The pros of muniland

June 15, 2011

Muniland is the subject of a lot of professional research, and I thought readers would enjoy seeing some of it. I’m going to highlight some of the best bits.

From Chris Mauro, Director of Municipal Research at RBC Capital Markets:

The Potential Impact of Federal Deficit Reduction on the States

    Deficit reduction continues to be a major focus of both the Administration and Congress. Recent rating agency warnings about the stability of the existing US AAA rating have added a sense of urgency to the discussions and it seems likely that any deficit plan will result in cuts to federal discretionary spending.
    We estimate that discretionary federal aid to the states accounts for, on average, about 11% of total state expenditures. While we don’t anticipate an abrupt reduction in this funding, even a gradual reduction will pressure state budgets, potentially negating some of the modest growth in tax revenues that states are currently realizing.

Like It’s 1999

    State general government employment is down to early 1999 levels and the cuts show no signs of moderating.
    Given the aggressive cost cutting at the state and local level, we take issue with the casual comments about federal “bailouts” of these entities. No government officials that we know of have asked for such a thing, so where is this notion coming from?

From Chris Shayne of Bonddesk:

Demand for individual municipal bonds among retail investors began to stabilize in May. Trade volumes have been falling consistently since peaking in January, but volumes in May were very similar to the levels in April (though still slightly lower). More importantly, the May figures were comparable to typical volumes before the recent crisis (triggered by Meredith Whitney’s now infamous comments on “60 Minutes”), suggesting the market is returning to “normal.”

Retail investors of individual muni bonds were overwhelmingly net buyers of muni bonds in May even though trading volumes was relatively light. The May buy/sell ratio was 2.4 (compared to April’s 2.5), meaning that investors purchased 2.4 bonds for every 1 bond they sold.

From Natalie R. Cohen, Managing Director, Municipal Securities Research, Wells Fargo:

Public Transit, Sales Tax and Consumer Spending

Reports on consumer spending show weakness, particularly in the face of high gas, food and clothing prices. Many large public transit systems support their bonds with sales taxes, which are intimately tied to consumer spending behavior in the service area.

High fuel costs may inspire some to take public transit rather than drive, which increases ridership and “fare box” revenue. But high fuel costs also affect operations of large systems, particularly those built around bus service. Tight sales tax revenue puts pressure on operations and capital spending, but we believe these securities also have unique features that protect the fixed-income investor. Large urban transit systems are capital intensive and typically high-profile heavy borrowers.

Credit rating agency Standard & Poors:

Appeal Of Alternative Financing Is Not Without Risk for Municipal issuers

Alternative financing products such as bank loans and direct-purchase debt are gaining in popularity in U.S. public finance. Standard & Poor’s Ratings Services expects the use of such products to continue because a large number of letters of credit (LOCs) and standby bond purchase agreements (SBPAs) will expire in 2011 and 2012.

We believe that there are two types of repayment risk tied to VRDOs, alternative financing products, and other debt instruments. The first is risk that is predictable or likely to occur. The second is event-driven repayment risk. the lower an obligor’s credit rating the more likely it is that event-driven risk could occur.

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