Retail seeks tax-exempt bonds as economic conditions thaw; California to price $4.5 billion

By Sheri Kasprzak

New York, Sept. 28 - Municipals closed out Monday with a firmer tone, even though yields didn't move by much, said a trader reached in the afternoon.

"We're mostly unchanged," the trader said.

"Not a lot going on. It's a typical Monday."

Amid the light trading action, the Louisiana Local Government Facilities Corp.'s recently priced series 2009B revenue bonds were seen moving. The 5% 2027 bonds were trading at 4.33%.

Elsewhere, the Wisconsin Health and Educational Facilities Authority's bonds sold last week for St. John's Communities were also seen in action. The 6.65% 2039s were trading near par throughout the session, a trader reported. The 7.55% 2032s were trading at 7.546%.

In other trades, the Massachusetts Health and Educational Facilities Authority's series 2009D revenue bonds for Southcoast Health Obligated Group were moving. The 4.75% 2029 bonds were seen Monday afternoon at 4.79%.

California plans $4.5 billion

In primary news Monday, the State of California announced plans to price $4.5 billion in general obligation bonds on Oct. 8, said Tom Dresslar, spokesman for the state treasurer's office. A retail order period is expected for Oct. 6 and Oct. 7.

The sale will include both tax-exempt and Build America Bonds, but the exact breakdown of those bonds may not be known until the pricing date.

It was also unknown Monday if the bonds will be sold on a negotiated or competitive basis.

Proceeds will fund capital expenditures.

Retail investors return

Meanwhile, investors may be returning to municipals as the U.S. financial crisis eases.

"Increases in investor risk aversion in the wake of the financial crisis encouraged a mass movement of funds out of riskier asset classes (including municipals) into the relative safety of Treasuries," wrote Guy LeBas, chief fixed income analyst for Janney Montgomery Scott LLC, in his weekly fixed-income report.

"As liquidity risks eased and the economic situation began to stabilize in mid-2009, investors reversed a large portion of that risk aversion attitude and returned to the more attractive yields available in municipals. Prior to the depths of the financial crisis, municipal arbitrage hedge funds and tender option bond programs were among the most active institutional buyers of municipal bonds; however, it was exactly these highly leveraged participants which were most impacted by the initial phase of the weakening municipal prices in September 2008, and we hold little expectation that arbitrage fund and TOB demand will return to the sector at the same level as in the 2005 to 2007 boom days."

Instead, LeBas noted, retail investors have been returning to the market in recent months, either directly or through municipal-focused mutual funds.

The product individual investors seem to be flocking to is tax-exempt municipals, LeBas said.

"Individual retail investors will continue to increase their municipal holdings and institutional buyers will continue to add [tax-exempts] to their portfolios," LeBas said.

"As municipal credit questions settle down, we expect money market funds, which have decreased their holdings of municipals over the first half of 2009, to start buying again. In 2010, we expect municipal supply to pick up. The financial markets are starting to operate close to normal levels versus where they were for the first two months of the year. We expect municipal insurance will continue to add value, even though the days of the triple-A [rated] insurer may be over. Municipal insurers are now and will continue to be categorized in tiers, with new firms expected to join the top tier."

Los Angeles USD bonds to price

For the coming week, investors will be able to sink their teeth into a $1.581 billion sale from the Los Angeles Unified School District on Thursday. A retail order period is set for Wednesday.

The deal includes $1.4 billion in series 2009G Build America Bonds and $181 million in series 2009KRY tax-exempt bonds.

Citigroup Global Markets Inc. is the sole bookrunner for the series 2009G federally taxable Build America Bonds and joint bookrunner for the series 2009KRY tax-exempt bonds, and Goldman, Sachs & Co. is the joint bookrunner for the series 2009KRY bonds.

Proceeds will be used to fund improvements to and the expansion of classrooms as well as improvements to the district's libraries, restrooms, laboratories, fire system, security system, lighting system and earthquake retrofitting.

Salt River offering ahead

Coming up on Tuesday, the Salt River Project Agricultural Improvement and Power District of Arizona is expected to price $325 million in series 2009B electric system revenue bonds, said a notice of sale.

The bonds (Aa1/AA/) will be sold on a competitive basis with Public Financial Management Inc. as the financial adviser.

The bonds are due 2013 to 2020.

Proceeds will be used to repay all of the district's outstanding commercial paper.

The district's headquarters are in Tempe, Ariz.

Pittsburgh schools to price

Also coming up during the week, the School District of Pittsburgh plans to price $103.67 million in series 2009 G.O. bonds Wednesday, said a preliminary official statement.

The bonds (Aa2/A/) will be sold on a negotiated basis with Janney Montgomery Scott as the senior manager for the series 2009A and 2009C bonds and Boenning & Scattergood Inc. as the senior manager for the series 2009B bonds.

The sale includes $28.83 million in series 2009A G.O. bonds, $42.14 million in series 2009B taxable Build America Bonds and $32.7 million in series 2009C refunding G.O. bonds.

The 2009A bonds are due 2010 to 2019, and the 2009B bonds are due 2020 to 2029. The 2009C bonds are due 2010 to 2020.

Proceeds will be used to fund various capital projects as well as refund the district's existing series 2001 bonds.

North Carolina G.O.s coming up

Looking out on the horizon, the State of North Carolina plans to bring to market $383.275 million in series 2009A G.O. refunding bonds on Oct. 6, said a preliminary official statement.

The bonds (Aaa/AAA/AAA) will be sold on a competitive basis with Davenport & Co. LLC as the financial adviser.

The bonds are due 2010 to 2020.

Proceeds from the sale will be used to refund the state's series 1999 school building bonds, 2001A public improvement bonds, 2003 G.O. highway bonds, 2004 G.O. highway bonds, 2006A G.O. higher education bonds and 2007A public improvement bonds.

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