By Tedra DeSue
(March 2012)Investors who moaned about the lack of supply in the municipal bond market have not had a lot to complain about recently. Beginning last month, issuers have been flooding the market with billions of dollars worth of new money and refunding deals, surpassing previous issuance numbers.
The debt that has been sold has run the gamut from revenue bonds to general obligation (GO) bonds, so it has been diverse enough to whet the appetites of a wide range of investors. This is particularly good news for retail, or individual investors, who are often left to slim pickings after institutional buyers purchase the deals.
Most of the bonds sold so far have been from California, including a $2 billion deal that the state priced at the end of February. This deal, which is made up of GO refunding bonds, has been especially attractive to retail, or individual investors. Individual investors enjoyed a two-day order period in which they were able to buy into the deal without having to compete against the larger institutional buyers. J.P. Morgan Securities was the senior underwriter.
Upcoming deals that will include retail order periods include a $102.4 million refunding from the Pennsylvania Economic Development Finance Authority; a $31.3 million refunding from the Abilene Independent School District in Texas; and a $106.6 million refunding deal from the Garland Independent School District, also in Texas.
The Pennsylvania deal involves taking out revenue bonds sold for Amtrak. The refunding was priced by Goldman Sachs and J.P. Morgan and is set to close this month.
The deal is structured with four term bonds. The amounts and maturity dates were not available at the time of writing. However, for retail investors looking to invest for the long-term, term bonds are attractive because they usually don’t mature for 20 to 30 years after the bonds are sold.
Abilene’s deal is structured with about $675,000 of premium capital appreciation bonds and about $30 million of current interest bonds. The premium cap bonds have maturities from 2013 through 2015. The current interest bonds have maturities from 2016 through 2023. Both the capital appreciation bonds and current interest bonds are serial bonds. Southwest Securities was the senior underwriter, or bookrunner.
The Garland deal is structured similarly to the Abilene deal, in that it has premium cap and current interest bonds. Garland’s premium cap bonds mature from 2013 through 2016. The current interest bonds mature from 2017 through 2028. Southwest Securities is also the bookrunner for this deal.
Abilene and Garland’s deals can be a boon for individual investors because of the premium cap bonds, which are usually sold at a deep discount. Furthermore, investors receive a guaranteed reinvestment rate because the interest generated from their investment is automatically converted to principal.
Purchasers of the premium cap bonds can expect them to generate yields that will be close to, or lower than, their current coupon yields in low interest rate environments. This is especially the case when interest rates are not expected to be raised, which is the case now that the Federal Reserve has said it will not increase rates at least through 2014. Investors who buy and hold these premium bonds through 2014 have the peace of mind of knowing that they have locked-in reinvestment rate through that time.
Investors in both of the deals can also take solace in the guarantee provided by a state program that will cover the debt service (principal and interest) on the bonds if the school districts can not pay it.
For both Abilene and Garland, the premium cap bonds accrete from the date they are delivered to the underwriter. The interest is compounded semiannually beginning on Aug. 15 and then on Feb. 15 and Aug. 15 until they mature.
The interest rates and initial yields were not available at the time of writing for the Abilene and Garland deals.
Issuers sold almost $24 billion of debt in February, compared to the roughly $17 billion of debt they sold in January, according to Thomson Reuters. One of the reasons issuance was up stemmed from the amount of refundings, like those mentioned above, that were sold. They increased considerably due to issuers trying to take advantage of record low interest rates. In fact, there have been more refundings than there have been new money deals.