Municipals end flat to firmer; Pennsylvania Turnpike's $600 million sale leads light calendar

By Sheri Kasprzak

New York, Aug. 30 - Municipal yields were flat to slightly better to kick off the week, with long and short bonds seen largely unchanged and intermediate bonds seen down 2 basis points, said a trader.

The highlight of the week's primary action will be a $600 million sale of Build America Bonds (Aa3) from the Pennsylvania Turnpike Commission. The commission decided Monday to conduct the sale on Tuesday, said chief financial officer Nick Grieshaber in an interview.

"There have been a few decision points," Grieshaber said.

"The 35% subsidy has been questioned, whether that program will continue, but we know we will receive the 35% subsidy this year. That percentage might be reduced, so we've now decided to fund for two years.

"It was also partly timing. Rates are at absolute lows right now. We wanted to get this in before the [Labor Day] holiday. Otherwise, we would have had to wait another two weeks."

Grieshaber also noted that the timing works in the commission's favor since a lackluster supply will make the deal the largest sale of the week.

The offering originally included a tax-exempt portion, but this has been removed, Grieshaber said.

"The offering will be all taxable," he said. "It makes the most economic sense to go all taxable with the subsidy."

Carl DeFebo, spokesman for the commission, said that the turnpike is celebrating its 70th anniversary this year and, as a result, 70 miles of state highways are being reconstructed. This sale will help finance a portion of that reconstruction, which is part of the commission's 10-year capital plan.

Bank of America Merrill Lynch is the senior manager for the sale.

Harris flood bonds to price

Also on Tuesday, the Harris County Flood District of Texas is set to price $205 million in series 2010A contract tax refunding bonds through Goldman, Sachs & Co. and Piper Jaffray & Co.

Proceeds from the bonds (/AAA/AAA) will be used to refund and defease all of the district's outstanding commercial paper notes.

A sellsider close to the offering told Prospect News Monday that the district has not come to market for almost two years, and the current market conditions did play a role in the decision to price Tuesday.

"We're certainly confident that we can get the best possible pricing going to market this week," said the source.

"They've got a triple A rating. Yields are at all-time lows. The fact that not much else is out there also works in their favor. Hopefully, we will be able to attract investor attention given those things."

The Houston-based district provides financial relief to flood-prone regions of the county.

Tennessee school bonds ahead

Heading up the competitive calendar, the Tennessee State School Bond Authority is preparing to bring $245.055 million in series 2010 higher educational facilities second program bonds on Wednesday.

The offering is comprised of $226.925 million in series 2010A tax-exempt bonds and $18.13 million in series 2010B taxable bonds.

The bonds (Aa1//AA+) will be used to retire commercial paper from the University of Tennessee at Knoxville, the University of Tennessee at Martin, Middle Tennessee State University, the University of Memphis and Tennessee Technological University.

Yields low, supply light

Even though investors, diverted from equities on worries that the economic recovery is moving slowly, are still interested in municipals, supply remains light, said one sellsider reached Monday afternoon.

"Yields are extremely attractive, but there's no supply," he said.

"I'm sure as soon as something comes through, investors are going to dive on it. I think we're at the point now that yields are so low, even if they do rise somewhat, demand will remain strong."

Meanwhile, states are getting a boost, said Alan Schankel, managing director with Janney Montgomery Scott LLC.

"States benefited from a second consecutive quarter of higher tax revenues in the second quarter of 2010 after five straight quarters of slow receipts," said Schankel, quoting data from the Nelson Rockefeller Institute of Government.

"While this outcome does not imply a full economic recovery for municipalities, it is undeniably a positive result. A total of 30 states saw higher revenues, mostly driven by growth in sales and income taxes, with Florida and Arizona realizing 14% and 3.9% revenue growth, respectively. Some states, such as those which still face some of the largest fiscal challenges including California, Illinois and Michigan, are still dealing with revenue declines, however."

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