Municipals ended unchanged to slightly higher yesterday as players waited for today's $700 million New Jersey issue that will bail out a bad driver insurance pool.
"This is the benchmark deal of the week," said Andrew Rowley, a managing director and director of Morgan Stanley & Co.'s syndicate desk--"Maybe it will even be deal of the month."
On Monday, senior manager Morgan Stanley & Co. had a conference call with 70 institutional investors about the New Jersey Economic Development Authority's deal, Rowley said. He said he thought the response was "tremendous."
Underwriters received their preliminary allocations on Monday. The structure of the issue will be essentially the same as the one announced last week.
Some discount and premium bonds will probably be added "to fit some people's needs," Rowley said.
Clark D. Wagner, chief investment officer at First Investors Management Co. said he's interested in the deal for his $60 million New Jersey fund as well as his $1.4 billion national fund.
"Based on the preliminary pricing, yes, I am certainly interested in it," Wagner said. Because of its size, the issue is priced "fairly cheaply" for New Jersey, he said.
"It will [offer] liquidity and the chance to buy a block of bonds in a state where you're not usually able to do so," Wagner said.
The MBIA-insured offering will consist of serial bonds starting with roughly $34 million in 1997 and increasing by roughly $2 million to $3 million a year out to the 2009 maturity, which will contain about $64 million, Rowley said earlier. A 2011 term will contain about $78 million, he said.
The management team sent out a consensus scale that begins in 1997 at 4.75% and shows a yield of 5.70% in 2004. The 2009 maturity would yield 6.15% and a 2011 maturity would return 6.25%., Rowley said yesterday.
Wagner said he would be most interested in the 2009 and 2011 maturities because they are expected to carry "some sort of discount." He added, however, that yields throughout appeared attractive.
An analyst yesterday said that even though the market has "New Jersey paper coming out [its] ears," demand is deep enough that the offering should have no problem.
"I don't think that they are going to have any trouble selling the paper," he said.
The analyst added, however, that the revenue stream backing the bonds is "unusual." While the bonds are MBIA-insured, and even if uninsured would carry a minimal default risk, "this is the sort of revenue bond that you sort of roll your eyes [at]," he said.
The revenue stems from surcharges collected from drivers incurring serious offenses such as drunk driving, the analyst said.
While no reason exists to believe that those surcharges are likely to drop off, the offering constitutes a bet that people a "are going to continue to misbehave," the analyst said. He characterized it as "mixup of state the policing powers" with "a revenue producing activity."
In addition, the analyst questioned whether individuals who break the law can be counted on to pay the surcharges.
"It's not an easily understood bond," he said.
Elizabeth L. Pugh, New Jersey's director of Public Finance, said the state has been collecting revenue from the surcharges for 10 years, and it has proven "a reliable source of income."
"This is a new credit for the state of New Jersey and any of its authorities, but it's not a new source of revenue," Pugh said.
In addition, the legislature last month passed a bill that elevated the surcharges to debt status. That enhances the state's collection power by allowing it to garnish wages or use other means to collect the money, she said.
In light secondary activity yesterday, dollar bonds ended unchanged to 1/8 point higher, a municipal analyst said. Yields on high-grade issues ended unchanged overall, but slightly better on the longer end. Bid list totaled an estimated $250 million to $300 million.
In debt futures, the September municipal contract closed up more than 1/4 point to 89 2/32. Yesterday's September MOB spread was negative 376, compared to negative 369 on Monday.
In the Treasury market, the 30-year bond ended nearly 1/2 point higher to yield 7.68%. The gain stemmed from favorable inflation news in the June producer price index report and a more stable dollar.
A municipal trader noted that munis were unable to keep pace with Treasuries yesterday.
"We've got too much inventory lying on people's shelves, and I think a lot of people are just tired," he said.
The trader said that with most signs pointing to higher rates, part of the lift in Treasuries yesterday could have stemmed from short covering as players tried to correct an oversold technical situation.
"We didn't follow Treasuries today," the analyst added. "We're in the doldrums and something's got to be done to shake that up."
The Illinois Development Finance Authority sold $72 million of tax-exempt 6-month commercial paper through Goldman, Sachs.
The issue marked the first of two sales of paper by the state agency on behalf of nursing homes that are owed Medicaid money by Illinois. On Friday, the authority plans to sell about $28 million more of the paper.
The commercial paper, backed by pooled state receivables held by nursing homes, was sold yesterday with an average interest rate of 3.435%, according to Stuart Fuchs, a vice president and co-manager at Goldman Sachs.
The deal, which was secured by letters of credit from Canadian Imperial Bank of Commerce and Industrial Bank of Japan, earned the highest commercial paper ratings of F-1-plus at Fitch and P-1 at Moody's.
Yesterday's sale covered more than 125 nursing homes that provided Medicaid services to the state in February, March and April, but have not received any money from the state, which ran out of Medicaid appropriations earlier this year.
In exchange for discounting their receivables at an annualized rate of 7.1% to cover cost of issuance, the nursing homes will receive their money about 90 days faster than if they waited for Illinois to work its way through a backlog of Medicaid bills after this week's expected approval of a fiscal 1995 state budget.
Karen Pierog contributed to this column
