Long bonds close softer ahead of massive supply; New Jersey Transportation preps big issue

By Sheri Kasprzak

New York, Nov. 14 - Municipal yields were softer, particularly on the long end of the curve, in anticipation of the busiest week for new issue volume so far this year, market insiders reported. With more than $12 billion in anticipated new deals pricing, supply pressure is mounting and driving yields up.

Thirty-year yields were seen up by almost 4 basis points, and 20-year yields were up by 2 bps. The rest of the yield curve was mostly unchanged with slight weakness seen in spots.

Tom Kozlik, municipal credit analyst with Janney Montgomery Scott LLC, said Monday that the week may provide the most volume in a single week so far this year, with about $12.2 billion in new offerings headed down the pipeline.

The coming supply, said one trader, may be just too much for the market to bear, despite the fact that municipals have handled an influx of offerings fairly well recently.

"We have been absorbing [new deals] well, but this is record volume," he said.

"I'm sure this will put some pressure on yields, and we may see some weakness."

Not everyone agreed with this assessment, however. Alan Schankel, managing director with Janney, said Monday that the market has had little trouble absorbing increased new issue flow so far this quarter, and he fully expects demand to continue to be high for the coming supply.

"Yields have moved lower thus far, and although municipal to Treasury ratios remain well above 100%, they've been relatively stable," he noted.

The coming week's volume, however, is poised to push the 30-day visible supply to the highs of the year, Schankel said. Even so, he said he expects demand to remain strong.

"We expect continued strong primary flow into December but believe demand will be up to the task, especially with ratios above 100% encouraging crossover buyers," Schankel said.

New Jersey deal set

Leading the pack of new issues is a $1.3 billion sale of transportation system bonds from the New Jersey Transportation Trust Fund, according to a source familiar with the sale.

The bonds (A1/A+/A+) will be sold on a negotiated basis with Morgan Stanley & Co. LLC as the senior manager.

Proceeds from the sale will be used to finance transportation-related capital projects within the state.

Massachusetts preps RANs sale

Another major offering coming out of the competitive market is the Commonwealth of Massachusetts' planned $1.2 billion offering of series 2011 general obligation revenue anticipation notes set to price Wednesday.

The offering includes $600 million of series 2011A notes and $600 million of series 2011B notes.

The notes (MIG 1/SP-1+/F1+) will be sold on a competitive basis.

The 2011A notes are due April 26, 2012, and the 2011B notes are due May 31, 2012, said a preliminary official statement.

Proceeds will be used to fund certain capital requirements of the commonwealth ahead of the collection of revenues.

New York water bonds to price

Elsewhere during the busy week, the New York City Municipal Water Finance Authority plans to bring to market $450 million of series 2012BB water and sewer system second general resolution revenue bonds, said a preliminary official statement.

The bonds (Aa2/AA+/AA+) will be sold on a negotiated basis with Barclays Capital Inc. as the senior manager.

Proceeds will be used to fund the costs of improvements to the city's water and sewer system and to repay commercial paper notes.

Jefferson has little impact

Late last week, Jefferson County, Ala., filed for bankruptcy with $3.1 billion in sewer debt, making it the largest municipal bankruptcy in history. However, the broader municipal market yawned at the news, illustrating that the county's poor fiscal policies and corruption are not indicative of the muni market itself, said Schankel.

The problem started, Schankel, said, when the county borrowed $3.1 billion to finance construction and improvements to its sewer system, a project that could have been completed for about half that amount.

"The vast majority of the bonds issued were variable-rate bonds with issuance accompanied by interest rate swap agreements with a notional value exceeding $5 billion," Schankel said.

"The put features of variable-rate debt were backed by liquidity agreements from JPMorgan [Chase & Co.] and other banks."

To add to the problems, the bonds were insured or included reserve funds backed by the now-defunct Syncora, the now-defunct FGIC, the troubled Ambac and Assured Guaranty, which is still a viable business.

"A project that probably should have cost about half of the amount borrowed saddled county sewer users with debt service payments that could not be supported by sewer fees," Schankel wrote in a report released Monday following the bankruptcy announcement on Thursday.

"The county commissioners have been negotiating for many months with creditors, led by JPMorgan. Bankruptcy was threatened at several points in the negotiation, but in September, an agreement was reached whereby the creditors agreed to settle with the county at about 65 cents on the dollar, with about $1 billion in obligations being forgiven and about $2 billion being refinanced with a new bond issue."

Problems arose even after this settlement agreement was reached. Parts of the agreement, including the state's covenant to replenish any draws on the debt service reserve fund, needed state approval. The state legislature refused to provide this support, and the county filed for bankruptcy on Thursday.

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