Munis close mostly firmer as wave of deals hits the market; Washington sells $656.96 million

By Sheri Kasprzak

New York, July 20 - Municipal yields were firmer for the most part on Wednesday as a big flood of new deals priced, said market insiders.

Five-year yields were down 3 basis points, and seven-year yields were down about 1 bp, said one trader. Out around 20 years, however, yields were about 2 bps off.

"We're firm just about everywhere except out around 20 [years]," said the trader.

"New deals seem to be being absorbed pretty well. The demand is there."

Meanwhile, the market began chattering Wednesday over news that Moody's Investors Service could downgrade five Aaa-rated states because of their reliance upon federal funds.

Maryland, Tennessee, New Mexico, Virginia and South Carolina could get downgraded, the agency reported Tuesday.

"The states identified by Moody's would likely be downgraded if the U.S. rating dropped and could face a lower rating even if the debt ceiling issue is favorably resolved or if the U.S. rating remains unchanged," Alan Schankel, managing director for Janney Montgomery Scott LLC, said in a report released Wednesday.

"Thus far, there has been no observable impact on trading levels for these states, but that could change over time, particularly if any or all are downgraded."

Supply for 2011 seen light

Despite the recent influx of new offerings, new-issue volume has been lackluster so far this year, said the municipal bond professionals at DWS Investments in a report released Wednesday.

"Most analysts believe the amount of supply will pick up in the second half of the year," wrote the professionals - Philip Condon, head of municipal bond portfolio management; Carol L. Flynn, head of municipal bond research; Ashton P. Goodfield, head of municipal trading; and Anthony Parish, fixed-income specialist.

"As of this writing, expectations are around $240 [billion] to $250 billion for all of 2011. That would put issuance roughly on par with 1999 levels. No doubt about it, this is shaping up to be a very light year."

About $115 billion of new issuance was priced in the first six months of the year, which equates to less than half of the new issue volume for the same period of 2010, the DWS desk wrote.

Part of the reason fewer deals are being conducted this year, the desk noted, is that many issuers took advantage of the Build America Bond program. Higher supply last year means lighter supply for 2011, they wrote. Additionally, states faced with budget gaps have been forced to scrap or postpone projects that would have been funded through new bond issues.

Washington brings G.O.s

Leading Wednesday's primary action, the State of Washington priced $656.96 million of series 2012 general obligation bonds, said a pricing sheet.

The offering included $390.845 million of series 2012A various-purpose G.O. bonds, $238.375 million of series 2012B-1 motor vehicle fuel tax G.O. bonds and $27.74 million of series 2012T taxable G.O. bonds.

The bonds (Aa1/AA+/AA+) were sold competitively. Citigroup Global Markets Inc. won the 2012A tax-exempt G.O. bonds with a true interest cost of 4.052596%. Bank of America Merrill Lynch took the series 2012B-1 motor vehicle fuel tax G.O. bonds with a 4.261237% TIC. J.P. Morgan Securities LLC won the taxable bonds at a 0.68175% TIC.

The 2012A bonds are due 2014 to 2036 with 3% to 5% coupons. The 2012B-1 bonds are due 2012, 2014 and 2020 to 2041 with 2% to 5% coupons. The 2012T bonds are due 2012 to 2014 with 0.3% to 0.85% coupons.

The state, according to treasurer James McIntire, received eight bids for the various-purpose G.O. bonds, nine bids for the motor vehicle fuel tax bonds and 15 bids for the taxable G.O. bonds.

"Investors are clearly attracted to Washington state bonds," McIntire said in a statement.

Proceeds will be used to pay or reimburse the state for various capital projects, state buildings and higher education institutions and Columbia River Basin water supply development, farmland preservation, riparian protection and outdoor recreation.

Washington's other bond deal

The state also came to market Wednesday with $89.35 million of series 2012B-2 motor vehicle fuel tax G.O. bonds, said a pricing sheet.

The bonds (Aa1/AA+/AA+) were sold on a negotiated basis with JPMorgan as the lead manager.

The bonds are due 2013 to 2023 with term bonds due in 2031 and 2036. The serial coupons range from 2% to 5%. The 2031 bonds have a 4% coupon priced at 98.913, and the 2036 bonds have a 4.375% coupon priced at 98.43.

Proceeds will be used to fund state and local highway improvements.

University of California sells

Also during the session, the Board of Regents of the University of California brought to market $550 million of series 2011 taxable general revenue bonds and taxable notes, said a pricing sheet.

The offering included $263.485 million of series 2011AA-1 taxable fixed-rate notes (MIG 1) and $286.515 million of series 2011AA-2 general revenue bonds (Aa1).

The 2011AA-1 notes are due July 1, 2012 and bear interest at 0.48%. They priced at par.

The 2011AA-2 bonds are due July 1, 2013 and bear interest at 0.887%. They also priced at par.

Goldman Sachs & Co. was the lead manager.

Proceeds will be used to pay a portion of the university's modified annual required contribution to its retirement plan for the fiscal year and to fund working capital costs, including costs related to the deferral of payments from the State of California general fund.

Ohio prices

Elsewhere, the State of Ohio sold $488.775 million of series 2011 G.O. refunding bonds, said a term sheet.

The deal included $211.53 million of series 2011A common schools G.O. refunding bonds, $127.765 million of series 2011A higher education G.O. refunding bonds, $114.285 million of series 2011B infrastructure improvement G.O. refunding bonds and $35.195 million of series 2011P natural resources G.O. refunding bonds.

The 2011A common schools bonds are due 2014 to 2024 with 4% to 5% coupons. The 2011A higher education bonds are due 2014 to 2024 with 4% to 5% coupons. The 2011B infrastructure bonds are due 2014 to 2024 with 4% to 5% coupons, and the 2011P natural resources bonds are due 2014 to 2024 with 2% to 4% coupons.

The senior managers for the bonds (Aa1) were Morgan Stanley & Co. Inc. and Fifth Third Securities Inc.

Proceeds will be used to refund existing debt used to finance common schools, higher education, infrastructure and natural resources projects.

Atlanta flies sale

Heading down South, the City of Atlanta sold $440.39 million of series 2011 airport general revenue refunding bonds in two tranches Wednesday, said a pricing sheet.

The offering included $224.195 million of series 2011A non-AMT bonds and $216.195 million of series 2011B AMT bonds.

The bonds (A1/A+/A+) were sold on a negotiated basis with Siebert Brandford Shank & Co. LLC and Goldman Sachs as the senior managers.

The 2011A bonds are due 2013 to 2021 with 3% to 5% coupons. The 2011B bonds are due 2012 to 2030 with 3% to 5% coupons.

Proceeds will be used to refund the city's series 2000A-C airport general revenue bonds.

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