April 1, 2020 – When I joined a bulge-bracket Public Finance shop in the 90s, my mentor touted the superior structure and fiscal qualities of municipal bonds. <\/p>\n\n\n\n
We match the asset life with the tenure of the bonds, ensuring inter-generational equity!<\/em><\/p>\n\n\n\n We NEVER issue bullets, only amortizing debt just like home mortgages!<\/em><\/p>\n\n\n\n Muni debt structures ensure budgetary conservatism, minimizing the change of default and rollover risk!<\/em><\/p>\n\n\n\n Yes… I grant you – these structures are conservative in a technical sense since they stretch out an issuer’s debt repayment over a long period of time, at roughly equivalent amounts on each repayment (debt service) date.<\/p>\n\n\n\n And yes, the level debt structure does provide optionality to issuers given another artifact of municipal bonds – the 10 year par call. In fact, I would even venture into controversial terrain and argue that too many issuers are addicted<\/em> to the 10-year par call, as it allows CFOs and Budget Heads to tout debt service and\/or refunding savings that invariably save the day for cash-strapped municipalities – every year, like clockwork, like magic.<\/p>\n\n\n\n Here’s what doesn’t work.<\/p>\n\n\n\n When bond funds are experiencing robust inflows and yield curves are appreciably sloping (not too steep, not too flat), investors love traditional structures and are ambivalent – whatever issuers sell, investors will<\/em> buy. Bankers and underwriters are co-conspirators in this regard, after all, who doesn’t love pocketing easy-to-come fees? The “integrity of the yield curve” is preserved as underwriters put together a 50-name order book with demand at every spot of the curve – all due to the marketing prowess of the underwriters (but of course).<\/p>\n\n\n\n Long-term investors are loathed to purchase long-dated risk assets as they contemplate the prospect of municipal credit potentially descent into the dark ages due to Covid-19. Investors are equally leary of short-term bonds, where the writing is on the wall and SIFMA will invariably reset at 0.05%. Again. Eventually.<\/p>\n\n\n\n So what would a Blackrock or PIMCO or Nuveen buy, in these unconventional, challenging times?<\/p>\n\n\n\n Probably a structure that doesn’t come forth from the cherished level-debt structure playbook? Structures that are perhaps just a bit more innovative and interesting?<\/p>\n\n\n\n How about index-eligible, billion-dollar-sized 5-year bullet maturities? Or 40-year taxable debt (after all – with 30-year Treasuries at 1.25%, what is the downside?). Or perhaps a rich coupon (any takers at 5%) for a 10-year note with a 3-year par call option?<\/p>\n\n\n\n Today, on April Fool’s day, even as AA+ and AAA-rated municipal issuers are shut out of the new issue market, Baa3-rated Carnival Cruises sold $4 billion of bonds. Yes Carnival paid dearly (over 10% in yield) but the near-distressed company also obtained a liquidity life line.<\/p>\n\n\n\n As municipal entities enter the next phase of the madness that is Covid-19, liquidity for both operating and capital expenditures will be paramount concerns. Many are going to find markets tough to navigate, and even tougher with clunky 30-year amortizing structures with $10M bonds in 2022, $11M bonds in 2023, $12M bonds in 2024 – you get the picture.<\/p>\n\n\n\n Our market has breadth and depth. After a century of the same old mindset on structuring and selling bonds, perhaps it is time to think about how we can be innovative again – and quicker to land on our feet.<\/p>\n\n\n\n Contact Caren Moses at CMoses@buymuni.com.<\/p>\n","protected":false},"excerpt":{"rendered":" April 1, 2020 – When I joined a bulge-bracket Public Finance shop in the 90s, my mentor touted the superior…<\/p>\n","protected":false},"author":15,"featured_media":783,"comment_status":"open","ping_status":"open","sticky":true,"template":"","format":"standard","meta":{"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[12,18],"tags":[],"class_list":["post-782","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-issuers","category-opinion","wpcat-12-id","wpcat-18-id"],"jetpack_featured_media_url":"https:\/\/buymuni.com\/wp-content\/uploads\/2020\/04\/20200401-BM-Images-Change.jpg","jetpack_sharing_enabled":true,"jetpack_likes_enabled":false,"_links":{"self":[{"href":"https:\/\/buymuni.com\/index.php?rest_route=\/wp\/v2\/posts\/782","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/buymuni.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/buymuni.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/buymuni.com\/index.php?rest_route=\/wp\/v2\/users\/15"}],"replies":[{"embeddable":true,"href":"https:\/\/buymuni.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=782"}],"version-history":[{"count":4,"href":"https:\/\/buymuni.com\/index.php?rest_route=\/wp\/v2\/posts\/782\/revisions"}],"predecessor-version":[{"id":787,"href":"https:\/\/buymuni.com\/index.php?rest_route=\/wp\/v2\/posts\/782\/revisions\/787"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/buymuni.com\/index.php?rest_route=\/wp\/v2\/media\/783"}],"wp:attachment":[{"href":"https:\/\/buymuni.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=782"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/buymuni.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=782"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/buymuni.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=782"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}For bankers who cover governmental issuers, the 30-year level debt service structure is almost a holy grail safeguarding against all fiscal irresponsibility. It’s a oldie but a goodie – like an old tee-shirt you’ve worn for 10 years when you were playing basketball and 20 pounds lighter.<\/h2>\n\n\n\n
That’s one scenario – and one that aptly describes the municipal market since 2010. When the going gets tough<\/em>er however, as markets are currently, things get much more dicey.<\/h2>\n\n\n\n
There has been no greater need for innovation in the marketplace today, not since 2008.<\/h2>\n\n\n\n
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