The Bond Buyer
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.
The Bond Buyer
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.
Connecticut's new governor faces tough choices, unpleasant options
One day after his election as Connecticut's governor, Ned Lamont acknowledged the steep challenges that await after his Jan. 9 inauguration.
"I need everybody rowing in the same direction," Lamont told reporters.
…improving the fiscal health of the pension systems," Municipal Market Analytics said in a commentary. "Contributing assets that are …
BondLink Partners with Municipal Market Analytics to Deliver Innovative Market Insights for Its Issuer Clients
MMA's research and analysis will be available in client portals, offering detailed weekly overview of market conditions.
BondLink, the sole provider of investor relations (IR) software solutions in the $4 trillion municipal bond market, today announced a partnership with Concord, Mass.-based Municipal Market Analytics (MMA) to deliver exclusive bond market research and insights to BondLink issuer clients.
The weekly Market Conditions Index (MCI) report from Municipal Market Analytics (MMA) is available exclusively to BondLink's issuer clients.
The new MMA Market Conditions Index (MCI) gives issuers a concise read of current conditions in the municipal bond market, providing them valuable perspective during the period they are accessing capital by issuing bonds. The elements comprising the MCI are MMA-curated market factors that have historically influenced bond yield movement and investors' perception of value.
"BondLink was founded to help public sector CFO's and finance directors improve how they issue bonds," said Colin MacNaught, BondLink co-founder and CEO. "We empower them with technology and tools they've never had access to before. Through our new partnership with MMA, they can access valuable insight into key market indicators. I know first-hand the quality of MMA's research, and we are excited to partner with them on this premier resource for the betterment of our issuer clients and the market."
MMA is a leading strategic research firm providing expert municipal sector analysis and commentary. Led by industry veteran and thought leader Tom Doe, MMA is a trusted voice across the municipal market. This partnership will further amplify MMA's voice through BondLink's fast-growing platform.
U.S. Cities Look to Shed Ratings While Taking On More Debt
U.S. cities and counties are using fewer ratings to assess the risks of the bonds they sell, providing investors with just one opinion on an increasing amount of new debt.
Roughly 25% of all municipal debt issued this year carried a single grade from one of the major ratings firms, according to Municipal Market Analytics data as of Oct. 3. If that percentage holds through the end of the year, it would be the highest since the research firm began tracking the data in 2006. For the riskiest debt, the single-grade ratio was 37%.
Municipal officials and advisers said fewer ratings help cities trim expenses and save time when they borrow money for everything from school construction to sewer repairs. Bond issuers typically pay rating firms to issue a report. But some analysts said opting for one grade from a single firm puts smaller investors at a disadvantage as less information circulates through the $3.8 trillion municipal market.
"Mom-and-pop investors and small asset managers without their own research staff are at a disadvantage," said Matt Fabian, a partner with Municipal Market Analytics.
3 Ways Tax Reform Has Impacted the Muni Market
Overall, Municipal Market Analytics' Matt Fabian is predicting that total bond issuance this year will be around $320 billion -- down about $100 billion from 2017. While he and other analysts thought that governments would find a way to replace the savings opportunity with other types of bonds, that hasn't happened. "The dominant response," he says, "has simply been to not [refinance] the bond."
This ‘Insanity’ May Be the Muni-Bond Market's Next Big Thing
It’s a "considerable risk," a "bad idea," or, as one expert put it, "insanity." And it may be the next big pitch Wall Street bond underwriters make to states and cities desperate to cover ballooning health-care costs.
Dearborn, Michigan, the 94,000-resident city that’s home to Ford Motor Co., tested the waters this week by selling $35 million of bonds to chip away at the $161 million it needs to cover the medical bills of workers who will retire in the years ahead. The city is betting that by investing the proceeds it will earn more than it will pay in interest, with the profits helping to cover health-care expenses.
Dearborn paid yields of 4.6 percent or less on the bonds it issued this week, well below the 7 percent or more that pension funds typically expect to earn each year on their investments. The injection of cash will bolster a health-care plan that was already about 29 percent funded as of fiscal 2016, bond documents say. That’s higher than the statewide average for localities that offer such benefits, James O’Connor, director of finance and treasurer for the city, said in an email.
"Unlike most municipalities in the state, the city of Dearborn has been prefunding its OPEB Trust Fund for some time," he said. The bond sale is part of an effort to reduce the liability that includes closing the plan to new hires, he said.
Municipal Market Analytics said in a report this month that it’s possible that more cities could follow Dearborn, in part because Wall Street underwriters will be looking for ways to drum up business given the lackluster pace of bond sales.
But the company said that -- like pension bonds -- they’re "a bad idea, maybe worse."
The Week in Public Finance: Kansas City Suburb Headed Toward Default
Platte County, Mo., is being punished for its resistance to bailing out a retail center that opened during the recession and has struggled to make bond payments.
County officials argue that taxpayers shouldn't have to pick up the tab. But the downgrades, says Municipal Market Analytics’ Matt Fabian, are already costing taxpayers. That’s because it will now be more expensive for the county to borrow money the next time it issues general obligation bonds in the municipal market. And Platte County is also extremely unlikely to find future buyers for any revenue debt that depends on an annual appropriation from the government.
“It hardly seems worth it when just restructuring the debt could have been an easy fix,” says Fabian. “From an economic development perspective, you’re now a non-investment grade county walking away from a bond. It’s hard to talk companies into moving there if that’s your debt profile.”
Muni-Bond Defaults Show Risk Clustered in Midwest, Southeast
To find the distress in the municipal-bond market, look to the Southeast and Midwest.
That’s the conclusion from Municipal Market Analytics, a research firm that examined state and local government bond defaults by using Bloomberg data and disclosure filings from issuers.
Such lapses are extremely rare, accounting for a minuscule share of the nearly $4 trillion market. But counties in the Midwest and Southeast are home to about 37 percent and 22 percent, respectively, of outstanding bonds that are in default for failing to make adequate payments or for violating elements of the debt contracts. Excluding bankrupt Puerto Rico, about $19 billion of the $31.8 billion in defaulted and impaired bonds are in those two regions.
That share is notable considering the areas together have issued only about one-third of all outstanding bonds.
Years of economic decline contribute to the distress in the Midwest, said Matt Fabian, a partner at MMA. The Southeast, meanwhile, has been home to speculative projects that have less of a cushion when they go downhill, he said.
Wall Street billionaire says he's eyeing move to Puerto Rico to avoid taxes
"It's the only place a U.S. citizen can go and literally avoid, legally, all their taxes," Paulson said at the Beryl Elite investment conference in Manhattan on Monday, according to Bloomberg News.
In 2012, hoping to rebrand itself as a "global investment destination" like its counterpart in the Cayman Islands, the island passed Act 22, legally making it the only place in the country where passive income from financial instruments like capital gains, interest and dividends go federally untaxed. Under the act, would-be Puerto Rico residents, possibly like Paulson, are only subject to taxes levied by the island, like sales tax and license fees, said Matt Fabian, a partner at Massachusetts-based Municipal Market Analytics. Even property tax has a 90 percent exception under the law, Fabian said in a telephone interview Tuesday with CBS News.
The act, officially dubbed the Act to Promote the Relocation of Investors to Puerto Rico, is not available to current island residents.
"You're sort of above it all," Fabian said. "It's a very lucrative tax package so as to attract 'richies' like Paulson."
U.S. municipal bond market struggles to find footing
If Democrats take control of the House of Representatives or the Senate, the potential for a large infrastructure bill could increase to about 50 percent, Municipal Market Analytics wrote on Twitter on Friday.
The Week in Public Finance: What the Aging Population Means for State Finances [Governing]
A Credit Ratings Echo Chamber?
In the years following the Great Recession, the municipal market saw a rise in what's called a split rating where two credit agencies issue a different rating for the same municipal credit. Now, reports Municipal Market Advisors, that trend is on the decline: Spilt ratings account for about 41 percent of outstanding bond debt, down from 46 percent in 2015.
But it's not necessarily because rating agencies are agreeing more. Rather, it's more likely due to the issuer trend of obtaining fewer ratings on new issues. Previous research from Municipal Market Advisors has found that through the first five months of this year, 25 percent of bond sales have involved just one credit rating. That's far higher than the 13 percent rate a decade ago.
Sweetwater’s Credit Rating Downgraded Days Before Voters Will Decide on New Bond Measure
“Conceivably they paid less [in interest] but it would probably be a very small amount,” said Matt Fabian, who researches municipal bond markets for Municipal Market Analytics. Bond investors don’t pay a great deal of attention to the underlying rating of California school districts when it comes to taxpayer-backed bonds, he said. That’s because, legally, tax money for construction bonds goes straight from homeowners to the county and into investors’ pockets. Because of California’s laws, investors and credit rating agencies see their bond investments as virtually untouchable regardless of a district’s credit rating, he said.
Houston's $100 Million Ballot-Box Fight Over Firefighter Raises
Prop B threatens to cast Houston into the company of “basket case” cities, said Matt Fabian, a partner with Municipal Market Analytics Inc. Unless the administration has a “reasonable and funded plan to pay for this,” bond investors have reason to worry about how well the city is being managed.
“Houston is a basket case lite,” Fabian said. The city “is on the radar of most investors, in the context of legacy liabilities. The fact that they sold pension bonds is a red flag.”
Chicago supersizes deal to wrap up securitization program early
“Rather than use its new rating arbitrage vehicle — the Sales Tax Securitization Corp. — to reduce scheduled GO debt service across its existing maturity schedule, Chicago plans to use the proceeds of an upsized $1.3B refunding this week to generate lopsided budget savings in the first 10 years while extending principal maturities by 13 years,” Municipal Market Analytics managing director Lisa Washburn wrote in the firm’s weekly outlook published Monday.
“Investors, rating agencies, and the state should be alarmed that Chicago has so quickly converted STSC from a pure refunding tool into a budget financing mechanism. This is not quite COFINA, but it’s getting closer,” she added, referring to a similar structure used by Puerto Rico that became tangled up in the commonwealth's Title III bankruptcy.
“The optimal use of the STSC is to use its lower cost of funds to generate the maximum savings for the city within the current debt structure,” she said.
The Bond Buyer
Why the Muni-Bond Market Cares About the Midterms
Matt Fabian, partner at Municipal Market Analytics, wagers there’s a more than 50 percent chance of an infrastructure bill passing the House if Democrats take control. Even so, it could easily die in a Republican Senate, given that a politically divided Congress is historically prone to gridlock.
“If you couldn’t get something done with control of both houses of Congress and the executive, it’s going to be difficult to get it done with a divided Congress,” said Ian Rogow, a municipal strategist at Bank of America Merrill Lynch.
The Chicago Tribune
Chicago pension bond remains in play after mayor's announcement
Municipal Market Analytics sees “some upside” for city creditors and taxpayers if Emanuel shelves a possible deal and while the administration stresses its commitment to solely issuing POBs to bring up funded ratios, MMA worries that the next mayor may have less “scruples" about taking contribution holidays or other budget financing gimmicks up front.
11 questions for Emanuel about a massive debt play
Governments borrow to finance long-term assets, like highways and sewers, that benefit citizens for decades. Isn’t this scheme instead like taking out a mortgage to cover a debt at the supermarket for groceries consumed years ago?
Credit specialists at Municipal Market Analytics say these bonds “seem particularly ill-suited for Chicago” and its recovery plan, which assumes “gradual but steady economic growth with no material downside surprises over a long period of time.” Why increase Chicagoans’ vulnerability to “downside surprises”?
Illinois law allows state investments to pay down backlog
The bill passed with bipartisan support in 49‑1 Senate vote and 115-0 House vote, but it has critics in municipal market.
“The transaction could optically lower the state’s headline-producing bill backlog” and “could reduce interest costs” but longer term “it also could be the start of a shell game that saddles the treasurer with less liquid, politically charged investments, defers real progress on addressing the bill-backlog, and could amplify Illinois’ fiscal woes if its finances continue to deteriorate,” Lisa Washburn, a managing director at Municipal Market Analytics, wrote in a report on the legislation earlier this year.