MuniLand

De Blasio blows off bond signals

Thomson Reuters MMD

Have the bond vigilantes begun to crack the whip at New York City Mayor Bill de Blasio? Capitol New York reports:

According to a report in Bloomberg News [May 21], UBS Global Asset Management and RidgeWorth Capital Management Inc. will each reduce their holdings of [New York City] debt due to concerns over the 8 percent in retroactive raises included the mayor’s proposed contract with the United Federation of Teachers, and his $8.2-billion affordable housing plan.

‘We’re concerned with what Mayor de Blasio might do in working with the unions, things like this housing project that he’s looking at with not having a full understanding of how he’s going to pay for it,’ Ebby Gerry, who works for UBS, told Bloomberg News. ‘We’re watching pretty closely.’

Public officials have been trained to monitor what credit rating agencies say, so de Blasio’s response, which brushes off sales by institutional investors of New York City debt is no surprise. Capitol New York again:

Mayor Bill de Blasio brushed off news on Wednesday that two financial management companies will reduce their holdings of city debt over concerns about his fiscal stewardship.

Muniland will keep shrinking

Thomson Reuters

One of muniland’s most accurate forecasters, Tom Kozlik of Janney Capital Markets, has some astonishing numbers in a new report. He predicts that total municipal bond sales for 2014 will drop to between $250 and $275 billion. That is a big fall from 2013 issuance of $330 billion. Here are some of the factors that Kozlik used to develop his rationale for a shrinking muniland:

    Higher interest rates Use of direct bank loans Austerity measures Less flexibility in spending Political and voter attitudes Lack of broad public policy supporting infrastructure spending

Kozlik goes further and says that the same factors will cause issuance to fall further in the next one-to-three years. So muniland could shrink for the next three years. Couple this with extraordinary demand for municipal bonds, and it’s an issuers’ market.

Most of Kozlik’s theory has already been dissected, but he brings in a sociopolitical angle that is not often discussed. The lack of broad public policy support for infrastructure spending is a significant issue. Reuters reported a poll in which California voters said they prefer paying down debt to broadening the social safety net.

Muni defaults and bond insurance: Part 3

Municipal bond insurers have been working to regain market share. Insurers like Assured, National Public Finance and Build America Mutual have active sales forces that are placing large advertising campaigns in trade publications and were big sponsors at the recent National Financial Municipal Analysts conference.

Thomson Reuters Municipal Market Data reported underwriting volume for municipal bond insurers of about $4 billion as of April 16. Insurers have underwritten 4.3 percent of 2014 municipal bond issuance, up from 3.5 percent in 2013.

Some state and local governments have been leaving the muni bond market and borrowing directly from banks. Standard & Poor’s estimates that up to 20 percent of new municipal borrowing is happening outside the municipal bond market. Shrinking bond issuance could make the muni insurer market penetration appear stronger simply because insurers would get a larger slice of a shrinking pie. Unfortunately, there is no consistent data on municipal entities borrowing from banks.

Puerto Rico’s flat budget

Puerto Rico’s plan for a balanced budget for fiscal year 2015 is ambitious. Economic conditions continue to worsen and the commonwealth had a massive tax revenue shortfall in April. Although bondholders were a promised a balanced budget, uncertain tax collections are threatening a smooth transition away from deficit financing. There appears to be a growing political struggle as Puerto Rico attempts to cut $1.5 billion in operating expenses from a $9.6 billion budget.

The effort to achieve a balanced budget reverses years of deficit spending. In a paper, Moody’s describes the new budget: “The proposed budget carries material risks associated with its implementation and projected revenues. Despite these risks, the budget does indicate positive movement toward structural balance and avoidance of new deficit financing.”

Moody's

I’m less positive than Moody’s. Some in Puerto Rico have pointed out how spending moved up in 2012 as part of the electoral process to gain support from voters. Post-election spending fell in 2013, inched up slightly in 2014 and is expected to be flat between 2014 and 2015.

S&P tells muni issuers to disclose bank loans

Eight out of ten times when state and local governments need to borrow money, they go to the municipal bond market. The public information repository EMMA, which is offered by the MSRB, allows anyone and everyone to assess how the borrowing affects the borrower’s capital structure and predict whether bondholders will be paid back.

But there is a growing trend of state and local government borrowing from banks for which no law says that it had to be publicized. This has left taxpayers and bondholders in the dark.

A white paper issued last year encouraged local governments to disclose when they take money from a bank. Muniland players have not followed the suggestion, and government borrowing from banks has continued to go on behind closed doors.

When Twitter turns sour

Yesterday an anonymous Twitter account that had been known only by the moniker “The Bond Girl” revealed herself to be an official with the Kentucky School Facilities Construction Commission. In other words, she is a public official. Her name is Kristi Culpepper. Bloomberg reports that she said in a phone interview from her home in Frankfort, Kentucky, “I changed my name on my account. I felt like it.” She declined further comment.

If the revelation and Culpepper’s subsequent nonchalance seem strange, it’s because the whole story is. While going by the nickname “Bond Girl” on Twitter, she was also responsible for coordinating bond issues from school districts to the municipal bond market. Her almost 24,000 Twitter posts under the name “munilass” are a mixture of analysis on bond news and barbed attacks on others.

Puerto Rico stumbles on tax collections

Puerto Rico

Puerto Rico’s April tax collections suffered a big collapse. The projections were missed by 27 percent, or $442 million. The data was released last Friday. The April shortfall, caused mostly by reduced corporate income taxes, imperils year-end budget figures. It also jeopardizes the recently proposed fiscal year 2015 budget that was proposed by Puerto Rico Governor Alejandro García Padilla.

If tax collections continue to taper, either substantial additional taxes must be levied or cuts larger than the anticipated $1.5 billion will need to be made for the 2015 budget to be balanced. Bondholders have been promised that the 2015 budget will be balanced and that it will not rely on debt borrowing to fill budget shortfalls. April’s tax collections, if not made up in May and June, will make this promise hard to keep.

According to Morningstar, 67 percent of U.S. municipal bond funds (as of March 31) have exposure to Puerto Rico general obligation and agency debt. The gross market value holdings of Puerto Rico bonds held by 486 U.S. municipal bond funds increased to $12.69 billion as of March 31, from $12.51 billion on December 31.

The public-private pay divide

Are public workers overpaid in relation to private workers? It’s a big question. There are conflicting schools of thought. On the left, Ezra Klein has asserted there is “[a] lot of jealousy toward public employees, most of it powered by an impression that public employees get more money for less work.” On the other end of the political spectrum, the right-leaning Heritage Foundation claims that public employee benefits, i.e. lifetime pensions, are undercounted. A full accounting would show that public-sector workers are more highly compensated than those in the private sector for equivalent work.

There are many ways to compare compensation data for public and private employees. Liberals often compare pay and benefits by level of education:

compensation

This widely cited data from a study by the Economic Policy Institute shows that from employees with less than a high school education to those with higher than a bachelor’s degree, private workers earn more. But when you carefully study the EPI analysis, it shows that the study compares state and local government pay to private sector pay for companies over 100 employees (page 4). Many public workers are employed by small government bodies like townships and special districts. It is not clear that this is the best framework for comparison.

Bearish on Puerto Rico

Tax-exempt investors have their own special metabolism. They seem not to react to bad news until someone presents them with an old newspaper and commands them to sit down and read it. The facts seem to startle the coupon clippers—why did no one tell them?— whereupon the market goes to pieces. Certainly, such was the case with Puerto Rico last summer (Grant’s, April 5, 2013). The commonwealth didn’t rack up all that debt by itself; a sleepy and guileless bond market was its co-dependent.

Grant’s Interest Rate Observer on Puerto Rico, May 2, 2014

Grant’s Interest Rate Observer’s research on Puerto Rico has been accurate and far-seeing. Its founder and editor Jim Grant has a reputation as a fixed-income analyst. His son, Charles Grant, studies Puerto Rico’s financials.

In a phone interview, Grant commended the Puerto Rico government for its effort to pay its debts. But, given the commonwealth’s population decline and low labor participation rate of around 40 percent, he is unable to discern any long-term plan to right size the government’s debt load. He wrote in a recent commentary:

Knowing the best way to trade municipal bonds

For retail investors, it has always been a little murky where their municipal bond trades are executed. Municipal bonds can officially trade on the New York Stock Exchange Bonds platform, but they rarely do. Instead, almost all municipal bond trades happen over-the-counter between dealers via alternative trading platforms like Bonddesk (a part of Tradeweb that is majority-owned by Thomson Reuters) or The MuniCenter. Unlike the equity market, municipal bond brokers are not required to disclose where they execute a specific trade.

Brokers are only required to give customers “fair pricing.” They are not required to route retail orders to where they will find the best execution. The fair pricing rule requires “the dealer either will need to know the current market value of the security, or will have to use diligence in the attempt to ascertain it.” A requirement for “fair pricing” is a lower standard than “best execution.”

The Municipal Securities Rulemaking Board announced that it will seek approval for a new best execution rule that governs how broker-dealers handle retail orders for municipal bond trades.

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