US$500m Industrial Development Revenue Bonds, Series 2019, on Tap

Municipal bond investors will likely be eyeing the potential sale of US$500m worth of revenue bonds, earmarked by Chandler AZ’s Industrial Development Authority to help bolster Intel Corp’s (Nasdaq: INTC) chip-making plants in the state.

The Industrial Development Authority of the City of Chandler, Arizona aims to issue US$500m of industrial revenue bonds, with proceeds pegged for funding the costs of acquisition, construction and installation of certain sewage and wastewater treatment facilities associated with Intel’s local semiconductor manufacturing factories.

Under the terms of a loan agreement struck between Intel and the City of Chandler dated as of June 1, 2019, the chipmaker will hold the responsibility for the payment of the bonds over a 30-year period.

The deal is being lead-managed by BofA Merrill Lynch, with Squire Patton Boggs (US) acting as legal counsel.

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Fab Factory

Intel had announced in February 2017 that it planned to pour more than US$7bn to complete its Fab 42 semiconductor factory in the City of Chandler, with aims to use a 7 nanometer (nm) manufacturing process, as well as create over 10,000 jobs in the state.

The unemployment rate in Arizona has eased slightly to 4.9% from 5.1% since then-Intel-CEO Brian Krzanich made his statement at the White House, together with President Donald Trump.

In August of that same year the Intel chief had resigned from the Trump Administration’s American Manufacturing Council, citing the “serious harm” stoked by a divided political climate that has helped to sideline “the important mission of rebuilding America’s manufacturing base.”

Semiconductor Space Sours

Meanwhile, the proposed industrial revenue bond transaction emerges at a volatile time for the semiconductor sector, amid heightened uncertainties over U.S.-China trade negotiations, with several domestic tech firms caught-up further in the fray.

It appears conducting business in China has become more sensitive for many of the largest U.S. tech companies, given the harsh spotlight thrown onto Shenzhen-based telecoms equipment and consumer electronics manufacturer Huawei.

Firms such as Apple (Nasdaq: AAPL) and Alphabet’s Google (Nasdaq: GOOGL), among others, are likely to face diminished growth prospects, amid what may be a protracted period of confrontation and volatility in the region.

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The unease in the market, spawned in large part by the two world powers, has generally spurred a downturn in the semiconductor space, with the PHLX Semiconductor Sector (SOX) having shed a little more than 14.5% over about a one-month period to May 20.

Earlier in May, Rareview Macro strategists noted that a U.S. ban on the sale of products to Huawei will pose a “significantly larger” economic disruption than that of the trade war.

They pointed out that South Korea – the epicenter of the technology ecosystem – saw its KOSPI Index undergo the “largest negative risk-adjusted return across global equities,” while the country’s 3-year 1st 10-year government bonds, back-to-back, “had the largest positive risk-adjusted returns across global fixed income.”

Rareview added that “what this tells us is that semiconductors are today’s swing vote.”

Against this backdrop, Intel’s stock has plunged nearly 25.5%, in line with the drop in SOX, and following a fall in the company’s first-quarter of 2019’s earnings.

In Q1’19, Intel’s earnings fell 6% year-on-year to US$0.87 per share and lowered its prior full-year guidance.

Intel CEO Bob Swan said that looking ahead, ‘we’re taking a more cautious view of the year, although we expect market conditions to improve in the second half.”

Investors will likely be eyeing further correlations in the semiconductor space between South Korea’s KOSPI, SOX and Chinese and U.S. tech companies, including Intel, for further signs of deterioration as trade talk tensions mount.

Muni Market Flows

In the meantime, the muni bond market has been recently enjoying a solid run of fund inflows, despite recent weakness in the market.

Analysts at Janney Montgomery observed a “weaker tone” on Tuesday, with ‘AAA’ benchmarks underperforming the broader U.S. Treasury market. They witnessed a three-month high in bid wanted amounts that amounted to US$1.3bn but see “no sign of fund inflows slowing.”

In fact, for the week ended May 15, Thomson Reuters/Lipper U.S. Fund Flows reported a net inflow of roughly US$1.25bn into municipal bond funds – not including ETFs such as the iShares National Muni Bond Fund (NYSEARCA: MUB) and the Vanguard Tax-Exempt Bond Fund (NYSEARCA: VTEB).

After a recent mild dip, both MUB and VTEB were on the upswing intraday Wednesday, with slight gains that brought the two ETFs back up to around US$112.32 and US$52.66, respectively, according to the IBKR Trader Workstation.