Municipal bonds are not just for rich people
This Bloomberg interview with John Miller, co-head of fixed-income at Nuveen Asset Management, is a good overview of the current state of muniland although I disagree with his comment that “many, if not most municipal bond holders are in the highest tax bracket”.
Actually IRS data tells us that about 75% of filers who claim exclusion for tax-exempt municipal interest earn less than $200,000 per year. As with all financial assets the richest own the most by quantity but municipal bonds are held pretty broadly. It’s not just a rich persons asset class.
Big, big day for Jefferson County, Alabama
The Jefferson County Commission will hold a meeting today to determine whether to accept their creditors proposal for settlement of defaulted sewer bond debt or declare bankruptcy. My opinion is that they will settle and creditors will take a haircut of about 33 cents on the dollar. This will be a very important precedence for muniland workouts. Stay tuned. Here is some of the coverage:
Federal Reserve highlights little known area of muniland with Euro risk exposure
The Federal Reserve Bank of Chicago has published Fed Letter with some background on risks to muniland from European financial institutions that have back-stopped about $60 billion of variable rate bonds called VRDO’s. It’s deep in the weeds stuff but important to know about.
A sizable share of long-term municipal debt is funded in variable-rate markets with daily or weekly interest rate resets. A common contract feature of these variable-rate debt obligations (VRDOs) is that investors have the right to return the obligation to the issuer with short advance notice. In other words, an investor can refuse to roll over a VRDO at any given reset date and demand that the issuer buy it back. This clearly presents a significant rollover risk for the VRDO issuer that is mitigated by obtaining external liquidity support.
In practice such support typically takes the form of a liquidity facility provided by a bank. Issuers with lower credit ratings often combine such a facility with an insurance wrapper in the form of a letter of credit.
Historically, variable-rate obligations accounted for about 14% of all new municipal debt issuance. At the height of the financial crisis in 2008, as other sources of variable-rate financing dried up, VRDO issuance shot up to more than 30% of all new municipal debt. Although variable-rate issuance has slowed down dramatically since then, there was about $380 billion in VRDOs outstanding at the end of the first quarter of 2011.
Many of these lenders were based in Europe and their expansion into the U.S. municipal market was rather rapid. By some estimates, by the fall of 2008, lenders
like Depfa, Dexia, Allied Irish, and various German landesbanken (state-owned
banks) accounted for about $90 billion in liquidity support. Most of these financial institutions have been winding down their facilities at a brisk pace, so that by the first quarter of 2011 their commitments had fallen by about one-third.
This has been especially true for institutions that found themselves in financial
distress. Their market share has largely been absorbed by the large U.S. banks.
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