Municipals mostly flat ahead of holiday; Foothill-Eastern Transportation runs default risk

By Sheri Kasprzak

New York, July 3 - Municipal yields were mostly flat on Wednesday amid very light trading during the short session, market insiders said.

"Not much is trading, and there's not a heck of a lot of movement," said a trader in the early afternoon.

Wednesday's early market close and the July 4 holiday on Thursday have kept the market in a holding pattern for the entire week.

Meanwhile, despite volatility in the market, retail buyers are returning to municipals, said a report released Wednesday by RBC Wealth Management.

"Over the last month, extremely volatile conditions in the municipal bond market have resulted in significant downward price movements," the report said.

"Essentially, concerns over a reduction (tapering) in Federal Reserve monthly QE3 purchases sparked a run on the bank - municipal bond mutual funds faced with larger investor redemption requests were forced sellers of their massive holdings. This redemption tsunami overwhelmed the market creating very illiquid market conditions, double-digit gaps higher in yield and many new issues being postponed."

Buyers have returned, taking advantage of these higher yields, and this has actually improved market conditions, said the report.

Volatility is here

Price changes, the report said, reflect market changes in interest rates and, in most cases, not a judgment on an issuer's underlying credit quality and ability to pay.

"There are a few truisms investors sometimes forget," the report said.

"Investing entails risks, and market valuation of bonds will fluctuate with changes in interest rates. Even government-guaranteed U.S. Treasuries are not spared the market's wrath. When interest rates rise, bond values fall. When interest rates fall, bond values increase - the teeter-totter concept. For the past five years, bond investors have benefitted from falling rates and investors became complacent. Well, goodbye complacency, hello volatility. The price changes have been swift and severe and are reflected in portfolio values."

FETCA could default

Looking to distressed issues, the Foothill-Eastern Transportation Corridor Agency of California could default on its bond payment obligations without a proposed $2.21 billion debt restructuring, said a report released Wednesday by California treasurer Bill Lockyer's office.

"The agency is not likely to meet its bond covenants going forward without significant revenue increases," said the report.

Failure to meet the agency's debt service obligations could include anything from not having the required amount of revenues over and above the amount needed to make bond payments to actually defaulting on payments.

According to Tom Dresslar, spokesman for the treasurer's office, much of the required additional revenue under the restructuring plan would come from extending by 13 years the time drivers are charged tolls. Currently set to expire at the end of 2039, the tolls would be extended from 2040 to 2053, he noted. The California Department of Transportation must approve the tolling extension.

Tobacco Settlement bonds price

In primary action Wednesday, the Tobacco Settlement Financing Corp. of Louisiana sold $659,745,000 of series 2013A tobacco settlement asset-backed refunding bonds, said a pricing sheet.

The bonds were sold through Citigroup Global Markets Inc. and Jefferies & Co.

The bonds are due 2016 to 2033 with a term bond due in 2035. The serial coupons range from 5% to 5.5% with 1.21% to 4.98% yields. The 2035 bonds have 5.25% coupon and priced at par.

Proceeds will be used to refund all outstanding series 2001B asset-backed tobacco settlement bonds.

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