Week's new issues to total $9 billion; New York City Municipal Water Finance plans $500 million

By Sheri Kasprzak

New York, March 5 - Municipals closed out a fairly quiet Monday session slightly weaker, said market insiders. Turmoil in Greece continued to take its toll on Treasuries, and municipals followed along, said one trader.

"Greece's troubles are definitely having an impact on us, even if it's not a direct impact," said the trader.

"Treasuries have felt the pressure, and munis are weaker as well."

Meanwhile, nearly $9 billion of new issues are expected to come to market, making this the busiest week so far this year.

The biggest deal of the week comes from the Commonwealth of Puerto Rico, which plans to price $1.9 billion.

The New York City Municipal Water Finance Authority is gearing up to sell $500 million of water and sewer system second general resolution revenue bonds (Aa2/AA+/AA+) through M.R. Beal & Co. It's one of two large sales coming from the Empire State, said Alan Schankel, managing director with Janney Montgomery Scott LLC. The Metropolitan Transportation Authority is scheduled to come to market on Wednesday with $400 million of transportation revenue bonds competitively in four tranches.

The latter deal includes $50 million of series 2012A-1 floating-rate tender notes, $50 million of series 2012A-2 floating-rate tender notes, $50 million of series 2012A-3 floating-rate tender notes and $250 million of series 2012B fixed-rate bonds.

"The floaters will be issued in three series with tender dates one, two and three years out," said Schankel.

"Interest rates will reset weekly based on a spread to the Sifma index. Unlike more traditional variable-rate debt, the MTA floaters will have no liquidity position. If they can't be remarketed on the tender date, the default rate becomes 11%."

The authority plans to use the proceeds to finance commuter and transit projects.

The New York City water offering will come to market on Tuesday, and proceeds from that sale will be used to make a deposit into the authority's construction fund and repay existing commercial paper notes.

Puerto Rico deal ahead

The largest deal of the week, however, comes from Puerto Rico, which will offer $1.9 billion of general obligation public improvement refunding bonds in two tranches.

Barclays Capital Inc. and J.P. Morgan Securities LLC are the senior managers for the 2012A bonds, and UBS FS Puerto Rico is the senior manager for the 2012B bonds.

The commonwealth intends to use the proceeds to repay Government Development Bank lines of credit and refund existing debt.

FMS 'baffled' by advice

A recent article in Barron's has FMS Bonds Inc. president James Klotz puzzled, according to a report Klotz released Monday. The article features a portion of a Morgan Stanley Smith Barney report.

"We are absolutely baffled by the commentary and advice offered," Klotz said.

According to Klotz, it suggested that investors should start selling their bonds under the argument that the muni market's rally that began in mid-October has run its course.

"First, the report's emphasis on the possible end to price appreciation in the municipal bond market struck us as odd - considering this is not the reason muni investors buy bonds in the first place," Klotz wrote.

"And the report's prescription for the alleged challenges ahead simply isn't logical."

Klotz noted that a strategy like this for the municipals market, a not very liquid investment, could not be employed without making a serious impact on the investor's portfolio.

"As the title of the Barron's column implies, municipal bonds are income investments," Klotz continued.

"They are purchased for the income, not for capital gains. Price appreciation is not a significant factor for sophisticated muni buyers because they don't sell their bonds; they know unequivocally they cannot replace the income due to the spread between the bid and offered side of the market. Re-investable dollars are also reduced after capital gains taxes are considered."

Also to consider, he said, is that retail investors do not operate mutual funds.

"The thought of selling long-term BBB-rated bonds yielding approximately 5% to 5.5% and replacing them with short-term A and AA bonds is laughable," he said.

The average AA-rated six- to 14-year bond yield is about 2.49%, Klotz said. The average yield on A-rated bonds for the same maturity range is about 2.6%.

"Why would any bond investor choose to sacrifice more than half his tax-free income?" he asked.

"Why would any broker tell a muni investor to dump the bonds he just sold him? Why wouldn't the investor wonder why he wasn't advised to buy the shorter securities in the first place, when the yield on those bonds was significantly higher? If the investor sells his bonds and doesn't reinvest the proceeds, how will he replace the income? Further, these exchanges would also likely require a reduction of principal."

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