Bloomberg News

St. Louis Airport Sells as Low-Rated Debt Attracts: Muni Credit

June 22, 2011

June 22 (Bloomberg) -- St. Louis is selling $30.5 million of A- rated airport securities tomorrow as the extra yield that investors demand to own lower-rated municipal bonds has declined to the least since April.

Investors are seeking riskier munis after a two-month rally reduced yields on top-rated state and local government debt.

“The choice at this point is I either go really high grade and accept really low yields or I loosen up my reins a little bit,” said Matt Dalton, who oversees $750 million of municipal bonds as chief executive officer of Belle Haven Investments Inc. in White Plains, New York.

The spread, or the extra yield, that investors demand to hold A- rated general obligations maturing in 10-years versus top-rated muni debt declined to 1.42 percentage points on June 16, the lowest since April 25, according to Bloomberg data.

Yields on top-rated securities maturing in 10 years reached 2.565 percent on June 9, the lowest since mid-November, as state and local government borrowing declined by half since last year and as the default scenario of Meredith Whitney, the banking analyst, failed to materialize.

“People are stepping away from the apocalyptic vision of munis stepping off the cliff left and right,” said Thomas Dalpiaz, who manages $280 million for New York-based Advisors Asset Management Inc.

Whitney told CBS Corp’s “60 Minutes” show in December that she expected hundreds of billions of municipal-bond defaults.

Default Total

Issuers have defaulted on about $640 million through mid- June according to Distressed Debt Securities newsletter.

Last week, investors added $39 million to U.S. high-yield municipal-bond mutual funds, making it the fifth out of the last six weeks that high-yield funds showed inflows, Bank of America Merrill Lynch said in a June 17 report, citing Lipper data.

By contrast, investors have withdrawn more than $30 billion from muni-bond mutual funds from mid-November through last week.

The spread on the Bank of America Merrill Lynch revenue bond index has rallied to 1.1 percentage points more than top- rated municipal securities, the report said. Airport debt has returned 5.074 percent through May compared with 3.88 percent for AAA rated munis, according to Merrill Lynch indexes.

Lambert-St. Louis International Airport issued revenue bonds in 2007 backed by Assured Guaranty Ltd. for an AA+ rating. Those yielded 4.109 percent on June 17, or 1.47 percentage points more than 10-year top-rated general obligations, according to data compiled by Bloomberg. This week’s issue won’t be insured and is graded five levels lower.

Refinancing Bonds

St. Louis is borrowing $30.5 million to refinance higher cost debt issued in 1998 and 2009, according to an offering statement. The bonds are backed by net airport revenue, which rose 18 percent to $93 million for the year ending June 30, 2010, according to the offering statement.

The airport’s terminal 1 was hit by a tornado on April 22 that blew out windows and caused extensive damage to the roof, gate areas and shops, the offering document said. Flights were disrupted for three days. The airport expects insurance will cover the damage.

Passenger traffic passing through the airport has declined at an average annual rate of 8.3 percent after reaching a five- year high of 7.7 million people in 2007, according to a report by Standard & Poor’s.

‘Weak’ Coverage

The debt-service coverage ratio, or the amount of cash available to meet $72 million in annual debt service is 1.14, according to the rating company.

“Coverage levels are weak compared with similar facilities rated in the ‘A’ category,” S&P said. “However, we note that coverage has remained relatively stable despite the weakened enplanement trends and despite the fact that debt service increased nearly 15 percent in 2010.”

The airport has cut 56 jobs this year and last through attrition and plans to cut another 15, S&P said. The airport has also deferred construction of a maintenance facility and reconstructing a baggage claim system saving $55 million.

Following is a description of a pending sale of U.S. municipal debt:

NEW YORK CITY TRANSITIONAL FINANCE AUTHORITY, which funds capital needs of the most-populous U.S. city, will sell $200 million in tax-exempt building-aid revenue bonds and $100 million in taxable qualified school construction bonds as soon as today. The securities, which carry the fourth-highest investment grade from Moody’s Investors Service and S&P, will be issued through competitive sales. (Added June 21)

--With assistance from Sarah Frier in New York. Editors: Walid El-Gabry, Ted Bunker

To contact the reporter on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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