform legislation on Friday and made sure to include some garbage to pollute the municipal bond market. The bill would force rating agencies to use a "uniform" scale that would rate municipal and corporate bonds on default risk. Municipal issuers would love this because some of them, including our deficit-ridden state, could get upgrades without any kind of fiscal discipline. As we noted in a recent print edition, an SEC commissioner recently argued for preserving "granularity" in the municipal rating scale. The House bill might still allow having a second rating based on relative strength of municipal issuers, though that isn't clear to us. No sense in fretting about this until the U.S. Senate develops its proposed "reforms." The municipal credit rating provision still could change.
(Dec. 11) -- The City of Gardena got our attention a few years ago after a mess created by an attempt to set up a municipal insurance program and a first-time buyers' home loan program. Gardena got out of the mess by selling fixed-rated debt in 2006 to refinance variable-rate bonds tied to the problem programs. Gardena's continuing effort to improve its general fund balances now has resulted in an upgrade to A-minus from BBB for its 2006 refunding COPs (Series A, B, and C), Standard & Poor's said. "Gardena has produced an 11-year string of sustained increases in general fund balances," S&P said. The outlook for the COPs is "stable."
(Dec. 10) -- As we note in the item below, we haven't been diligent about our regular complaining about the federal giveaway known as taxable Build America Bonds. Let's provide more evidence. The Las Virgenes Unified School District priced $47 million of general obligation bonds this week and $39 million disappeared into the taxable BAB market. The Menlo Park Fire Protection District priced $12 million of COPs and about $9 million were taxable BABs. Millbrae just got a one-notch upgrade on wastewater revenue bonds, some of which will be sold as taxable BABs. A recent survey of broker-dealers indicated taxable BABs could represent about one-quarter of municipal bond volume in 2010. They save issuers the most money on longer maturities, and the reduction in "long" tax-exempt bonds will keep yields lower than they otherwise would be.
(Dec. 9) -- Lest anyone thinks we are finished griping about the federal giveaway masquerading as taxable Build America Bonds, we note that the Moulton Niguel Water District recently sold $60 million of such debt. The district's COPs are rated AA+ and would be a popular "buy" for tax-exempt investors. Sorry, not this time around. Various stories also are circulating (in general, not about this sale) regarding the taxable rates some municipal issuers have paid. The thesis is that the rates should be lower than they have been because of low municipal default rates. But what incentive is there to get the best rate possible when the federal government (you, the taxpayer) picks up 35% of the interest costs for taxable BABs? This federal "stimulus" giveaway could be extended beyond a sunset of 2010, no doubt with little debate about the actual cost to taxpayers. The taxable Moulton Niguel deal yielded a bit less than 7% on a 2039 maturity, and a 30-year U.S. Treasury bond now yields about 4.4%. The water district COPs look a lot more enticing than Treasuries, especially if inflation picked up.
(Dec. 8) -- A recent release by Fitch Ratings indicates that the Atherton Baptist Homes Project in Alhambra won't be selling double-B bonds until 2010. The deal is still worth a gander for sophisticated investors looking for yield.
(Dec. 7) -- Our December print edition notes that credit ratings will increasingly factor in the way state and local governments are addressing the funding of public retirement benefits for pension and healthcare costs. We are also monitoring a potential initiative on California's statewide ballot that would attempt to curb certain public retirement benefits for new workers in the future, a reform we believe is badly needed. It is being sponsored by the California Foundation for Fiscal Responsibility. Expect to hear more about it in 2010.
(Dec. 4) -- A "story" bond in the municipal market involves a deal that requires some added explanation, beyond a "plain vanilla" transaction. The Adelanto Public Utility Authority plans as soon as next week to sell $77 million of unrated bonds to refund certain existing debt and finance water and wastewater system improvements. A municipal utility usually sells bonds with a credit rating, so what is up with this unrated deal? The story is rather complicated, but a problem arose over past variable-rate debt the utility authority sold in 2005. The deal involved an interest-rate swap that included backing from insurer Ambac. The subsequent downgrading of Ambac set off a chain of events that included termination of the swap contracts and litigation between Ambac and the Adelanto utility. All this has created pressure for the utility because the variable interest-rate jumped to 12% on the 2005A bonds and about 6.49% now on the 2005B bonds, according to a footnote on page 17 of the preliminary official statement for the new 2009 bonds. The added pressure has reduced the debt service coverage provided by "total net revenues" for the 2005 bonds. The new unrated fixed-rate bonds will refinance the higher-cost variable rate debt and improve debt service coverage ratios. The prospectus also notes that water and wastewater rate increases have been approved for coming years. The POS also includes a discussion of Proposition 218 to understand how such rate increases must be approved. Obviously an investor should read the POS for the background and not depend on our very short summary. In essence, the utility is selling fixed-rate bonds to escape the burdensome variable-rate penalty (certain other municipal issuers faced a similar problem after the "credit crisis" caused problems for some variable-rate deals, including auction rate securities). Adelanto is north of San Bernardino.
(Dec. 3) -- The Virgin Islands Public Finance Authority plans to sell about $40 million of subordinate revenue bonds to finance a wastewater treatment facility at the Cruzan rum distillery on St. Croix. A U.S. excise tax on imported Cruzan rum provides the revenue stream backing the debt, which is rated at the lowest investment-grade (Baa3, BBB-). We have written about such "rum" bonds previously and noted they didn't yield much more than a California general obligation sale at the time. It might be difficult to get your hands on any of these "rum" bonds due to the smaller size of the sale. The interest income is state and federal tax-exempt in all 50 states.
(Dec. 2) -- ACA Financial Guaranty, the former single-A bond insurer that is in a "run-off" state, has released a quarterly financial statement for the period ended Sept. 30, 2009. We have mentioned ACA recently because it backs the COPIA wine center bonds sold through California's infrastructure bank. In Footnote 11 to its financial statements, the "unpaid losses and loss adjustment expenses" didn't rise much between June 30 and Sept. 30 (going to $30.8 million from $28.6 million). The COPIA discussion also is quite similar in the new financial statement. However, there is a new paragraph in the Sept. 30 update we didn't notice in the June 30 Footnote 11, pertaining to other obligations. Here is what it says: "The Company ultimately expects to pay claims on additional insured bonds classified in surveillance category 4. These additional credits with par outstanding of $219 million have experienced a material decline in creditworthiness and will probably be unable to make all principal and interest payments on the insured bonds. However, because SSAP 60 does not allow for establishment of loss reserves until a default in payment occurs, the Company has not accrued any losses on these insured bonds. Where possible, the Company has taken action and is attempting to eliminate the probability of default." We aren't sure right off hand if these are public finance bonds or other types of insured obligations, but just thought we would flag that footnote.
(Dec. 1) -- For a change taxable Build America Bonds didn't gain as much ground in the U.S. municipal bond market in November. Instead, we highlight the fact that refundings (the refinancing of existing debt) contributed a little more than one-quarter of November's national new-issue sales, or almost $10 billion, according to figures compiled by Thomson Reuters. Low interest rates help fuel such refundings. Taxable BABs, which get a 35% interest-subsidy from the federal government, still ate up almost 19% of overall new sales in November. Overall muni bond sales totaled about $38 billion in November, making up a bit more than one-tenth of volume so far in 2009. In 2010 taxable BAB sales could rise above $100 million, said a recent report from JPMorgan Chase & Co. That wouldn't surprise the Bond Advisor because issuers will rush to take advantage of the generous federal giveaway disguised as a "stimulus" program,
(Nov. 25) -- As we keep noting, conservative safety-oriented investors are accepting yield trade-offs when they purchase higher-quality municipal bonds under current market conditions. The Beverly Hills PFA lease revenue bonds (Aa2 and AA+) priced earlier this week and yielded 1.74% in five years and 3.16% in 10 years. You had to go out 15 years to get 4.03% tax-exempt and 30 years for 5.06%. A rural school district priced single-A certificates of participation the other day and had to pay about two full percentage points more in yield on the five- and 10-year maturities than the Beverly Hills sale. Talk about a credit spread!
(Nov. 24) -- Based on a rating assignment, it looks like the market will see another good-quality nonprofit issuer selling tax-exempt bonds. The Thacher School, a prominent private school in Ojai, plans to sell $36 million of revenue refunding bonds through the California Enterprise Development Authority. Standard & Poor's rates the bonds AA-minus. We recall talking to former California Treasurer Philip Angelides and learning he attended The Thacher School, so seeing the bond sale jogged our memory. Thornton Wilder began writing plays while at Thacher and later produced the classic Our Town. Howard Hughes also attended Thacher for a time. It is in a beautiful setting above the Ojai Valley, but we're sure S&P was swayed more by sound financials.
(Nov. 23) -- After we published our weekly review early Friday, a couple deals priced that are worth summarizing. The Coalinga - Huron School District priced $7 million of general obligation bonds with an A+ rating and an Assured Guaranty Corp. financial guarantee. The 10-year maturity yielded almost 4% (3.99%), and the five-year, 2.51%. The 15-year yielded 4.48%. We mention this because Assured Guaranty has been in the news quite a bit after the Moody's downgrade, but there seems to be optimism the bond insurer will salvage its double-A rating. In any event 4% in 10 years is a magic yield for some investors. (A day earlier the Newman - Crows Landing School District priced certificates of participation, which yield more than G.O. bonds. The single-A deal with AGC bond insurance yielded 3.01% in five years, 4.41% in 10 years, and 4.93% in 15 years.) Also on Friday, the Washington Township Health Care District priced $55 million of revenue bonds rated Aa3. The five-year bond yielded 4.41% and the 10-year, 5.59%. The 15-year was pegged at 5.95%. Health care bonds, as we noted in our November print edition, are paying some juicy yield premiums. By the way, Long Beach last week priced its senior airport revenue bonds we previewed previously. Most of the bonds ($45 million) were structured as taxable Build America Bonds so we didn't flag the deal in our weekly review. The $16 million of tax-exempt debt (A2, BBB, A-) yielded 3.56% in 10 years, 4.87% in 10 years, and 5.24% in 13 years.
(Nov. 20) -- The Southern California Metropolitan Water District plans to sell $35 million of triple-A general obligation bonds soon. It also is lining up $26 million of water revenue bonds that are graded triple-A or high double-A, depending on the rating agency. We provide this as a "public service announcement" for investors who stick to high-quality municipal bonds. Due to the small size of these deals and continuing demand for high-grade credits, the yields will be depressingly low. The California Department of Water Resources priced high-quality water bonds this week that yielded 1.86% in five years and 3.20% in 10 years. The tax-exempt yield was only 4.32% on a 20-year maturity.
(Nov. 19) -- We said yesterday that the new report on California's looming budget deficit could only help boost yields on the $1.3 billion State Public Works Board bonds being priced this week. Smaller "retail" buyers placed orders for about $400 million of the debt yesterday and final yields will be set at an institutional sale today. In the "retail" offering a 25-year bond provided a tentative 6.63% tax-exempt yield. The Taxable Equivalent Yield for that level is above 11% for someone in the top 35% federal tax bracket and above 10% for the 28% bracket (it isn't too far shy of 10% for the 25% bracket). Institutional buyers could demand even higher yields in the pricing today. Enough said.
(Nov. 18) -- The required regulator's capital surplus at bond insurer Ambac Assurance Corp. jumped to $856 million at the end of the third quarter on September 30, up from about $306 million at the end of the second quarter. The increased surplus will reduce fear about the insurer facing any imminent regulatory takeover, at least for now.
(Nov. 18) -- Equity investors aren't exactly enamored with the bond insurers after the debacles surrounding former triple-A powerhouses MBIA, Ambac, etc. Even so, it has been interesting to watch a vote of confidence of sorts in Assured Guaranty Corp. in recent days, even though Moody's Investors Service recently lowered the rating on one of its bond insurance subsidiaries to the lowest double-A rung. The stock price touched a 52-week high of $28.14 before dropping a bit. The 52-week low for the stock, recorded just last March, was $2.69. The optimism reflects a few things, including a belief that the company will be stronger going forward after absorbing the former Financial Security Assurance (FSA). The company's status as the best "older" bond insurer left standing also means it is the main one still doing new municipal bond business. Some analysts also seemed relieved by the Moody's downgrade since it left room for the company to take steps to hold on to its double-A insurance rating; it is still triple-A from S&P. Finally, certain accounting complexities in the way the FSA acquisition was handled apparently bodes well for future earnings reports, though we leave that item for the stock analysts to decipher. FSA is now called Assured Guaranty Municipal Corp. and will restrict its new business to municipal bonds only, operating as a separate subsidiary from Assured Guaranty Corp. While Assured Guaranty isn't out of the woods, there are signs it will still be able to carve out a decent niche as a financial guarantor.
(Nov. 17) -- The Ripon Redevelopment Agency saw its credit rating on Series 2003, 2005, and 2007 tax allocation bonds fall two notches, to Baa2 from A3 at Moody's Investors Service, because of a smaller debt service cushion. "The downgrade is based upon the declining assessed value (AV) in the project area, which has resulted in debt service coverage significantly narrower than anticipated, and the potential for additional declines in the future," Moody's said in a report. "An important near-term mitigating factor is the agency's sound liquidity, which is sufficient to address the state's proposed property tax shift and still provide a substantial cushion for additional needs." The 1,188-acre redevelopment project area is mainly residential and quite diverse, with the 10 top taxpayers making up only 17% of the "incremental" assessed value providing bond security, Moody's said. That diversity is a good thing. Ripon, which is 82 miles east of San Francisco, has been hit by the residential downturn affecting other Central Valley cities, and that in turn has led to declining assessed value. In fiscal 2010 projected debt service will drop to 1.15 times, which is "quite low" for a tax allocation bond rated by Moody's, the rating agency said. The credit rating could face more pressure if assessed values keep dropping. On the plus side, Ripon's Redevelopment Agency has $8.5 million of unrestricted cash and investments, enough to cover several years of debt service. The downgrade affects about $31 million of existing bonds.
(Nov. 16) -- Palmdale Water District revenue certificates of participation were downgraded to A from A+ by Fitch Ratings. The COPs were given a "stable" outlook after the downgrade. Fitch issued a rating warning last May after a "sharp drop in liquidity" at the district, which is affected by an area that has been hard-hit by the recession. Even so, Fitch commended the district's five-year rate increase plan passed in May, which "has stabilized" the district's liquidity position. That led to the "stable" outlook. Fitch continues to monitor two lawsuits by the City of Palmdale, one of which challenged the water district's rate increase package and the other that contests a district plan to sell debt to reimburse itself for completed capital improvements.
(Nov. 13) -- Assured Guaranty Corp., the bond insurer that still lands some municipal bond business, was downgraded late yesterday to Aa3 by Moody's Investors Service. Moody's also left the insurer under review for possible downgrade. Moody's said that "capital strengthening initiatives under consideration" for the insurer, if fully implemented, could help protect the Aa3 rating, albeit with a "negative" outlook. "Absent such initiatives, Moody's would expect to lower AGC's rating into the single-A range," a rating report said. Fitch Ratings also recently lowered AGC to the lowest rung of the double-A level. It is obviously critical that Assured Guaranty do all it can to stay in the double-A category if it wants to keep insuring municipal bonds, and this one notch downgrade plus the rating warning is going to put a damper on business prospects (and send yields higher on AGC-insured bonds). Moody's cited "substantial deterioration" in collateral for mortgage-backed securities as a continuing concern for the bond insurer, even though AGC didn't get involved in these products as much as other former triple-A guarantors (MBIA, Ambac, etc.). In a bit of good news, the former FSA kept its Aa3 rating with a "negative" outlook from Moody's. As we recently noted elsewhere, FSA is now called Assured Guaranty Municipal Corp. after being acquired by AGC's parent company. AG Municipal is so named because it is only backing municipal bonds going forward. Dominic Frederico, the president and chief executive officer of AGC's parent company, issued a statement about the Moody's downgrade that included these remarks: "In assigning these ratings, Moody's has put our insured residential mortgage exposures through a revised stress loss scenario, which is based on an extremely pessimistic view of the future performance of residential mortgage exposures. Even under Moody's stressful scenario, the Assured companies' combined $12.5 billion of claims-paying resources were more than sufficient to meet all projected obligations. We are committed to maintaining the highest possible ratings and plan to implement a capital plan to meet rating agency requirements to maintain double-A ratings. Moreover, these capital initiatives, which entail external reinsurance that has already been negotiated, intercompany capital support and approximately $300 million of additional capital, are to solely support rating agency capital requirements." The Bond Advisor should note that other bond insurers previously vowed to protect higher ratings but failed to do so. We believe Assured Guaranty has a far better chance of at least staying double-A because it is shooting for a clearer target to meet rating agency concerns. Standard & Poor's still rates AGC triple-A with a "negative" outlook.
(Nov. 12) -- In our November print edition we said we expected "decent yield opportunities" from the triple-B Palomar Pomerado Health certificate of participation sale. Last week we said on this Web site the yields would be "intriguing" after Moody's Investors Service lowered the health system's COPs to Baa2 from Baa1. Fitch Ratings graded them BBB. In the pricing of $233 million COPs this week, a six-year maturity yielded 4.80% and a 10-year, 5.75%. Intriguing indeed! The 20-year maturity reached 6.83% and the 30-year, 6.95%. We like PPH's market position in northern San Diego County, but recognize some smaller investors don't buy triple-B credits. Those who do just jazzed up their interest income-earning potential with this sale.
(Nov. 11) -- The California Statewide Communities Development Authority issue of four-year bonds, backed by the state, had to boost the tax-exempt yield to a whopping 4% to draw enough buyers in the sale yesterday to institutional investors. That is a good three-quarters of a percentage point more than the recent market trading had suggested, even though this debt is approximately on par with state general obligation bonds. The large $1.9 billion sale packed into one four-year maturity probably played a role in the higher yield. Smaller retail investors only bought a bit more than $600 million in a two-day order period so institutions also had some leverage going into yesterday's pricing. The market also has been saturated with California state deals recently and at some point growing buying resistance will develop. Investors also recognize that the state faces more multibillion-dollar budget deficits, a point the governor also made yesterday. We thought some smaller investors would find these four-year bonds appealing at 3% tax-exempt; 4% is a slam-dunk for many buyers because that is more than double the going yield for many other issuers. For example, the Santa Ana Unified School District yesterday priced A+ general obligation debt with Assured Guaranty bond insurance and the four-year maturity yielded 1.9%. (See other yields in that school sale here.) The state bond sale will let local governments offset a state property-tax shift used to balance its own budget this summer.
(Nov. 10) -- The credit rating agencies don't agree on the grades for $58 million of Long Beach airport revenue bonds coming to market in coming days. Moody's Investors Service rates them A2; Fitch Ratings, A-, and Standard & Poor's, BBB. This is called a "split" rating. However, they all agree on one thing: the smaller airport is heavily dependent on one carrier. JetBlue Airways handled 80% of all "enplanements" in 2008, Moody's said. On the plus side the Long Beach airport's overall enplanements grew slightly in fiscal 2009, showing it has carved out a solid niche. This occurred during a time when many airports have seen passenger traffic drop during the recession. Heavy dependence on a single carrier also poses challenges in case that airline ever reduces its commitment to the Long Beach airport, the rating agencies note. By the way, "split" ratings can be a plus for investors in that the yields might be higher to accommodate the lowest grade. Bond proceeds will finance a parking garage and refund 1993 certificates of participation. One piece of bad news: More than $40 million might be sold on a taxable basis.
(Nov. 10) -- We neglected to mention in the item below that the $500 million sale of high-quality Los Angeles Department of Water and Power water system bonds will probably include $350 million taxable Build America Bonds. We also continue to see other new deals featuring taxable BABs, sometimes reducing the tax-exempt offering to mere crumbs. Maybe we better get used to it. We have seen several reports in the last couple weeks about an expectation that the taxable BAB program will get extended by the U.S. past a 2010 sunset date. This "stimulus" program has provided an unneeded giveaway of federal tax dollars by subsidizing 35% of the interest costs on municipal bonds that use the gimmick. This is a bigger drain on U.S. coffers than the subsidy built into tax-exempt bonds. At the least we can hope the 35% payout gets reduced. In our November print edition we also mentioned the growing use of Qualified School Construction Bonds, a "stimulus" program built around taxable debt and tax credits. The Beaumont Unified School District plans to sell $30 million of G.O. bonds soon, with $9 million structured as QSCBs. We are seeing more of these animals, too, with the net result being a reduction in the sale of traditional tax-exempt bonds.
(Nov. 9) -- In our Nov. 6 weekly update we noted the yield opportunities on credits rated single-A or lower. But many "traditional" municipal bond buyers who seek safety first and foremost aren't interested in those credits. Don't worry, you aren't being left out of the new-issue market either. A Beverly Hills financing authority plans to sell about $80 million of lease-revenue bonds with AA+ ratings from both Standard & Poor's and Fitch. Part of the bond proceeds will finance construction of four city-owned water tanks. (Yes, even in Beverly Hills, some water comes through pipes and not in bottles.) The Portola Valley School District isn't quite as well known as Beverly Hills but it boasts of an S&P triple-A rating for an imminent $5 million general obligation bond sale. The district notes that it is "nestled in the foothills behind Stanford University" and the high wealth levels in the area help support the high credit rating, along with funding from a local foundation and a parcel tax. In other pending higher-rated deals, the Los Angeles Department of Water and Power could soon sell $500 million of water system revenue bonds (AA from S&P), based on a recent rating assignment. The California Department of Water Resources also plans to sell $175 million of water system bonds (AAA from S&P), though the final amount apparently hasn't been set. These "essential-purpose" revenue bonds are especially popular when a recession impacts other tax collections. Also remember, however, that you will give up yield in the current environment on higher-quality muni bonds. For some investors that is a fair trade-off to let them sleep better at night. Last week the Glendale Unified School District priced a G.O. bond with a Moody's Aa3 rating. The five-year maturity yielded 2.05% and the 10-year, 3.32%. A day later the Washington Township Health Care District priced a G.O. (Moody's rated A3) that yielded 3.57% in five years and 4.88% in 10 years. We like the extra point-and-a-half yield on the lower-rated issue but some smaller investors wouldn't look at the A3 deal.
(Nov. 5) -- When the "old" triple-A bond insurers stumbled, famed investor Warren Buffett seemed poised to capitalize with a triple-A financial guarantee from a new company (Berkshire Hathaway Assurance Corp.). In reality the company has been very selective about insuring municipal bonds and hasn't emerged as a major player. Now Standard & Poor's has said it might downgrade the Berkshire bond insurer as it evaluates the "liquidity and capital adequacy" impact of Buffett's multibillion-dollar purchase of railroad company Burlington Northern Santa Fe. (Buffett's parent company is doing that acquisition.) Moody's Investors Service already lowered BHAC to Aa1 earlier this year. Holders of existing municipal bonds backed by Buffett's BHAC shouldn't worry much about the strength of the financial guarantee, though they should be peeved at how fast this triple-A insurer lost its top status. (Some of that might reflect the rating agencies' aggressiveness in evaluating bond insurers after the debacle surrounding the "old" triple-A insurers and riskier mortgage-related securities.) The downgrade warning won't rattle the municipal bond market because, unlike former big players such as MBIA and Ambac, Berkshire Hathaway Assurance only guaranteed a small slice of deals. Traders told us they can't remember BHAC insuring any new-issue munis in recent months. Buffett had said he might be less enthusiastic about backing local and state debt amid a serious recession. Nevertheless, the bonds BHAC guaranteed face a very remote risk of default in the first place.
(Nov. 4) -- The other month we noted that the State of California still could sell general obligation bonds at a slightly lower yield than Virgin Islands "rum" tax debt. Of course that isn't saying much. This week California can still borrow at slightly lower yields than Puerto Rico, a tax-exempt issuer that is rated lower than the Golden State. California's initial pricing for retail investors on G.O. bonds due in 25 years yielded 5.5%. Puerto Rico sold $372 million G.O. bonds the other day and a 27-year maturity yielded a tax-exempt 5.875%. In a separate taxable deal, California ended up pricing more than $900 million of Build America Bonds with a taxable 7.26% yield in 30 years. The U.S. government (federal taxpayers) will pay 35% of the taxable interest expense under the so-called "stimulus" plan, so California's actual borrowing cost is 4.74% on the taxable debt. If the state is paying 5.5% tax-exempt on a 25-year bond you can see why we say the federal government is "giving" money away. California still paid three full percentage points more than the 30-year Treasury on the taxable bonds and no doubt paid a premium relative to similarly rated corporate borrowers.
(Nov. 4) -- The California State Public Works Board plans to sell $1.3 billion of lease revenue bonds during the week of November 16. A tentative listing before had put the sale at $769 million. At least investors can't complain there aren't any billion-dollar plus sales anymore. California and its various issuing agencies seem to be selling a billion-plus every week or so.
(Nov. 3) -- Can the municipal bond market get any more bizarre when it comes to finding any excuse to sell taxable debt and take a federal handout? Apparently it can get even more wacky than even we believed. Today the State of California plans to sell $750 million taxable Build America Bonds (in the form of 30-year G.O. debt) after announcing the sale yesterday. An investor apparently contacted the state and said he/she/it would love to buy a bunch of taxable state bonds, according to the treasurer's office. The state, thrilled to take the taxable BAB 35% interest-cost handout from the U.S. government (meaning us the federal taxpayers), gladly complied. This sale is in addition to the $1.5 billion of tax-exempt G.O. bonds being sold by California this week. This fits nicely with our item below about the way taxable issuance is capturing more and more of each month's new-issue sales. As long as the state is granting requests now, maybe we'll call the head honchos, too, and ask them to pass a budget that is actually balanced instead of using usual lies and gimmicks. Think they'll meet our demand, too?
(Nov. 2) -- The great federal giveaway of so-called "stimulus" money pushed taxable bond sales to 37% of the overall U.S. municipal bond market in October, according to preliminary statistics from Thomson Reuters. In dollar volume almost $16 billion of "traditional" tax-exempt bonds disappeared as issuers lapped up a 35% federal subsidy toward their taxable interest costs. Municipal issuers already benefit from a subsidy of sorts since tax-exemption lets them sell debt at a lower rate; in doing the math, however, they realized the 35% subsidy lets them borrow at even lower costs by selling taxable bonds (especially on longer maturities). Our November print edition discusses some ominous possibilities about this trend because federal policymakers are sharpening their knives for a potential attack on tax-exempt bonds. The trend isn't letting up. We hear a California community college district plans to sell more than $50 million of bonds on a taxable basis soon. Last week the Central Contra Costa Sanitary District sold bonds and included about $20 million of taxable Build America Bonds in the mix, along with $34 million of tax-exempts. The item directly below mentions a $1.3 billion taxable BAB sale.
(Oct. 29) -- Sorry, to understand the headline you have to read to the end of this short item. The Bay Area Toll Authority priced its $1.3 billion of taxable Build America Bonds yesterday (otherwise known as the taxable Let's Tear Down the Tax-exempt Bond Market in exchange for a 35% interest-cost subsidy from the federal government). The bonds yielded a taxable 6.26% on a 40-year maturity. Not too attractive considering you could pick up a tax-exempt 5.79% on a state Public Works Board 20-year maturity the other week. The toll authority is thrilled with this federal giveaway because its cost is 4.07% after the U.S. chips in taxpayer money to subsidize the expense. We guess the toll authority needs all the help it can get after a 5,000-pound crossbeam fell the other day and caused the San Francisco - Oakland Bay Bridge to be closed temporarily. That is one of seven state-owned bridges the toll authority oversees.
(Oct. 28) -- About 1,325 local agencies have lined up to participate in a borrowing program that will lessen the impact of a state property tax grab. The California Statewide Communities Development Authority plans to price $1.75 billion of revenue bonds on November 10 to raise money for the local agencies. The state, under yet another gimmick in this year's budget-balancing plan, "borrowed" property tax revenue from localities. It must repay those funds with interest by June 30, 2013. However, to relieve pressure on localities facing budget pinches of their own, the state paved the way for a borrowing that will let bondholders essentially step in the place of the local agencies. The local agencies will sell their "receivable" from the state in exchange for getting the money upfront now (actually in two payments in January and May, 2010). The state will pay all the borrowing costs for the program. The participants include 57 counties, 395 cities, and 873 special districts, according to the development authority. California has 58 counties and 480 cities so the participation level is very high. We believe recent "clean-up" legislation will let the bonds be sold on a tax-exempt basis. We assume they will mature in 2013 as well.
(Oct. 27) -- Southwestern Community College District sold $100 million of municipal bonds the other week, with $90 million as taxable Build America Bonds. More issuers are lining up for this giveaway of federal funds under the guise of a "stimulus" subsidy, including more than half a planned sale by the Central Costa Costa Sanitation District. All we can say is that, in exchange for some quick federal bucks, issuers are putting the traditional tax-exempt bond market at risk. A 50-page "study" by Congressional groups talk about the current tax-exempt bond "regime," and we all know that if there is a regime, there is always the risk of "regime change."
(Oct. 23) -- Elsewhere earlier this week we noted that California's $8 billion of existing 2004 economic recovery bonds will get a three-notch credit rating boost from two agencies after the state "restructures" its debt service schedule with a $3 billion new sale next week. As we noted in 2004, these are "deficit" bonds that the new governor supported to clean up the recalled governor's mess. (If they were going to spur an "economic recovery" they missed the mark.) While the upgrade is great for holders of the existing deficit bonds, and the "refunded" shorter maturities will get even bigger upgrades from the escrow structure set up to pay them off, there is a downside for taxpayers. The new deal essentially means taxpayers will be on the hook much longer to pay off very old state deficits. (If we remember correctly about $3 billion of the original deal has been paid off, leaving the $8 billion balance.) This is akin to refinancing a home mortgage so you can pay it off over a longer time. True, falling state sales tax revenue that helps back the bonds has dashed the state's hopes to pay this debt off more aggressively. Even so, this is another example of how one poor decision (selling deficit bonds in the first place) can end up penalizing taxpayers for a very long time. Voters approved the bonds so we guess they're getting what they wanted, plus even more interest expense over time.
(Oct. 22) -- We saw a little doom-and-gloom headline pass our way that said municipal bonds are having an awful month in October, in fact the "worst" since September 2008. This is based on a muni bond index tracked by Merrill Lynch & Co. We don't have a problem that such an index exists because it is a valuable way to track market trends over time. However, we can never say enough how disgusting we find this month-to-month or even week-to-week obsession with "Total Return" performance. Is it surprising that municipal bonds are going to have a "worst" month eventually after rallying so much that yields fell for 1960s levels? Income-oriented investors looking for yield might want to hope for a few more "worst" months the way things have been going. Recent yield increases meant that the State of Maryland, a perpetual triple-A credit, decided to put off a planned refinancing of older bonds. We guess some see such postponed sales as a "bad" thing but, in reality, sometimes "bad" things for issuers (the borrowers) can be "good" things for yield-oriented investors (the lenders). Current tax-exempt yields, especially on higher-grade municipal bonds, still aren't anything to write home about, but at least 10-year maturities are staying well north of 3% again.
(Oct. 21) -- Our item below, which previously was on our "Home" page, explains how a $3 billion State of California sale of "economic recovery bonds" next week also will benefit the existing 2004 economic recovery bonds to the tune of a three-notch upgrade from Moody's Investors Service. For similar reasons Fitch Ratings also plans to upgrade the existing economic recovery bonds by three notches to A from BBB. The "deficit" bonds benefit from double-barreled security (sales tax revenue and a G.O. pledge), and that will translate into a higher rating than the state's general obligation debt after the new sale adjusts the way future debt service is cushioned for the deficit bonds.
(Oct. 20) -- A new $3 billion State of California sale of "economic recovery bonds" next week also will benefit the existing 2004 economic recovery bonds to the tune of a three-notch upgrade from Moody's Investors Service. The rating is expected to rise to A1 from Baa1 once the new sale closes, Moody's said. Of course, the Bond Advisor calls these bonds what they are: "Deficit" bonds the state approved to clean up the mess left by recalled Governor Gray Davis. The deficit bonds are backed by sales tax revenue and, if needed, the state's general obligation guarantee. However, due to declining sales tax revenue the last couple years, debt service coverage ratios have declined on the existing debt. The new $3 billion bond sale will let the state tinker with the way the bonds get paid off. The current debt service schedule is "front-loaded," Moody's noted, but after the new bonds are sold a "level" debt service structure will be in place. That will help provide a better revenue cushion for the bonds, hence the upgrade. We also noticed that Standard & Poor's has assigned an A+ rating to the new "deficit" bonds and has the existing economic recovery debt (now at single-A) on a "positive" WatchList for possible upgrade. Moody's rates California's general obligation bonds Baa1 so the "deficit" debt actually is considered stronger thanks to the sales tax backing and the restructured debt service schedule.
(Oct. 20) -- Our weekly review is always written by Friday morning, which means deals priced on Friday aren't included in our initial update. A handful of issues in California's municipal bond market were priced the other day and we thought we would add some yield examples. The Mojave Water Agency sold $39 million of revenue certificates of participation with an AA- rating from Fitch. The five-year bond yielded 2.73% and the 10-year, 4.10%. The 15-year yielded 4.61%, the 20-year, 4.90%, and the 30-year, 5.19%. These yields reflect the recent rate rise in the muni market. Allan Hancock Joint Community College District sold general obligation bonds that included a 10-year yield of 4.20%. Moody's rates the bonds A1. Most of the Allan Hancock deal went away as taxable Build America Bonds. The Torrance Unified School District sold general obligation bonds rated in the lower double-A category. A five-year bond yielded 2.50% and a 10-year, 3.75%. John Muir Health sold $104 million of revenue bonds through a financing authority. The A1 and A+ bonds yielded 3.45% in five years, 4.65% in 10 years, 5.18% in 20 years, and 5.35% in 30 years. A Brentwood finance authority deal also went away as almost all taxable Build America Bonds. These federal "stimulus" bonds continue to be bad news for volume in the new-issue tax-exempt bond market.
(Oct. 19) -- California's State Public Works Board plans to sell most of this week's deal as taxable Build America Bonds. Even so, we quote two items about the security of these bonds to follow up on an item in one of our recent print editions. From Fitch: "Lease rental payments are appropriated annually by the legislature, with the lessee required by law to use the first funds appropriated to it for lease payments along with other rental amounts supporting existing PWB debt." And, from Moody's: "There are strong statutory provisions for payment of debt service, including the requirement that rental payments be allocated from first lawfully available revenues of the relevant department (the lessee for each series). There is also a provision for a continuing appropriation for rental payments should the department fail to provide rental payments in its budget, or operate without a budget." These factors are worth keeping in mind since the crumbs offered to the tax-exempt market still might offer decent yield premiums relative to higher-grade credits.
(Oct. 16) -- The Bay Area Toll Authority is just the latest big issuer to bow to Washington D.C. and take its 35% interest rate subsidy in exchange for selling taxable Build America Bonds. It is another example of the deleterious impact on the tax-exempt market because this is a big fixed-rate sale ($1.3 billion). Net toll revenues from the seven Bay Area bridges overseen by the authority secure the debt. Bond proceeds will help finance the authority's retrofit program to protect against earthquake damage, with the biggest project represented by the new East Span of the San Francisco-Oakland Bay Bridge. The bonds are rated Aa3 by Moody's Investors Service.
(Oct. 15) -- Recently we noted that a debt sale of Cedars-Sinai Medical Center, a prominent health provider in Los Angeles, was worth looking at for a "conservative" investors willing to dip into tax-exempt healthcare bonds. Another prominent issuer, Catholic Healthcare West, is looking at selling roughly $500 million of fixed-rate bonds as soon as this month through the California Health Facilities Financing Authority. (It also is selling about as many bonds in variable-rate mode.) Some of our long-time readers will remember when Catholic Healthcare West (CHW) suffered through a series of rating downgrades a decade or so ago. Since that time, however, the health system has vastly improved its management so individual hospitals meet budgets and generate income. In response, a series of upgrades put CHW back solidly in the single-A category. It isn't without challenges, along with just about any healthcare entity in a complex field that requires plenty of capital and exposure to various "reforms." One thing we want to point out is that CHW is a non-profit system operating 34 hospitals in California alone (plus a handful in Arizona and Nevada). This diversity is a strength when good management is in place, and that factor helps CHW in a tough operating environment. In contrast, very recently elsewhere on this page and in our Bond Updates page we have discussed three hospitals and/or health districts in bankruptcy. All those cases involve smaller "standalone" operations with several operating challenges unique to such entities. You can't lump all tax-exempt healthcare bonds into one basket.
(Oct. 13) -- We have written about the bankruptcy of the Palm Drive Health Care District previously. As we have noted, principal and interest payments on the Series 2005 parcel tax revenue bonds continue to be made during the bankruptcy. Standard & Poor's, which rates the debt BB, has now removed the bonds from a "CreditWatch" for possible downgrade. A new "three-year contract entered into between the district and BRIM, a national hospital management and consulting firm, will likely provide the managerial support necessary so that the district can remain solvent in the near-term and create a foundation for long-term operational stability," S&P said in a statement. The outlook is "stable," and the current rating assumes the bonds will be classified as "allowed unimpaired secured claims" in the final bankruptcy reorganization plan. The district is based in Sebastopol and oversees a 37-bed hospital.
(Oct. 13) -- The troubled Downey Regional Medical Center, which filed for bankruptcy in September, had its credit rating on Series 1993 revenue bonds cut to C from CCC by Standard & Poor's. In the same action S&P suspended the rating, citing a lack of audited or unaudited financial statements for the last three fiscal years (2007 to 2009). S&P will consider reinstating the rating once audited financials are available. The hospital doesn't expect to provide current financial statements until January 2010, S&P added. The California Health Facilities Financing Authority issued the revenue bonds for what was then known as Downey Community Hospital. Bond payments are current "to date," said S&P, which also concern about turnover in the key chief financial officer position. The 199-bed hospital filed for bankruptcy protection to avoid further losses on HMO contracts. Upon filing their bankruptcy petition, hospital officials said in a release that they believed they can return to cash-flow surpluses after the reorganization process.
(Oct. 12) -- Municipal bond funds continued their year-long roll by taking in another $1.78 billion in the week ended October 7, according to Lipper FMI. Muni funds have seen "inflows" each week in 2009 and they should smash the annual record for cash intake set in 1993. Inflows have been higher than $1 billion for 11 straight weeks. We have discussed the implications of these inflows for the tax-exempt market in recent print editions, including the potential impact on the long end of the yield curve.
(Oct. 9) -- California's Economic Recovery Financing Committee is meeting on Monday (Oct. 12) and will consider issuing up to $4 billion of economic recovery bonds to refund "certain" existing bonds. The sale is tentatively set for the week of October 26th, according to the state treasurer's office. This economic recovery debt, more accurately called "deficit" bonds by the Bond Advisor, was sold after Gov. Schwarzenegger and state leaders backed a plan to borrow to help close the deficit mess left by Gov. Gray Davis. (Boy, all that has worked out great, hasn't it?) Existing holders of the "certain" older bonds that are refunded would end up with top-notch debt because a high-quality escrow would secure the debt. The economic recovery bonds are a full faith and credit general obligation of the state. However, a quarter-cent sales tax also was pledged to repay debt service on the bonds. Because of the recession, that sales tax revenue hasn't been flowing as expected. The state wants refund some of the existing debt to better match actual tax receipts.
(Oct. 9) -- California's Public Works Board plans to sell $820 million of lease-revenue bonds the week of October 19th. They are rated Baa2, A-, and BBB- (Fitch is obviously a bit more bearish on the state than S&P.) According to Moody's, roughly $600 million might be structured as taxable BABs. That would certainly lessen some yield "penalty" pressure on the tax-exempt portion. Yuk. Now that the Cedars-Sinai sale is over, another big single-A healthcare issue might be coming to market. Catholic Healthcare West just received an S&P rating for $237 million of bonds through the California Healthcare Facilities Financing Authority. You can see the recent Cedars-Sinai yields here.
(Oct. 8) -- "Retail" investors, including smaller individual buyers, ordered about $428 million of California's tax-exempt general obligation bonds in a two-day order period, or 33% of the overall sale. Tax-exempt rates are rising slightly and institutions might require even higher yields to finish the deal.
(Oct. 7) -- Miracles happen. There seems to be a consensus among traders that tax-exempt yields in the "general" municipal bond market finally rose yesterday by at least a hundredth of a percentage point, also known as one basis point (100 basis points equal a full percentage point). Going back to about mid-September it seems yields kept dropping, and dropping, and dropping. Now a high-quality bond that was recently sold at a 2.50% yield on a 10-year maturity might yield a whopping 2.51%. Yippee! With yields at those levels income-oriented investors will make it to the poorhouse a day later now. Ha!
(Oct. 7) -- "Retail" investors yesterday ordered roughly one-quarter of California's tax-exempt general obligation bond sale during the first day of a two-day period. Institutions will get a crack on Oct. 8 and final yields will be set then. Preliminary yields are roughly in line with what we discussed in October's print edition. On the first day of order taking, a six-year bond offered a 2.87% yield; a 12-year maturity at 4.04% was the first to crack 4%. (UPDATE: The state on Wednesday is sweetening the yields and adding a handful of basis points to the rates mentioned above.) While that's a little low for our taste, the state is relieving "supply pressure" by selling a far bigger chunk as taxable Build America Bonds. The 16-year maturity preliminarily yields 4.38% (now 4.42% after yields were sweetened) and a 20-year, 4.63% (now 4.66% after preliminary yields were sweetened). The Virgin Islands "rum" bonds we discussed recently yielded 4.75% in 20 years for a triple-B credit, so California isn't too far off that level.
(Oct. 7) -- We could run one of these items just about every day, but we don't. The Southwestern Community College District in southern San Diego County is lining up a $100 million general obligation bond sale and it looks like $65 million will be structured as taxable Build America Bonds. This item about the "destruction" of the tax-exempt market is brought to you courtesy of the federal "stimulus" legislation that authorized these taxable BABs.
(Oct. 6) -- Our October print edition pretty much said it all regarding smaller investors and this week's California general obligation bond sale. Some investors who missed out on the great yield spreads available during the budget crunch are wondering if they will get another shot at a bigger yield "penalty" down the road. Maybe, especially if an economic recovery stalled. S&P, for example, warns the state's credit rating could tumble if the recession dragged on. And, in any event, the state faces multibillion-dollar deficits for a few years even if a recovery kicks in. But if the economy keeps rebounding, even slowly, the state's now-shrunken yield penalty could keep narrowing. The big issue is new supply. California is selling tons of bonds, but the taxable Build America Bonds are draining away tax-exempt supply. That will occur throughout at least next year and if the taxable program is extended it could reshape the tax-exempt market for years to come. The state is also benefiting from collapsing tax-exempt yields on higher-quality issuers, which is pushing investors into lower-rated credits to find extra return.
(Oct. 2) -- Our October print edition discusses an old controversy that just won't go away. Scores of school districts sold bonds to refinance older debt, but they also structured the deals in way to take cash out. Should this approach have triggered another bond election? California's Attorney General weighed in with an opinion almost a year ago. While that opinion thrilled some critics of these deals, does it mean they can undo the bonds years later? Read the October edition to get our take. It still isn't clear whether there will be attempts to provide redress for affected taxpayers, but don't confuse those discussions with the validity of existing bonds. And be careful about some of the media stories and commentaries that keep popping up. The courts, not these stories, determine the validity of bonds, and there is a short time frame for challenging muni bonds in the first place.
(Oct. 1) -- We told you recently that when some highly-rated issuers sell bonds in the current environment, the tax-exempt yields would be downright depressing. The East Bay Regional Park District was one of those issues we cited. It just sold $88 million of general obligation bonds rated Aa1 by Moody's and triple-A by S&P. The highest tax-exempt yield was 3.59% on a 20-year bond. (It wasn't that long ago smaller investors were mad about having to accept 3.59% on a 10-year bond.) The district's 10-year bond yielded 2.50%. Go to our Yield Trends page and scroll down to the chart of recent yields to see other depressing deals pricing this week.
(Oct. 1) -- Our October print edition reviews several predictions we made a year ago, amid a growing "panic" that we said presented a fantastic buying opportunity. Many of the things we expected came true, including a yield curve that is still steep but lower across all maturities. With a rally making tax-exempt yields look unattractive, what should investors do? We briefly mention one idea using a "barbell strategy" and identify a deal that yielded 3.05% in about 16 months. Many higher-quality munis yield that in a bit more than 10 years. You can subscribe and get the October print edition.
(Sept. 30) -- New York City is now selling roughly $800 million of taxable Build America Bonds to hop on the bandwagon of issuers getting an unneeded subsidy from the federal "stimulus" legislation. It never ends, and this "stimulus" provision goes through 2010. If the taxable BAB provision is extended it will have unfortunate implications for the tax-exempt yield curve (it remains "artifically" low thanks to all the taxable BABs siphoning off new supply).
(Sept. 29) -- The National Public Finance Guarantee Corp., a subsidiary set up by MBIA Inc. to segregate municipal bonds from the bond insurer's other "riskier" portfolio, is still rated single-A with a "developing" outlook. We only want to make that point because Standard & Poor's has downgraded the "old" MBIA insurance company by two notches to BB+ (the highest rung in the so-called junk bond category). Projected losses on mortgage-related securities and other complex securities remain problematic for the "old" MBIA insurer, according to S&P. The public finance subsidiary (NPFGC) doesn't have exposure to those riskier projects, S&P said.
(Sept. 25) -- Since we mentioned a capital appreciation bond sale in the item below, let's throw in a pricing the other day by the Victor Valley Union High School District. The bonds were rated A2 and AA-minus and included insurance from Assured Guaranty. A non-callable zero-coupon bond yielded 3.28% in five years and 4.80% in 10 years. The 15-year yielded 5.41% and the 19-year, 5.77%. A 2031 maturity callable in 2026 yielded 5.75%.
(Sept. 24) -- The Whittier Union High School District recently priced $136 million of general obligation bonds, with most of the deal issued as capital appreciation (or zero-coupon) bonds. A 2034 maturity that isn't callable yielded 6.18%. A 2034 maturity that is callable in 2019 yielded 6.41%. The callable "zeroes" yielded 5.75% on a 2024 maturity. This type of bond is sold at a steep discount to par value and doesn't make any semiannual interest payments. Instead, the investor gets the "appreciation" in value as the bond's value rises in future years. The bonds are rated AA-minus by Standard & Poor's.
(Sept. 21) -- The City of Long Beach sold $53 million of tax and revenue anticipation notes the other day. The coupon was 2.50% and they were priced to yield 0.47% on notes that mature in one year. That should give you some idea why the State of California will find plenty of buyers for its $8.8 billion revenue anticipation note sale. While the state's yields might not seem all that attractive when they are initially priced for retail, they will be a lot higher than 0.47% and California's notes mature next June, three months earlier than the Long Beach deal. Massachusetts recently sold RANs maturing in June and they yielded 0.31%.
(Sept. 18) -- In our list of Upcoming Sales we have had for some time a couple pending general obligation issues from the El Monte City School District and the Montebello Unified School District. However, a source who shares our contempt for taxable Build America Bonds said she believes good chunks of these deals will be sold taxable, not tax-exempt. In fact, well above half of the total issue could go taxable. We are going to assume they are being sold as taxable BABs and don't have to be sold "taxable" for another reason. If so, it is more proof of how this unneeded giveaway of federal "stimulus" money is siphoning supply away from tax-exempt issues (and affecting tax-free yields as well). And yes, we will keep griping about this issue.
(Sept. 17) -- One of our readers said he is attending a public finance conference where California Treasurer Bill Lockyer spoke. Among the notes he jotted down, he said California plans to sell $5 billion of general obligation bonds in October. Some of them will be taxable Build America Bonds, according to Lockyer. In total the state probably will sell about $14 billion of G.O.s over the next year, Lockyer also said. The treasurer also said, according to our reader, that California faces a tough few years with continuing structural deficits and thorny decisions if the state tries to reform its tax structure.
(Sept. 16) -- Unlike the other rating agencies (see item below), which put California's revenue and anticipation notes in their top short-term categories, Fitch Ratings gave the RANs an F2 grade. Fitch mentioned the still-weak economy, a "precariously" balanced budget, and the "uncertain direction" of general fund revenue receipts. We should note that Fitch also has the lowest rating on California's general obligation bonds (BBB), so its lower short-term rating isn't a surprise.
(Sept. 15) -- California's $8.8 billion of revenue anticipation notes received a top MIG-1 rating from Moody's Investor's Service. They received an SP-1 from Standard & Poor's, which is still a high rating but not the highest SP-1+ level. The sale is scheduled for next week. The state lowered the sale by about two billion dollars, but the legislature didn't approve certain cash-flow measures the controller's office was seeking. However, the legislature can revisit the issue; otherwise the state might have to sell more notes later on in the fiscal year. Our comments on the note sale from a recent print edition still stand. The potential yields could be lower than we discussed a month ago because the short end of the yield curve is still extremely low, which helps all borrowers no matter their reputation.
(Sept. 14) -- The Bonita Unified School District, featured in one of our recent commentaries on the growing use of taxable Build America Bonds, ended up selling more than $24 million of taxable debt and less than $8 million tax-exempt. Fitch rated the debt AA-. The five-year tax-exempt bond yielded 1.95% and a nine-year maturity, 3%. The taxable bonds yielded a top 6.93% in 30 years. As we discussed in our September print edition, issuers are finding it more economical to sell shorter-maturity bonds on a tax-exempt basis and offer taxable bonds for longer maturities. The Bonita school deal conformed to that pattern.
(Sept. 10) -- Even though they face financial challenges because of the recession and a state budget pinch, most California school districts are in a position to avoid credit downgrades, Moody's Investors Service said. State oversight standards are helping to ensure that school districts make timely budget adjustments to the current stress, Moody's said, even though there is real "negative rating pressure" on these issuers. Moody's has assigned "negative" outlooks to some school bonds. Still, actual downgrades may end up being limited "to a relative few in the near term," the rating agency said. This reinforces a comment the Bond Advisor made recently: Many other municipal issuers will avoid downgrades as well, regardless of what the "sky-is-falling" crowd is saying, because tax-supported entities have ways of muddling through downturns. And in almost all cases downgrades are the biggest threat to traditional tax-backed entities (not default), so yield opportunities on lower-rated issuers are worth exploring.
(Sept. 9) -- As we mentioned in our September print edition, we plan to flag some upcoming bond sales on our Web site from time to time. (Very soon this will be a subscriber-only feature.) The Polytechnic School, an independent K-12 school in Pasadena, plans soon to sell $26 million of revenue bonds. The tax-exempt bonds will be sold through the California Statewide Communities Financing Authority. Proceeds will help pay for new buildings among other things. Polytechnic accepted only 17.3% of the applicants for fall 2009, a sign of "significant" admissions flexibility, Moody's Investors Service said. Moody's rates the bonds A1, the fifth-highest out of 10 possible investment-grade ratings. Polytechnic's reserves provide a "solid" debt and operating cushion, Moody's said, including about $23 million of its endowment that can become "liquid" within a week. For investors who prefer bonds from a more "traditional" public issuer, the Pasadena Area Community College District plans to sell $52 million of general obligation bonds. S&P just upgraded this district to AA+ (the second-highest rating) from AA-minus. Moody's rates the bonds Aa3, its fourth-highest rating. Just remember, in the current market environment it is a seller's market for double-A credits. You will give up some yield.
(Sept. 8) -- Our September print edition mentions the continuing hot streak for municipal bond funds. For the week ended Sept. 2 they took in another $1.5 billion, just short of the weekly record set a week earlier, according to AMG Data Services. Muni bond fund assets have grown by almost 25% so far this year. All that money has to go somewhere, and tax-exempt yields have been dropping as plenty of demand chases less supply (tax-exempt issuance across the U.S. is down in 2009 over 2008). In addition, the taxable "Build America Bonds," part of the federal stimulus package, are siphoning off municipal bond supply, including about 30% of the total new sales in August.
(Sept. 3) -- The Bond Advisor has explained for years why revenue bonds are particularly appealing to safety-conscious investors during an economic downturn. The San Francisco Public Utilities Commission proved our point again when it sold $412 million of water revenue bonds (including an AA-minus rating). The five-year bond yielded 2.13% and a nine-year bond, 3.13%. A day later the John Swett Unified School District sold $6 million of general obligation bonds with an A+ rating and insurance from Assured Guaranty. The school bonds yielded 2.50% in five years and 3.85% in 10 years. As we have been explaining in several recent print editions, income-oriented investors are better off taking a tiny bit of added credit risk to pick up extra yield. We discuss this more in the upcoming September print edition.
(Sept. 1) -- As we note on our home page, almost 31% of the municipal bond volume across the U.S. was marketed as "taxable" bonds in August. Most of this taxable issuance is being spurred by the federal "stimulus" program known as "Build America Bonds." Local and state issuers are taking advantage of this federal giveaway because an interest-cost subsidy from the Feds makes the "taxable" sale cheaper than a tax-exempt offering. The "part two" of our August print edition reflects on this depressing trend, and wonders what the Feds will do next now that they see how easy it is to get municipal issuers to sell their souls for a "taxable" alternative. We discuss one scary idea here.
(Aug. 18) -- California's sale of "interim" revenue anticipation notes has been accomplished through a $1.5 billion loan from JP Morgan. Money raised by the sale will help California pay off IOUs it began issuing in recent weeks after the budget was delayed. The "interim" placement will be paid off by a regular RAN sale that is mentioned in the item below.
(Aug. 14) -- California plans to sell $1.5 billion of "interim" revenue anticipation notes before the end of August as part of its plan to meet cash-flow needs in the current fiscal year. Money raised by the sale will help California pay off IOUs it began issuing in recent weeks after the budget was delayed. The IOUs will be paid off in early September, or almost a month earlier than required. In mid-September California plans to sell $10.5 billion of RANs to pay off the "interim" notes and meet other cash-flow needs in the current fiscal year that began July 1. Such short-term notes are used by municipal issuers to meet cash-flow needs because property taxes and certain other receipts only get collected during certain time periods. While most of our readers buy longer-term bonds, the state's note sale in September should offer a decent yield premium for investors looking to park some cash for a few months.
(Aug. 17) -- We wanted to get our new format up and running so we could begin adding several market-related updates in coming days and weeks. As a result, you will see more updates posted throughout the site soon after August 17.
(Aug. 17) -- The parent companies tied to disgraced bond insurers MBIA and Ambac need to show they can generate new business within a couple years or face growing risks of liquidity crunches, according to various analysts monitoring the companies. Of the two, insurer Ambac continues to be in the most dire straits and is taking steps to buy time, such as freeing up reserves to meet capital requirements. As far as their insurance backing muni bonds is concerned, the Bond Advisor continues to believe--if push comes to shove--state regulators should work to have the existing "safer" muni bond portfolio sold off the healthier companies. In the meantime, the rarity of muni bond defaults is a plus because the guarantees aren't being tapped anyway.
This little item was posted six months ago amid state budget negotiations earlier this year. We're leaving it on here for just a few days more as a reminder that the state's controller did just what he should have done, even up through the IOU fiasco in July, to make sure debt service payments were always safe. Here's the "old" post: (Feb. 17) -- All the amazing hyperbole about what dire straits the State of California faces is scaring some bondholders unnecessarily. California's general fund took in $7.7 billion in January and only had to pay $13.7 million in debt service. California's controller is covering debt service and all required constitutional payments.