Despite a troubling fiscal backdrop, New York City's $1 billion competitive note offering tomorrow is expected to benefit from a confluence of politics and market stability, as well as the structure and credit of the notes themselves.
A number of municipal market participants said they expect aggressive bidding on the offering of tax anticipation notes -- the city's first sale of debt since the beginning of fiscal 1992 on July 1. The Tans are considered the strongest credit of the city's two short-term borrowing vehicles because it is secured with revenues garnered from property tax collections.
The city received good news from Moody's Investors Service yesterday when the agency said it rated the Tans MIG-1, its highest short term tax-exempt rating. Standard & Poor's Corp. is expected to announce its decision this morning. The last set of outstanding Tans, before being paid off on June 28, were rated MIG-1 by Moody's and SP1-plus by Standard & Poor's.
The city got an additional boost yesterday when Fitch Investors Service announced it rated the city's Tans F1-plus, the agency's highest tax-exempt short-term rating. The agency said this was the first time it had been asked to rate city Tans.
And money market funds, reacting to a recent ruling by the Securities and Exchange Commission that affects their investments, are expected to eye the offering with strong interest.
In market pricing chatter yesterday, the notes were expected to be priced to yield between 5% and 5.25%. They are also expected to have "built-in" coupon protection, with a coupon as high as 5.75% by some estimates, to attract investors and create price protection in the secondary market. Coupon protection is often used for issues with credit concerns or in anticipation of volatile markets. In it, the coupon will give more basis points to act as a cushion between the yield and the coupon. Investors will pay a premium on such notes in in exchange for the extra basis points between the yield and the coupon.
The estimated yield on the Tans would be close to the weekly Bond Buyer note index of July 24, which was pegged at 5.25%.
The short-term market went through a rough technical pricing adjustment in July, with yields on notes surging as the month progressed, driven in part by investors looking for a better price. A $1.3 billion County of Los Agneles Trans offering, rated SP1-plus by Standard & Poor's and MIG-1 by Moody's, was priced to yield 4.55% with a 5% coupon on July 1. The note index of July 26 was 4.93%, while last Thursday it showed the average yield on the country Trans, a component of the index, was 5.05% while the overall index was 5.25%.
New York State Trans, rated Mig-2 and SP-1, were priced to yield 4.95% with a 5.40% coupon on June 21. Last Thursday, they were yielding about 5.45%.
The note levesl are apparently now at more realistic levels from the rich levels in late June, note traders said, adding this lends stability to the short-term market.
But another factor that will play a major role in Wednesday's offering is politics. Municipal dealers explained that because the city note sale is just a week away from its $750 million negotiated general obligation bond offering, underwriters, who are also members of the city's bond syndicate, are expected to show their strong support for the city credit on the notes. Some dealers characterized this as "political bidding."
On the last city Tan sale, which was a $1.1 billion offering on July 24, 1990, the city received bids from 24 firms and made awards to eight different accounts. The notes, priced with a net interest costs of 5.9688%, were reoffered by dealers at a 5.90% net. The coupon range was 6.25% to 6.50%.
On July 25, 1990, the overall Bond Buyer note index was 5.95%, while the city component was 5.99%.
The city last sold notes April 30, when it was forced by New York State's budget impasse to tap the short-term market for operating revenues -- $1.25 billion of revenue anticipation notes. The notes, secured with state aid payments, were sold competitively and reoffered by most of the winning accounts at a 6.75% net yield, with a coupon range of 7% to 7.50%. The yield on the Ran offering was high compared to the 4.97% note index of April 24.
The city's Tans, however, are expected to fare better in the market because their underlying security is property taxes. City officials in a sales information meeting last week said they expect total estimated collections for January to be $2.8 billion. Revenues backing the notes notes are expected to be 2 times debt service coverage, they said.
The accounts paying the interest and principal on the Tans are held and administered by the state comptroller. The comptroller will deposit funds into both accounts beginning Jan. 1. The Tan account, securing principal, is expected to be fully funded on July 4.
A general debt service account, which covers debt service payments on bonds in February and March and includes revenues for the interest payments on the Tans, is expected to be fully funded on Jan. 2.
In addition, one note trader said tomorrow's Tan offering has a lot more than usual going for it: a shorter than average maturity. The last Tan matured in 12 months, while this offering will mature on Feb. 3, 1992. "Nothing matures in February," said one note dealer. "So money market funds like it."
Money market funds may also jump at the offering because of the impact of the Securities and Exchange Commission's recent decision to reduce the maximum allowable average maturity of those fund's portfolio from 120 days to 90 days.
