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.
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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.
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“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.
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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.
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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.
Chicago mulls $10 billion debt sale to fill pension funding hole -- here's why it's a bad idea
Pension obligation bonds, or POBs, have been connected with high-profile municipal defaults in California's San Bernadino and Stockton, as well as Detroit. At the state level, issuers of POBs including New Jersey and Connecticut, and the territory of Puerto Rico, have seen a decline in their pension funding ratios and suffered downgrades to their credit rating as a result, noted analysts at Municipal Market Analytics. Illinois, in fact, issued pension bonds in 2003 that only temporarily brought up funded ratios.
The Bond Buyer
In unusual move, Fifth + Broadway developer seeks $25M in tax-exempt bonds from MDHA
"This development is so important to Nashville for a number of reasons, including the fact that it's the future home of the National Museum of African American Music, so we wanted to at least consider the developer’s options," said MDHA's Jamie Berry.
But a municipal finance expert said the move may portend problems for the developer.
“It could be that the tax-exempt market is cheaper,” said Matt Fabian, a partner at Massachusetts-based Municipal Market Analytics. "But that may not be the whole story.
“The developer may be struggling," Fabian said. "You have to be concerned that the developer has tried and failed to get financing on their own. Either they can’t get it, or it’s coming in at a very high rate."
The Chicago Tribune
Why MMA says Chicago should avoid selling pension bonds
“In the short-run, the shift of the pension liability to bonded debt may enable the city to realize some budgetary relief,” MMA writes in its weekly outlook. “But in the long-run we suspect that this would—as with most pension obligation-using governments before them—cost taxpayers more money and could weaken the city’s fiscal position despite a ‘savings’ claimed at issuance.”
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Another bond analyst, Matt Fabian, frowned on the whole idea.
“There is no best practice for pension obligation bonds,” Fabian, a partner at Municipal Market Analytics, said in an email response to Tribune questions. “When you invest borrowed money, you lose twice if the stocks you buy decline in price.
“The ‘hysteria’ about pensions is very effective in marshaling fiscal discipline,” Fabian added. “Would be a shame to lose that.”
The Chicago Tribune
Puerto Rico Power Utility Bonds Soar on Restructuring Deal
(Bloomberg) -- The Puerto Rico electric company’s bonds surged after it struck a preliminary agreement with bondholders to restructure its crippling debts, marking a major advance in the government-owned utility’s efforts to emerge from bankruptcy.
The pact -- reached by the island’s government, the territory’s federal oversight board and a key group of investors -- would slash the debt service bills of the Puerto Rico Electric Power Authority more deeply than an agreement the board rejected a year ago. The board said in a statement Monday that it’s working to finalize the deal for the power company known as Prepa.
The company’s bonds were the most actively traded municipal securities Tuesday, when investors pushed up the price of some of them by nearly 40 percent. Debt due in 2040 jumped to an average of 60.2 cents on the dollar from 43.4 cents Monday, according to data compiled by Bloomberg.
Reducing the utility’s $9 billion of debt may push the utility closer to privatization because investors would be cautious about lending needed money to the company if it continues to be run entirely by a government that steered it into collapse, said Matt Fabian, partner at Municipal Market Analytics. Puerto Rico is seeking to sell some of the utility’s assets or enter into long-term concession agreements with private operators.
“The board likes this deal because it’s going to force the issue of privatizing Prepa,” Fabian said. “Investors will always be more careful in lending a Prepa successor money.”
Crain's Detroit Business
Feds started probing source of $6M used to fund Harvey library expansion mere weeks after 2015 groundbreaking
The deal set the purchase price at $6,733,740 with a 7.1 percent interest rate, also known as the coupon rate. The library district received more than the $6 million face value of its bond because it issued the security at a premium, meaning it got more money up front, but would have to pay a higher interest rate to investors over time. The 7.1 percent coupon was the highest coupon on any comparable municipal security issued in Illinois that year, according to Bloomberg L.P.
“Having such a high coupon would indicate it’s an outlier in a bad way,” said Matt Fabian, a partner at the municipal bond research firm Municipal Market Analytics. “Sometimes (issuers) will use a high coupon to entice buyers, but that usually stops around 5 percent.”
Lisa Washburn, managing director for Municipal Market Analytics, said that while the bond’s peculiarities raise concerns for her as a credit analyst, there could also be legitimate explanations for its unusual structuring — like Harvey’s reputation.
“The name ‘Harvey’ could mean that buyers demand more yield on that,” she said. ”There could be reasons for all of this.”
In addition to its structuring, the bond’s initial trading activity also may have attracted federal investigators’ attention, Fabian said.
One-fourth of Monroe’s revenue in tax fight with DTE Energy
An overdependence on one industry has proven a pitfall for other U.S. municipalities. Detroit collapsed into bankruptcy after decades of seeing its population dwindle as auto-industry jobs disappeared. Atlantic City had to be rescued by New Jersey as some casinos shuttered and others appealed their tax bills. Wayne, New Jersey, could be in trouble now that its third-largest taxpayer, Toys 'R' Us, is out of business.
"A concentrated tax base is a principal credit risk in a small government," said Matt Fabian, managing director and senior analyst at Municipal Market Analytics Inc. "Their reliance on a single industry or company creates potential volatility and that could be hard for a small government to manage."
The Bond Buyer
Public Schools Scramble To Absorb Hurricane Maria Evacuees, Hoping Money Will Follow
“For the most part, it’s a net positive for the states that are receiving Puerto Ricans. It will add to the economic growth where they’re residing,” said Matt Fabian, partner at Municipal Market Analytics. “They’ll buy things and pay rent and taxes, get jobs, which all add to the local economy.”
In addition, many Puerto Ricans have the ability to seamlessly slide into the economy: they already have citizenship and many are bilingual.
The Bond Buyer
Politically driven cancellation of Maine deal may cost the state next time
Municipal Market Analytics partner Matt Fabian said a governor not allowing a previously priced bond transaction to proceed just for closing is “not typical” and that the circumstances behind the cancellation may impact Maine’s future borrowing capabilities.
“If it’s just a mistake, then mistakes happen and there wouldn’t likely be any credit harm,” said Fabian. “But if it’s concerted effort to hurt the deal then bonds will have to come cheaper to make it up to investors.”
Rise in single-rated municipal bonds spurs investor concerns
A trend toward single-rated municipal bonds has accelerated this year, raising concern among investors who were accustomed to two or three rating agency opinions to support their purchasing decisions.
Single-rating transactions represent about a quarter of new sales by par value so far this year, a 17.5% increase from the rate in all of 2017, according to a report this month from independent research firm Municipal Market Analytics.
The Week in Public Finance: For an Increasing Number of Governments, One Credit Rating Is Plenty
For years, governments paid for the extra cost of getting multiple credit ratings when they sold bonds, mainly to appease the investors who bought them. But now, more and more governments are forgoing multiple ratings in favor of just one -- and 2018 is shaping up to be the biggest year yet for the trend.
Through the first five months of this year, 25 percent of bond sales have involved just one credit rating, according to data analyzed by the research firm Municipal Market Analytics. That’s far higher than the 13 percent rate a decade ago and the 20 percent average over the past few years.
Lisa Washburn, a managing partner at Municipal Market Analytics, says she expects the trend to continue, especially since issuances with just one rating don’t appear to be penalized with higher interest rates.