November 26, 2019 – About this time every year, Wall Street bankers begin the process of performance evaluation and bonus tinkering. Much is at stake. For Managing Directors, variable pay may constitute up to 200-300% of their base salaries, with total compensation of close to half a million. For Vice Presidents and Associate-level employees, bonuses can constitute as high as 100% of base salary, for a total compensation of about $350,000.
After a dramatic decline in municipal bond issuance 2018, 2019 is proving to be a banner year, with year-end issuance expected to exceed $375 billion, a 10-15% increase. Some industry practitioners believe issuance this year will top out at $400 billion.
Before public finance bankers begin to pop the champagne, sane minds will take a closer look look at issuance statistics year to date. New Money issuance – the portion of bond proceeds used to fund new capital projects – barely exceeds $200 million, a steady-state level since 2016.
Dark Clouds Ahead
With the economy slowing and property prices declining, tax receipts are likely to demonstrate weakness in the coming quarters. Mighty New York State is experiencing budgetary pressures, forecasting budget gaps of between $7-9 billion in each of its fiscal years through 2023. Even California – the golden child of municipal finance with multi-billion dollar surpluses – is expected to post revenue weakness. “We’re about to begin our descent”, said Governor Gavin Newsome at a recent interview.
What does all that mean for new capital spending?
The short answer is capital spending is likely to decline. Compounding the problem is the current slew of taxable advance refundings which are a dominant theme of the 2019 municipal market. Public finance bankers are keen to advise issuers to “advance refund” tax-exempt bonds using taxable debt. Not all are forthright in advising issuers that taxpayers are forgoing 70-100 basis points of future savings by issuing more expensive taxable debt, assuming interest rates stay the same.
Interest rates will never stay as low as they are now, the bankers will say. As bankers have been saying for 10 years now since the Great Crisis.
Karma swings back, eventually. By insistently promoting taxable advance refundings (fees can be higher in the taxable market), underwriters/bankers are cannibalizing on future tax-exempt refundings. Which leads to a no-win situation. If rates go up, future refundings will dry up. If rates go down, issuers will blame their bankers.
With reduced new money issuance, a decline in refundings and unhappy issuer clients, near-term issuance looks bleak. Savvy bankers will stash their 2019 bonuses in preparation for the wasteland to come.
Contact Caren Moses at CMoses@buymuni.com.
