Municipal yields close mostly unchanged; Iowa Fertilizer preps $1.9 billion offering of bonds

By Sheri Kasprzak

New York, April 29 - Municipal yields were largely unchanged on Monday to kick off what promises to be a slower week for new issues, market sources reported.

"We're staying in line with Treasuries since there's not much else really moving us, but Treasuries are keeping in line with Friday's levels," a trader said in the late afternoon.

New-issue activity this week will slow, said Tom Kozlik, municipal credit analyst with Janney Montgomery Scott LLC. Supply is expected to be about $6 billion after weeks of new issue action topping $10 billion.

One of the largest offerings of the week will come from the Iowa Finance Authority, which plans to sell $1,194,000,000 of series 2013 Midwestern disaster area revenue bonds for the Iowa Fertilizer Co.

"This issue is expected to be rated below investment grade, making the issue the largest sub-investment-grade primary market offering since the West Penn Allegheny Health System's $750 million sale in 2007," Kozlik said Monday.

"The Iowa issue is rated BB- by Standard & Poor's."

The bonds will be sold through Citigroup Global Markets Inc. and BofA Merrill Lynch and are due 2019, 2022 and 2025.

Proceeds will be used to construct a nitrogen-based fertilizer and industrial production facility in southeastern Iowa, near the Illinois border.

Benchmarks tumble

Municipal AAA benchmark yields fell slightly last week, Kozlik said.

"The 10-year AAA MMD dropped 3 basis points and ended the week at a 1.69%, while the 30-year ended the week at a 2.87%," Kozlik wrote Monday.

"For the month of April, the 10-year benchmark is 20 basis points lower, while the 30-year is down 22 basis points in yield.

"The demand side is still showing outflows, as expected for this time of year. ICI reported $698 million of flows out of municipal mutual funds for the week ending April 17, while Lipper data (more timely, but less comprehensive) showed an eighth straight week of outflows for the week ending April 24 at a more moderate ... pace of only $102 million."

Downgrades keep coming

Looking to ratings news, Moody's Investors Service reported Monday that U.S. public finance downgrades made up 83% of rating changes during the first quarter. The total par amount of debt downgraded dropped to $27 billion from $95 billion in the previous quarter.

Upgraded debt in the first quarter jumped to $10 billion from $4.2 billion in the fourth quarter of 2012, Eileen Hawes, public finance analyst with Moody's, said in the report. This marks the highest quarterly total since the fourth quarter of 2010, she reported.

"Local governments dominated both upgrades and downgrades during the first quarter, with 26 upgrades on $7.4 billion in debt and 144 downgrades on $18.7 billion in debt," Hawes said in the report.

"In the final quarter of 2012, there were 21 local government downgrades on $2 billion in debt and 104 local government downgrades on $15.6 billion in debt."

The trend of downgrades will continue, Hawes said.

"We expect rating activity to continue to be skewed toward downgrades over 2013 as local governments continue to struggle with increasing pension and health-care costs and constraints on key property tax and state aid revenue sources," Hawes said.

"Sluggish economic and revenue growth persist in other sectors, including state governments, infrastructure enterprises and not-for-profit organizations."

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