Refinancing to dominate U.S. municipal bond sales next week

WASHINGTON Fri May 16, 2014 2:45pm EDT

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WASHINGTON May 16 (Reuters) - Refinancing will come roaring back into the U.S. municipal market next week, when $5.7 billion in total new issuance is expected.

Two-thirds of the $4.36 billion in negotiated sales are refinancing deals. About a fifth of the $1.34 billion in competitive sales will go toward refunding.

The two biggest deals on the negotiated calendar will refinance existing debt: Missouri's $894.45 million highway state road bonds underwritten by Bank of America Merrill Lynch and Connecticut's general obligation bonds underwritten by Morgan Stanley & Co.

Throughout 2014, issuance of municipal debt has run below last year's levels, mostly due to the end of a refinancing binge brought on by rising interest rates. As of Thursday evening, $5 billion of municipal bonds had priced this week, Thomson Reuters data shows.

Recent low yields and Treasury ratios, though, are creating refunding opportunities for issuers, said Municipal Market Data Analyst Randy Smolik.

On Monday, a 30-year top-rated municipal bond yielded 95.99 percent of a comparable Treasury, which is taxed, according to MMD, a Thomson Reuters company. That was the lowest ratio in a year, and well below the average of the last year of 107.5 percent.

At the same time, the yield for highly rated 30-years was 3.22 percent on MMD's benchmark scale on Thursday, nearly a full percentage point below the 4.20 percent notched on the first trading day of 2014. Top-shelf 10-year bonds had a yield of 2.16 percent, compared with 2.79 percent at the beginning of 2014.

"The municipal market traditionally sees reinvestment demand pick up in May, due to the upcoming June and July coupon and principal redemption period," wrote Wells Fargo Advisors Municipal Analyst Dorian Jamison in a note. "However, the redemption effect could be dampened this year by muni-to-Treasury ratios below 10-year averages - which indicate that municipal bonds are expensive relative to Treasuries - and new issue supply which is down 28 percent year-over-year."

Missouri's road refunding bonds are set to price on Tuesday, with a retail order period on Monday. The deal will refinance $586.29 million in road bonds rated AAA by Fitch Ratings, and $301.98 million in road bonds rated AA+ by Fitch.

Connecticut's bonds are rated AA by Fitch and Standard & Poor's Ratings Services, and Aa3 by Moody's Investors Service. The bonds will have serial maturities running from 2014 through 2025, according to bond sale documents. They will be used to refinance debt issued in 2004 with coupons ranging from 3.25 percent to 5 percent, and bonds sold in 2005 with coupons ranging from 4 percent to 5 percent. The 2004 series has a redemption date of June 4 and some of the bonds mature later this year.

Massachusetts will dominate the competitive calendar next week with $200 million of taxable general obligation bonds, open for bidding on Wednesday morning, that are being sold as part of the state's capital spending plan. (Reporting by Lisa Lambert; Editing by Dan Grebler)

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