Distress Rises in Muni-Bond Market as More Borrowers Face Strain
Distress is rising in the $3.8 trillion municipal-bond market.
The number of borrowers reporting so-called impairments, such as a breach of the financial terms contained in the securities contracts, rose to 101 so far this year, up 41% from the same period in 2018, according to Municipal Market Analytics. At the same time, 33 skipped interest payments for the first time, compared with 21 a year earlier, though the size of the outstanding debt involved declined.
Sales of bonds by borrowers in the riskiest corner of the municipal market have increased in recent years as low interest rates leave investors...
Anything goes in today’s muni bond market
“It is a very aggressive market — but to say that it is frothy means that this is the end of it, and I don’t know,” said Matt Fabian, a partner with Municipal Market Analytics, an independent research firm. “A year from now, we might be yearning for the discipline of 2019.”
Some money managers have started to pull back. Vanguard Group Inc. has cautioned against taking too much risk as the economy’s record-long expansion makes a recession look overdue. Goldman Sachs Group Inc. earlier this year shifted a record amount of its high-yield municipal fund into investment grade debt, anticipating that some of the projects financed by the securities may run into distress.
PRASA deal on federal debt said to be mixed news for bondholders
PRASA has been in default on these loans for years, said Matt Fabian, partner at Municipal Market Analytics.
Though the debt will be made “senior” equal to senior bonds, the senior debt service reserve account shall only secure the authority’s bonds.
In some ways the deal is step backward for bondholders in so far as it elevates the federal debt to the same level as the bond debt, Fabian said.
However, some bondholders may welcome it as a step in the right direction by bringing the restructuring of PRASA’s bonds closer, Fabian said. For many Puerto Rico bondholders, advancing the day when they can sell their newly restructured bonds is an important goal, he said. There has been an active audience for buying restructured Puerto Rico bonds.
Detroit Free Press
This Bill Could Save Rural Governments Millions in Infrastructure Financing
But only small governments that issue $10 million or less in bonds per calendar year can sell bank-qualified debt. In today's dollars, $10 million doesn’t go very far. “Over the years, there’s been a steadily shrinking universe of governments who are benefitting from the rules,” says Municipal Market Analytics partner Matt Fabian.
45-cent gas tax? Less dumb than GOP's road funding plan
Matt Fabian,a partner at Municipal Market Analytics, told government finance trade publication Bond Buyer that he's neg on this plan: "Pension bonds undertaken to do things not related to pensions are the worst kind of pension bonds in that they are being deployed almost purely as a budget gimmick, adding leverage and risk to a government’s budget in exchange for a few years’ relief from tax hikes or spending cuts."
Fabian also suggested that an interest in selling pension bonds for this purpose suggested some unpleasant things about the state's financial outlook: that there could be problems with Michigan's financial flexibility, and future credit outlook — in other words, a financially healthy state shouldn't consider such a convoluted financial transaction.
Trump’s Immigration Policy Shows Why Jails Are Risky Investments
Investing in jails and detention centers is one of the riskiest bets in the $3.8 trillion municipal bond market because they’re subject to the vagaries of politics and policymakers. According to research firm Municipal Market Analytics, jail bonds are among the most likely to go into default.
Buyer Beware of States With a High Number of Muni Bankruptcies
Municipal bankruptcies are so rare that bondholders scour each for potential precedents. But they’re far more common in some states than others, according to data from Municipal Market Analytics Inc.
Of the 94 filed since 2007, California saw 16, the second most, MMA figures show. That’s understandable given the most populous U.S. state’s dominance among bond issuers in the $3.8 trillion market and its permissive attitude to such filings, which included the cities of Vallejo, Stockton and San Bernardino.
“An investor has to assume an elevated risk of restructuring,” he said.
Fabian isn’t recommending avoiding debt from the high-bankruptcy states. But he suggests investors demand more in return for the risk, if possible in a market where yields are very low. He also said they should be prepared to do more surveillance on the bond issuer after buying its debt and insist on more disclosures than is typically required beforehand.
The risky business of chasing high-yield muni bonds
The downside, though, is that if enough of these risky municipal projects default, those attractive yields will quickly reverse.
About 2.5% of non-investment-grade munis are currently in default, according to Municipal Market Analytics.
The New York Times
NFMA ANNOUNCES ANNUAL AWARDS AT 36TH ANNUAL CONFERENCE
The Industry Contribution Award is given to an individual or organization that provides positive influence on the market to increase transparency or promote market effectiveness. The 2019 award recipient, Matt Fabian, has been a diligent researcher and steady commentator on distressed issuers, creating a bully pulpit to ensure that the voice of the market is heard not just on high profile issues like Puerto Rico and Detroit, but many that fall under the radar like Platte County, Missouri. From the Bond Buyer to CBS News and the New York Times, Mr. Fabian is often sought for comments.
Puerto Rico Seeks to Have $9 Billion in Debt Ruled Unconstitutional
Matt Fabian, a partner at Municipal Market Analytics, a research firm that is not involved in the litigation, said he thought the lawsuits would make it harder for Puerto Rico to negotiate with its creditors. In some cases, he said, the institutions being sued were the same ones that Puerto Rico would seek assistance from in the future, once the current restructuring is finished and the island needs to issue new debt.
Citibank, one defendant, is working as an adviser to the oversight board on the debt restructuring. “How do you sue?” Mr. Fabian asked. “It’s like going in for a root canal and suing the dentist while you’re still in the chair.”
The Bond Buyer
N.J. joins the parade as states test mileage-based fees
Lisa Washburn, managing director at Municipal Market Analytics, noted that future prospects for gas taxes as the main driver for transportation funding are dim because of increased electric and hybrid vehicle use coupled with many politicians reluctant to raise rates. The federal tax rate has not been raised since 1993 and while President Trump endorsed a 25-centfuel hike last year for his proposed $1.5 trillion infrastructure bill, congressional republicans quickly balked at the idea.
“There are a lot or negative views of the gas tax and that makes it hard to raise frequently to address infrastructure needs,” Washburn said. “It’s like a third rail tax.”
Washburn said the mileage-use fee is an idea that has potential to work in northeast states such as New Jersey if drivers can see linkages between their vehicle usage and the importance of improving the roadways on which they travel. Some possible complications would need to be addressed, according to Washburn, such as how to determine mileage-fee program credits for gas taxes and making sure that those with more fuel-efficient or electric vehicles don’t get adversely affected from the change. She added that assurances about privacy concerns with data collected would also be important, especially with trying to attract older participants.
“Looking for an alternative to the gas tax for funding infrastructure is very important,” Washburn said. “We have to find innovative ways to fund infrastructure and this certainly could be a very good way to shore up and make more sustainable revenues for infrastructure.”
Where climate analysis meets municipal bond analysis
A climate analytics business is partnering with a municipal bond research firm in an effort to get a better handle on the risk climate change creates for municipal debt.
“Climate change is a burning fuse and no one knows how fast it is burning and where the explosives are,” said Thomas Doe, president of Municipal Market Analytics. “Market participants are beginning to assess how to incorporate that into their decision making.”
Troubled Municipal Borrowers Can’t Hide From Matt Fabian
The $3.8 trillion U.S. municipal bond market is home to more than 50,000 individual issuers. That’s almost 10 times the number of corporations that sell debt. Yet muni issuers, which range from a tiny California school district to an economic powerhouse such as New York City, aren’t beholden to the same reporting requirements that companies must follow. Matt Fabian, a partner at Concord, Mass.-based research firm Municipal Market Analytics Inc., scours their often haphazard filings for signs of troubled borrowers. His database tracks events such as issuers dipping into reserves or skipping payments, informing his weekly reports to clients.
This labor-intensive undertaking has yielded surprising insights into where defaults cluster and may offer investors a road map. Fabian, based in Westport, Conn., joined MMA in 2006 after working at a ratings company, bond insurer, and investment bank. Here, he talks about his process, his bleak outlook for the U.S., and the implications for investors.
Preston Hollow v. Nuveen breaks open high-yield muni world
Preston Hollow lays out its claims in eye-popping detail. It accuses Nuveen of unlawful and strong-arm tactics in its effort to thwart its business opportunities by wielding its power and cash to run interference with broker-dealers. The firm takes on not just Nuveen but its prominent head of municipals, John Miller.
“This comes at a time when there is intense competition for product and so this is reflective of the competition that exists in the industry,” Thomas Doe, president of Municipal Market Analytics, said of conflicts laid out in the litigation. “You are fighting for any product and any opportunity you can find.”
Does the case drive a change in market behavior or is it one-off dispute between two firms? “It’s too early to tell,” Doe said.
Could New York City Go Bankrupt? The Muni Market Doesn’t Think So.
It wasn’t quite “Headless Body in Topless Bar.” A New York Post column published online last weekend blared: “New York City is edging toward financial disaster, experts warn.” But that is news to the municipal bond market.
“New York City could go bankrupt, absolutely,” the Post quoted an economist as saying—yet that didn’t even happen during the fiscal crisis of the 1970s. And as for how the muni market is viewing the Big Apple’s credit quality, it sees it more as gilt-edged than junk. (Barron’s and the New York Post are both...
MTA bond buyers are like New York commuters waiting for a train
The plan would raise money from electronic tolling in streets south of 61st Street, a step studies have shown could raise about $1 billion a year that could be leveraged into $15 billion in municipal bond sales. Money from a new Internet sales tax in the city and a tax on the yet-to-be-legalized marijuana would also help infuse cash into the system.
The additional money would come after annual debt service bills have consumed a growing share of the agency’s revenues since 2015, according to Moody’s Investors Service figures.
It "gives some relief to the credit," said Matt Fabian, a partner at Municipal Market Analytics. "At the same time, it’s not going to change the direction. This is probably going to be a slow and redundant process to allocate new revenue from the state and the city to the MTA."
MTA leadership has said it needs $40 billion over the next decade to get the system up to 21st century standards. And the MTA faces declining ridership, threats from ride-sharing applications, and inefficiencies with how it spends money on capital projects, said Evercore’s Cure, who rides the 6 train to work each morning.
The Bond Buyer
Puerto Rico Tests the Trump Strategy to Wipe Out Debt
Matt Fabian, a partner with Municipal Market Analytics, put it more bluntly to Kaske: “The courts generally allow the debtor to act as they please, so even a logical inconsistency this glaring probably won’t get in the way of plan implementation.” He agrees that there might be a stronger argument that Cofinas violated the debt limit.
The rest of the muni market would probably appreciate it if Puerto Rico’s restructuring resolved some lingering questions— specifically, how G.O. bonds should fare in cases of extreme distress. Connecticut is a ways away from such a scenario, but it nevertheless raised red flags last year when it issued a new class of securitized bonds that effectively pushed its outstanding full faith and credit debt into a subordinate position. Chicago has issued new, higher-rated securities through the Sales Tax Securitization Corp., which is set to sell more taxable obligations this week.
How PG&E's California woes may impact high-yield munis
The financial woes of investor-owned utility PG&E could indirectly cheapen municipal high-yield debt, according to a municipal research firm.
PG&E could face billions in liabilities related to its alleged role in sparking some of the massive forest fires that have plagued the state over the last two years.
…possibly widening spreads,” said Matt Fabian, a partner with Municipal MarketAnalytics. “Muni yield prices are indirectly ..
Municipal Market Insights For 2019: Tactical Moves Will Guide Investors through Market Uncertainty
PRINCETON, N.J., Jan. 9, 2019 /PRNewswire/ -- MacKay Municipal Managers™, the municipal bond team of fixed income and equity investment management firm MacKay Shields LLC, today published its top five insights for the municipal bond market in 2019.
Municipal financing with embedded real estate risk underperforms.
We anticipate the market will penalize sectors and credit structures exposed to real estate market values. Financings tied to selected commercial real estate, raw land housing development and continuing care retirement centers, in our opinion, will come under pressure as peaking market values recede. These same sectors also historically experience higher default rates (source: Municipal Market Analytics Inc.). By contrast, we believe that financings dependent on assessed valuations of existing developed real estate (e.g. general obligation debt) will find favor in the market as debt coverage remains strong.
Q4 2018 Credit Commentary And A Look Ahead To 2019
The number of issuers seeking multiple ratings has declined since the financial crisis. Until the crisis, issuers often had debt ratings from two or more rating agencies. According to data collected by Municipal Market Advisors (MMA), issuers that were triple-rated (by Moody's, S&P and Fitch - data on Kroll is not able to be queried yet) declined steadily from 55% in 2007 to 34% through 2017. Viewed another way, by the end of Q3 2018 there were 1.91 ratings assigned per dollar par issued, down from 2.29 ratings assigned per dollar par issued in 2007. The par value of bonds that are rated by just one rating agency has grown to 25% from 21% in 2007. The trend is likely a function of municipalities' looking to reduce costs. Additionally, in the recent low-interest-rate environment with narrow credit spreads, fewer ratings on bonds have been sufficient to gain market acceptance, especially as investors chase yield. If credit spreads were to widen, a differentiation in yield might become visible among bonds with just one rating compared to those with two or more ratings, and this development could reverse the trend.