Municipals little changed amid volatility for Treasuries; tobacco bonds could see problems

By Sheri Kasprzak

New York, Feb. 9 – Municipals were mostly flat on the session as Treasuries experienced some ups and downs on the day before falling, market insiders said.

Yields were mostly flat on the day even as Treasuries flip-flopped.

The Treasuries market started out strong but reversed with yields climbing about 1 basis point across the curve.

In the coming week, new issues are expected to total about $8.5 billion, a little lighter than recent weeks. The new-issue action will be led by a $1.06 billion offering from the South Carolina Public Service Authority.

Washington deal ahead

Heading up Tuesday’s primary action, the State of Washington is on deck to sell $483,615,000 of series 2015 general obligation refunding bonds competitively.

The bonds (Aa1/AA+/AA+) will be offered in three tranches, including motor vehicle fuel tax G.O. refunding bonds and various purpose G.O. refunding bonds.

Proceeds will refund outstanding debt.

Tobacco bonds eyed

Looking to sectors, tobacco bonds could see some trouble, said Alan Schankel, managing director with Janney Montgomery Scott LLC.

“We remain cautious on the tobacco sector, while noting that issues marketed in the post-2008 timeframe have more resilient structures than older issues, especially the longer maturity turbo issues of 2006-2008 vintage including New Jersey, TSASC (New York City), Buckeye (Ohio), Virginia and Golden State (California),” said Schankel Monday in a note.

“Despite some recent positive media attention on the sector and a relatively strong market performance in 2014, we see problems and likely defaults ahead because the pace of smoking continues to decline beyond the 4% rate, which underlies structuring assumptions of many issues. States and cigarette manufacturers continue to arbitrate claims related to nonparticipating manufacturer disputes from past years, although some have been settled with both favorable and unfavorable outcomes for various states.

“Manufacturers continue to withhold a portion of payments, pending resolution of future disputes. A favorite analyst of ours described the situation as an ‘amorphous blob of unpredictable variables’ which is as good as any definition of uncertainty.”

This news comes as the New York Counties Tobacco Trust III recently announced that it has engaged Jefferies LLC for a potential refunding bond offering.

The proposed offering will refund the trust’s series 2003 tobacco settlement asset-backed bonds.

The redemption of these bonds will trigger the redemption, at par, of existing bonds attributable to the senior debt.

The exact timing and the details of the deal have not been determined yet.

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