The muni loan market emerges

By Felix Salmon
February 16, 2011
worrying about munis last week, I said that "the amounts here are far too big for states to go to the loan market instead: if investors won’t buy bonds, banks won’t lend the states the money they need".

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When I was worrying about munis last week, I said that “the amounts here are far too big for states to go to the loan market instead: if investors won’t buy bonds, banks won’t lend the states the money they need.”

Which might be narrowly true, when it comes to state borrowers in particular. But other borrowers are finding the banks quite eager to lend to them:

J.P. Morgan Chase & Co. is devoting billions of dollars to direct loans this year to both refinance deals and for new projects, according to a bank official. Last year, the bank made a few hundred million dollars of direct loans to municipalities. Now, the bank would consider making a single loan for hundreds of millions of dollars, the official said. It also is dispatching teams to explain the concept to wary public borrowers.

Citibank also is courting municipal borrowers with direct loans, according to several bond issuers. A spokesman for the Citigroup Inc. unit declined to comment.

“This used to be unheard of,” says Eric Friedland, managing director of public finance at Fitch Ratings…

For banks, this is a potentially lucrative business at a time when they are sitting on cash that isn’t earning huge interest and are reluctant to make loans for mortgages and other areas they see as risky…

When word got out that Riverside, Calif., was floating a bond recently, several bankers called offering direct loans.

This is a welcome development, I think. It brings a whole new investor class to the muni market, as well as a lot more serious underwriting in an area where the amount of diligent credit analysis has always been much lower than it should be given the size of the market.

That said, if banks start picking off the most attractive borrowers in the muni market, that might only serve to reduce the overall quality of outstanding municipal bonds. Every time a municipality issues a bond from now on, potential investors will start asking themselves whether they’re being offered the sloppy seconds which various banks have all passed on. Direct loans might be very attractive, on a case-by-case basis, to both borrowers and lenders. But if people continue to look for reasons to mistrust the municipal bond markets, this isn’t going to help.


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Banks have always been willing to lend to muni-issurers. The issurers just got use to the looser terms and lower rates that wallstreet had to offer. Guess someone was doing gods work after all eh!

My small bank is happy to offer low rates on loans to municipalites because in the case of cities and towns the loans are usually self funding. The town needs a million bucks for a new firehouse… sure we’ll give them a loan at prime minus a half…

if they use us for their non interest bearing municipal deposit accounts of course.

Cities and towns might be in tough shape financially but they got nothing on a 2nd lien loan to a small business or an unsecured loan to an average consumer…

The story is not about will banks lend… it about the rate on the loan. In New England an average town can get fixed for 10 years sub 4% on a G.O. JPM and C would balk at those terms just on the interest rate risk alone.

Posted by y2kurtus | Report as abusive

That’s crazy. Its TBTF banks lending huge sums to other TBTF institutions without the transparency and discipline that a market issuance entails. At least with with monoline wraps there is a layer of private capital that must be annihilated before taxpayers get pushed into the breach.

Posted by MRLAMF | Report as abusive

The monoline business model is and alwasy has been fatally flawed. 10 billion in private capital backing up 2 trillion in munidebt… it’s fake insurance always has been always will be.

The FDIC insures a couple trillion in deposits with about the same 0.5% cushion but there is one little difference… the FDIC is backed by a line of credit to the U.S. Treasury.

Posted by y2kurtus | Report as abusive

If banks want to gamble so be it-not me! Flirtin with dynamite here folks-confidence is low and it wouldn’t take much to fall off a cliff! Another reason to live at our means not miles above!

Posted by DrJJJJ | Report as abusive

So the banks will borrow hundreds of millions of dollars from the Fed at near zero, and loan it to cities and towns at 4% or 5%? That’s better than lending it to the treasury at 3%! If the Fed didn’t object to banks lending their money to sub-sub-prime home buyers, why are they going to care about these loans?

It’s just more of banks borrowing money from the government to loan that same money back to a different level of government. That warrants a big bonus, don’t you think?

Posted by KenG_CA | Report as abusive

The financial system depends on extending credit in excess of the economy’s growth rate or it may collapse. The big banks do not care a lot about the risk with munis as they will be saved by the Fed if need be. The states who run deficits continue on the same path. All is well it seems.

Well, to me it looks like a ponzi scheme. To increase debt endlessly is not sustainable and one day the market will demand higher rates and the aftermath will be again stuck onto the taxpayer.

The way to move is cut salaries/benefits and other government expenses and reduce debt not just deficits.

Posted by linushuber | Report as abusive

Banks and bankers have a way of finding money if the price and incentives are right.

The syndicated leveraged loan market was a mere 20% the size of the high-yield bond market in 2001, and even tinier in the early 1990s. By 2008, it had almost reached parity (92%) thanks to all of the LBO issuance and the numerous CLO and other structures the Street came up with to absorb the paper.

They don’t have the same buckets of cash to tap now, but if they can get the structures and IRRs right to match the demand (there’s a huge retail bid for high-income/low rate-vol investments right now) they can almost certainly find somebody to buy municipal loans.

(HY and leveraged loan data cited from Credit Suisse)

Posted by fixedincome | Report as abusive