California received favorable pricing on $407 million of general obligation bonds that the state sold yesterday, buy-side market participants said.
"I think it was [an] aggressive pricing," said Reid Smith, an assistant vice president at the Vanguard Group of Investment Companies.
Joel Silva, a portfolio trader at the Benham Group, agreed. "I think it was a gooddeal for the state of California," he said. BA Securities outbid Goldman, Sachs & Co. and Prudential Securities Inc. to win the bonds with a true interest cost of 6.79%. "The sale is going very well," Scott Gorzeman, an assistant vice president at BA Securities, said yesterday. "On the pre-sale front, we had a large amount of institutional buying, [and] we're having some good retail follow-through."
Though orders were still being processed, Gorzeman estimated that a balance of $80 million to $90 million remained near day's end.
Serial bonds were reoffered to investors at yields ranging from 4.60% in 1995 to 7% in 2014. The deal also contained three term bonds.
A 2017 term, containing $27 million, was reoffered at 7.05%; a 2020 term, containing $27 million, was reoffered at 7.10%; and a 2024 term, containing $32.5 million, was reoffered at 7.15%.
Financial Guaranty Insurance Co. insured the term bonds as well as serials in 2003 and 2004 and from 2009 to 20!4. Moody's Investors Service assigned an underlying rating of A1, while Standard & Poor's Corp. and
Fitch Investors Service assigned underlying ratings of A.
Gorzeman said the 7% "handle" on each of the term bonds made them "very attractive" to both institutional and retail investors. Institutions participating in the offering were mainly insurance companies, he said.
"The bond funds did sit on the sidelines for this," he said.
California assistant state treasurer Hal Geiogue said the state was "extremely" pleased with the sale, adding that the BA Securities bid was "better than we expected."
Goldman had the cover bid with a 6.80% TIC, while Prudential placed third with a 6.81% TIC, he said.
Smith, who manages Vanguard's $900 million California Insured LongTerm Fund, said pricing, not dissatisfaction with the credit, kept him from participating in the offering.
"We're very positive on the credit," Smith said. "We think the state of California has reached a bottom."
The portfolio manager noted that the state was able to get by a Nov. 15 target date in healthy enough financial shape to avoid triggering a mechanism that could have forced automatic spending cuts in the general fund.
Vanguard had stayed away from California paper "for a number of years" before participating in the state's last GO sale in August. Smith said, however, that while the California economy appears to be improving, "it's going to be a long and slow process."
The portfolio manager also noted that the spread between insured and uninsured paper appeared to be widening since the last time California GOs came to market. While in California's last GO deal, the spread between insured and uninsured bonds was seven basis points, yesterday's deal had a 10basis-point spread, he said. The spread widening could be an indication that bond insurers' exposure to California is getting pretty full, he added.
Benham's Silva said he passed on the deal mainly because of the way it was structured. Silva was looking for premium bonds in the shorter maturities and discounts in the long end. "There was nothing that was really attractive to me in the ranges that I was looking for, so I let it go," he said. While yesterday's deal had some slight discounts in the long end, they were "closer to par than anything else," Silva said, adding, "most of the serials were discounts with a couple of premiums in the short end."
In the negotiated market, a Goldman, Sachs & Co. group priced and repriced $108.6 million of ChicagoO'Hare International Airport special facility revenue refunding bonds, Series 1994, for American Airlines Inc. Tentative pricing had shown a yield of 8.25% in 2024, but was later lowered to 8.20%.
In light secondary activity yesterday, dollar bonds ended unchanged, after having been down 1/8 point earlier. Yields on high-grade issues ended mostly unchanged, though yields rose by three basis points in the intermediate range.
In the government market, the 30year bond closed up 3/4 point to yield 8.04%. In debt futures, the December municipal contract closed up more than 1/2 point to 81 27/32. Yesterday's December MOB spread was negative 490, compared with negative 496 on Monday.
The 30-day visible supply of municipal bonds yesterday totaled $3.29 billion, up $424.5 million from Monday. That comprised $1.875 billion of competitive bonds, up $208.9 million from Monday, and $1.419 billion of negotiated bonds, up $215.6 million from Monday.
Standard & Poor's Corp.'s Blue List of municipal bonds was down $15.8 million yesterday, to $1.902 billion.
