Municipals advance along with Treasuries; University of California preps $2.6 billion offering

By Sheri Kasprzak

New York, Sept. 23 - Municipals were firmer across the board on Monday, with particular interest seen in munis in the eight-to-10-year range, said traders.

Comparatively, the 10-year Treasury note yield, which has demonstrated the most volatility recently, ended lower by 3 basis points at 2.707%. The 30-year yield was also lower by 3 bps to end at 3.732%. The five-year note yield shrank by 2.5 bps to 1.459%.

During the session, the City of New York held the first retail order period for its $425 million of series 2014D general obligation bonds. The offering is slated to price for institutions midweek in two tranches. The deal includes $300 million of series 2014D-1 tax-exempt bonds due 2014 to 2033 and $125 million of series 2014D-2 taxable bonds due 2014 to 2033.

The bonds will be sold through lead manager Siebert Brandford Shank & Co. LLC.

Proceeds will be used to finance capital expenditures within the city.

Tax swap a new opportunity

Redemptions in the municipals market have opened up new opportunities for investors, said James Klotz, president of FMS Bonds, Inc.

Although these redemptions have caused substantial market value declines, a tax swap can offer muni investors more value.

"Although some long-term individual municipal bonds have decreased in value, we normally would not recommend a sale," Klotz wrote Monday.

"The bonds are paying interest and have a stated maturity date with the promise to return principal. It's not unusual for market values to fluctuate, and it isn't a problem for investors focusing on the chief advantage of munis - generating tax-free income."

The tax swaps work when investors cash out their profitable assets and sell some of their munis at a loss. The proceeds from the sale can be used to acquire other bonds, enabling them to take the loss for tax purposes, offsetting capital gains dollar-for-dollar without losing their muni market position.

This tactic has not been utilized in recent years because most munis were valued above their costs over the past decade, Klotz noted.

"Keep in mind, even if you have no gains, you will want to avail yourself of this tool," Klotz's report said.

"The IRS allows you to offset up to $3,000 per year of your adjusted gross income and carry forward any remaining losses, dollar-for-dollar, into ensuing years."

California schools face risks

Looking to ratings agencies, Fitch Ratings released a report Monday outlining the risks California schools face despite their improved funding trends.

Credit quality for districts in the state is expected to stabilize over the short term as solid funding gains ease immediate budgetary and liquidity pressures, the report said.

Other factors, however, could overwhelm or neutralize any gains, said the report.

"Although the education funding environment has improved quite a bit from a year ago, it's unknown whether future funding growth will keep pace with cost increases," Scott Monroe, director with Fitch, said in the report.

"We are especially focused on CalSTRS [the California State Teachers' Retirement System] whose weak and deteriorating funded status poses what we view as the greatest long-term budgetary risk to districts."

Although state education funding has growth since hitting rock bottom in fiscal year 2012, one-time expenditures have absorbed much of the funding growth.

CalSTRS annual contributions have been funded below the required contribution for some time now, worsening the pension system's weak funded ratio, said the statement.

"Fitch views the new local control funding formula as mixed for credit quality, with positive to negative effects varying by individual school district," said the report.

"The formula changes the distribution but not the size of state funding, resulting in a zero-sum game with some school districts benefiting over time to the detriment of others. Future state guidance will determine the flexibility of significant new revenue streams aimed at targeted student populations."

U of California deal ahead

Looking to California offerings, the University of California is slated to hit the market during the week with a four-tranche deal totaling $2.6 billion.

The 2013 general revenue bonds (Aa1/VMIG 1//AA+) includes $700 million of series 2013AI bonds, $700 million of series 2013AJ taxable bonds, $600 million of series 2013AK bonds and $600 million of series 2013AL variable-rate demand bonds.

The bonds will be offered through Barclays, and proceeds will be used to refund and restructure about $2.4 billion of outstanding California State Public Works Board lease revenue bonds.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.