The week is starting out on a quiet note as the market looks forward to tomorrow’s inflation, consumption and housing data. The CPI data in particular is expected to remain constructive. With Janet Yellen’s confirmation vote scheduled for later in the week, Ben Bernanke is expected to re-affirm the Fed’s dovish stance in a public speech this evening.
In the absence of market-moving economic news, the 10-year Treasury yield appears well-anchored around the 2.70% level.
The tax-exempt market was also able to firm up by about 2 basis points on the long end yesterday, although the inter-market ratios actually cheapened to 97% in 10 years and 109% in the 30-year range.
New Issue Market
This week should see a significant increase in the new issue calendar to just under $8 billion. However, just two deals, $1.7 billion from Jefferson County and $1.5 billion from the Port Authority of New York and New Jersey, account for the bulk of the supply. Other notable negotiated deals will include $380 million from the Los Angeles Department of Water & Sewer (LADWP) and a $326 million second lien revenue refunding for Chicago’s Midway Airport.
JeffCo has now joined Puerto Rico in the “controversial investment-grade rating” category.
The headline issue will be, of course, Jefferson County’s $1.8 billion refunding. Although we’ve already discussed the credit at length in last Friday’s column, having now seen the final pricing, we must shade our opinion slightly and admit that the Assured Guaranty-insured tranches do look quite attractive, particularly for buyers who can use the 40-year maturities, such as life insurance companies. As for the uninsured subordinate lien bonds, Citigroup is certainly not pricing them as anything even close to investment-grade.
Not surprisingly, the early read on the JeffCo deal is a potential price bump of 3-13 basis points on the senior insured bonds, depending on maturity, and a cheapening of the longest uninsured maturities by 15-25 basis points.
JeffCo has now joined Puerto Rico in the “controversial investment-grade rating” category. Based on media reports over the last few days, virtually no one besides S&P views this credit as investment grade. Any financial institution whose potential participation hinges on the IG rating should really think twice.
As you may recall, we expressed concern that the JeffCo issue may need to be “restructured” again around the 2024 time frame. As it turned out, the Birmingham News has made an entertaining video to illustrate precisely that scenario. You can check it out here.
Returning to the new issue calendar, Puerto Rico’s current travails appear to have worked out to the benefit of other U.S. territories who can also issue triple tax-exempt debt. As a case in point, the Guam Waterworks Authority is also in the market with a $174 million water & wastewater system revenue issue. Here again, S&P is the odd man out with an “A-” rating while Moody’s and Fitch are closing ranks at “Ba1” and “BB,” respectively.
In this case, the market seems to be siding with S&P: the preliminary price talks for the Guam deal are more reflective of a low BBB credit. To wit, the 2028 are priced to yield 5.25% or +194 versus AAA, the 2033 maturity at 5.50% or +172 and the 2043 maturity at 5.75% or +164.
Over the last five years, Guam’s credit outlook has remained stable, if not slightly improving, while Puerto Rico’s has been on a clear downtrend. As a result, Guam bonds are now trading approximately 300 basis points lower than Puerto Rico paper. Ironically, the opposite used to be true: as recently as 2009, according to Bloomberg, Guam paper used to yield about 100 basis points higher than PR.
In all fairness, the technical underpinnings for the two islands’ debt markets are completely different. With a population of only 160,000 (versus PR’s 3.7 million residents), it’s unlikely Guam will ever issue enough debt to create much of a ripple in the $3.7 trillion municipal market. Hopefully, we’ll never have to discuss the “systemic effect” of Guam debt.
Flashback to High Yield Muni History
In the last issue, I noted how much the Ark Encounter deal reminded me of some notorious non-rated defaults of the 80s and 90s. Speaking of flashback to the high yield market’s murky past, Bank of America recently priced a $200 million non-rated issue to finance a container-board recycling facility in the City of Valparaiso, Indiana. To any high yield veteran, the mere mention of “paper and container-board recycling” brings back bad memories of the paper de-inking fiasco from the late 90s, which still ranks as one of the worst credit debacles ever in the muni market.
Fortunately, this time around, we’re no longer dealing with a stand-alone project financing: the Valparaiso issue does carry a corporate guarantee from Pratt Industries, the parent company. Industry old-timers will recognize Pratt Industries as the former Visy Paper, a privately-held paper and packaging company which operates 71 plants spread across the U.S. and Mexico. The Visy-guaranteed projects, incidentally, were among the few that actually worked out back in the days.
The Valparaiso deal was priced to yield 6.00% in 2024 (with an average life of around 7 years), 6 ¾% in 2034 (16-year average life) and 7.00% in 2044 (26-year average life). Even though the bonds are subject to alternative minimum taxation, we still view the pricing as relatively attractive.
Among factors that may have contributed to a relatively cheaper pricing: the deal was offered as a private placement available only to Qualified Institutional Buyers (QIBs). Disclosure by a privately-owned firm such as Pratt could also be limited to current holders, which may detract from secondary market liquidity (owners of an older issue from Gaston County, North Carolina guaranteed by National Gypsum will sympathize with this point). We also note that the debt service reserve fund was funded at only half a year’s debt service, although in all fairness, most corporate-backed deals don’t even come with any reserve fund at all.
All in all, there are still some decent relative values left in the high yield sector for the discerning investor.
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