Mu­nis Stronger as An­a­lysts Weigh Fu­ture Im­pact of Tax Re­form

The Bond Buyer - - Market News -

Mu­nic­i­pal bonds strength­ened Thurs­day as mar­ket an­a­lysts ex­pressed con­cern a pro­posal in a tax re­form bill in­tro­duced in Washington would cur­tail is­suance by elim­i­nat­ing ad­vanced re­fund­ings and pri­vate ac­tiv­ity bonds.

In the big­gest deal of the week, Bank of Amer­ica Mer­rill Lynch priced and repriced the Vir­ginia Small Busi­ness Fi­nanc­ing Au­thor­ity’s $737 mil­lion of se­nior lien pri­vate ac­tiv­ity re­fund­ing bonds for the Trans­form 66 P-3 Project. The bonds were repriced to yield 3.71% with a 5% coupon in 2047, 3.79% with a 5% coupon in 2049, 3.90% with a 5% coupon in 2052 and 4.00% with a 5% coupon in 2056. The deal is rated Baa3 by Moody’s In­vestors Ser­vice and BBB by Fitch Rat­ings.

At repric­ing yields were bumped eight ba­sis points in the 2047 and 2049 ma­tu­ri­ties, seven ba­sis points in 2052 and five points in 2056.

“This deal was very at­trac­tive and with the way it was bumped, the de­mand was very strong,” said a New York trader. “It also helped that there are lots of peo­ple out their look­ing for yield and this was a yield­ier deal.”

Since 2007, the au­thor­ity has is­sued about $2.7 bil­lion of debt with the most is­suance be­fore this year oc­cur­ring in 2012 when it sold $905 mil­lion. It did not come to mar­ket in 2013, 2015 or 2016.

Muni pros said a pro­posed House Repub­li­can tax bill would shrink the mu­nic­i­pal mar­ket by halt­ing ad­vance re­fund­ings and pri­vate ac­tiv­ity bonds af­ter the end of this year.

“I put the like­li­hood of bill pas­sage at some­where be­low 50%, based pri­mar­ily on the con­tentious D.C. en­vi­ron­ment and com­pet­ing lob­by­ing ef­forts by var­i­ous in­ter­est groups,” said Alan Schankel, man­ag­ing direc­tor and mu­nic­i­pal strate­gist at Jan­ney. “That be­ing said, I sus­pect if bill is even­tu­ally passed, the pro­vi­sion to elim­i­nate ad­vance re­fund­ings, by mak­ing in­ter­est tax­able, will make the fi­nal cut.”

He said pas­sage of this re­stric­tion on ad­vance re­fund­ings will cer­tainly have a neg­a­tive im­pact on new mu­nic­i­pal is­sue vol­ume in fu­ture years, al­beit with a uptick in vol­ume through year-end 2017 as is­suers and bankers ad­vance re­fund be­fore the door closes, even if sav­ings are small.

Matt Fabian, part­ner at Mu­nic­i­pal Mar­ket An­a­lyt­ics, said that MMA has been pes­simistic that Repub­li­cans can pass a tax re­form bill be­fore year-end and the lat­est news com­ing out today in­creases the firm’s con­vic­tion in that.

“Ad­vance re­fund­ings are less im­por­tant now, then they were 10 years ago, but state and lo­cal is­suers still use them to lock in low in­ter­est rates,” he said. “The loss of ad­vance re­fund­ing ca­pa­bil­ity could lead is­suers to dial back in­vestors’ call pro­tec­tion to al­low ear­lier cur­rent re­fund­ings. This will push yields mod­estly higher in the pri­mary mar­ket and would hurt cross­over in­vestor de­mand per­haps the worst.” Tom Ko­z­lik, man­ag­ing direc­tor and mu­nic­i­pal strate­gist at PNC Cap­i­tal Mar­kets said that while it is dif­fi­cult to say how it plays out, com­pre­hen­sive tax re­form is dif­fi­cult to pass even un­der op­ti­mal cir­cum­stances. “It took law­mak­ers three-ish years to ham­mer out 1986 tax re­form. There­fore, it seems like time could be work­ing against the pro­posal.”

Top-shelf mu­nic­i­pal bonds were stronger to close out Thurs­day.

The yield on the 10-year bench­mark muni general obligation was two ba­sis points lower to 2.00% from 2.02% on Wed­nes­day, while the 30-year GO yield was also two ba­sis points lower to 2.80% from 2.82%, ac­cord­ing to a fi­nal read of Mu­nic­i­pal Mar­ket Data`s triple-A scale.

U.S. Trea­suries were stronger at the mar­ket close on Thurs­day. The yield on the two-year Trea­sury dipped to 1.61% from 1.62%, the 10-year Trea­sury yield fell to 2.35% from 2.37% and yield on the 30-year Trea­sury bond slipped to 2.83% from 2.86%.

On Thurs­day, the 10-year muni-to-Trea­sury ra­tio was cal­cu­lated at 85.2% com­pared with 83.2% on Wed­nes­day, while the 30-year muni-to-Trea­sury ra­tio stood at 98.9% ver­sus 98.6%, ac­cord­ing to MMD. ◽

Aaron Weitz­man

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