Rare bond offering from top-rated state due this week

Utah, one of seven top-rated U.S. states, will this week sell $635 million of general-obligation debt, its first offering since its record $1.25 billion of Build America Bonds and tax-exempts in September. Utah is borrowing as yields on those securities decline and sentiment improves in the market. U.S. municipal-bond mutual funds last week saw the first inflow since November. States and municipalities this week are slated to sell $5.6 billion, compared with $7.8 billion in debt last week, which was the most since the five-day period ended Dec. 17 and double the average weekly issuance this year, data compiled by Bloomberg show. The bonds should see good demand because Utah is an infrequent issuer and its debt is “not readily available in the marketplace,” said Matt Dalton, who oversees $650 million in munis as chief executive officer of Belle Haven Investments Inc. in White Plains, New York. Also, investors are flocking to highly rated municipal debt amid concerns about the economy and its impact on local finances, he said in a telephone interview. “There's demand for high-quality paper, and when you combine that with Utah, it'll do very well,” Dalton said. The yield on a Build America Bond maturing in July 2025 from the September sale declined to 3.76 percent June 6, 181 basis points below the average yield on Build Americas, according to a Wells Fargo index, and down from 4.36 percent on Jan. 5. A basis point is 0.01 percentage point. The yield on a tax-exempt bond maturing in July 2016 from that offering has declined to 1.1 percent as of June 8, 51 basis points below top-rated 6-year tax-free debt, according to Bloomberg data, and down from 2.4 percent on Jan. 25. Retail Demand “The market has rallied in our favor,” Richard Ellis, Utah's treasurer, said in a telephone interview. He said he expects “strong retail demand.” Proceeds of this week's issue will go toward a $1.73 billion expansion of Interstate 15 in Utah County that is expected to be completed in December 2012 and a $730 million renovation of the Mountain View Corridor in Salt Lake County that's scheduled for a 2013 completion, bond offering documents show. The debt will also fund improvements at the state's colleges. The Utah Legislature authorized the transportation projects to stimulate the economy, Ellis said. The highway construction program has increased Utah's debt median, or ratio of tax-supported borrowing, to 3.9 percent in 2011, compared with the U.S. median of 2.8 percent, Moody's Investors Service said in a report June 2. “While Utah's debt ratios have risen quickly, it still amortizes its debt quickly, reflecting its conservative approach,” added the analysts led by Marcia Van Wagner. Utah will have $3.5 billion in outstanding general obligations as of July 6, the sale documents said. Sales Building The yield on 10-year tax-exempts fell to 2.57 percent on June 9, the lowest since November, after reaching 3.48 percent in January, the highest since 2009, according to data compiled by Bloomberg. Municipal-bond sales are building as bondholders receive coupon payments this month, said Dexter Torres, principal at New York-based Samson Capital Advisors, which manages $6 billion in munis. “There's definitely a calendar that people need to digest but it may be balanced by the reinvestment money coming in,” he said in a telephone interview. New bond deals this week should also be met with demand from mutual-fund managers adjusting their holdings as the end of the second quarter approaches, said Alex Grant, portfolio manager who oversees $1.6 billion in tax-exempt munis at San Fransisco-based RS Investments. First Inflow “You want to make sure you're managing your fund and you're not sitting on a lot of cash,” he said in a phone call. Investors added about $274 million to U.S. municipal-bond mutual funds in the week through June 9, marking the first net addition since November, Lipper US Fund Flows said. Withdrawals totaled more than $30 billion from mid-November through last week, the Lipper data show. While this represents a milestone, said Samson's Torres, several more weeks of such performance are needed to show the trend is actually reversing. --Bloomberg News Los Angeles Department of Water & Power, the largest U.S. municipal utility, plans to sell $675 million in tax-exempt bonds June 15 to refinance existing issues from 2001 and 2003. The revenue-backed securities carry the fourth-highest investment grade from Standard & Poor's and Fitch Ratings at AA- and Moody's at Aa3. The bonds will be marketed by a group led by Morgan Stanley. (Added June 13)