New York City continues to pay a stiff penalty on its bond sales, but the sky-high yields are some of the most attractive on the Street, and investors are stumbling over themselves to buy them.
The city sold $560 million of uninsured tax-exempt bonds with a maximum yield of 8.60% but later lowered the yield to 8.55% after the issue was oversubscribed.
The yield was one of the highest offered on city bonds in the primary market since the city emerged from its mid-1970s fiscal crisis in the early 1980s.
The maximum yield topped the 8.50% offered on last December's offering, when the city's dire budget problems began driving up yields.
Traders noted that success came as no surprise, despite both the state and city's fiscal troubles. The yields, they said, are among the most attractive in the tax-exempt arena and even rival yields in sister markets.
"There aren't any surprises to be had here," said one New York trader. "Traders' cash flows are good and they need yields. You can get a New York City tax-exempt bond at 8.60%. There isn't anything even close to that out there."
Another trader remarked, "Name another bond with these ratings that's within 60 basis points. That says something about market accessibility."
The Chicago component of The Bond Buyer's 20 bond index for long-term tax-exempt outstanding general obligation bonds was yielding 7.16% on May 30. Chicago is rated A-minus by Standard & Poor's and A by Moody's. The Baltimore component of the index was yielding 6.99%. Baltimore is rated A by Standard & Poor's and A1 by Moody's. The New York City component, which is rated A-minus by Standard & Poor's and Baa1 by Moody's, was 8.53%.
"They're a lot cheaper than Treasuries, and that means you get a lot of hard lookers," one New York trader said. "It's a positive carry, and there is a good spread. The city's problems have really been played out in the press, and the facts are out there. That's created a pretty orderly process and has been helpful for this deal."
The 30-year Treasury bond was yielding 8.38% yesterday at the close of trading in New York City.
Institutional investors remain the big buyers of the city's offerings, market sources note, although retail interest is present.
James Gammon, senior portfolio manager for Loews/CNA Holdings, said he had sold all of his city bond holdings in recent weeks because of concerns about the city's ability to pay off outstanding short-term notes and the state budget imbroglio.
But the passage this week of a state budget eased his concerns, he said, and he placed an order for over $150 million of city bonds in various maturities, although he expected not to receive his full order because of market demand.
Goldman Sachs as senior manager repriced and restructured $675 million New York City general obligation bonds, to lower yields five to 10 basis points for the tax-exempt portion, five and 12 basis points for the 1993 and 1996 maturities, respectively, of the taxable bonds, and about five basis points for the CitySavers.
The final terms include $560 million tax-exempt bonds priced to yield from 7.20% in 1992 to 8.55% in 2020.
The $115 million taxable portion is priced to yield from 9% in 1993 to 11.50% in 2014.
The $26 million CitySaver portion is priced to yield from 7% in 1991 to 8.45% in 2011.
The $26 million principal strip portion is priced to yield 8.45% in 2011.
"We increased the size by $75 million, which isn't a whole lot, but when you have this much institutional business, you have to be careful about playing around with the size too much," said David C. Clapp, a general partner in charge of Goldman Sachs's municipal securities division. "It's a question of good faith to the buyers."
Mr. Clapp said that when Goldman bumped the deal, several institutional buyers backed away. He added that retail interest was prevalent with institutions on the shorter end of the loan.
Mark Page, deputy director of the city's Office of Management and Budget, said, "I think it went reasonably well. There seemed to be good institutional and retail demand."
"There were some institutions in the deal that had not been" in on a city deal for some time, he noted. The true interest cost on yesterday's tax-exempt portion was 8.54%, he said.
A $1.3 billion tax-exempt and taxable city deal sold in December had a true interest cost of 9.052%. A $1 billion tax-exempt and taxable offering sold in February had a TIC of 8.66%.
