MuniLand

Some interesting municipal bond trading data

A few times a year, the Municipal Securities Rulemaking Board releases its trade data, giving the rest of us a chance to peer into the murky municipal bond market. Yesterday, we got access to the data for the first quarter of 2012, and a few interesting facts jumped out.

Revenue bonds, or debt issued with the backing of dedicated streams of payment from specific operations, trade a lot more than general obligation bonds. This makes sense because revenue bonds accounted for 69 percent of the municipal debt outstanding as of Mar. 31, 2012, according to Bloomberg. From retail-size trades of less than $25,000 to mid-market ones of up to $2 million, revenue bonds trade at about twice the par of general obligation bonds, or bonds with the “full faith and credit” backing of a governmental entity that has the authority to tax. Once trades become institutional, that is, exceed $2 million, demand triples for revenue bonds. Revenue bonds seem to be much more popular among institutional buyers like pension funds, mutual funds and insurance firms than general obligation bonds.

Within the revenue bond category, we can drill down further into the various sectors. For bonds with a fixed interest rate, the most traded sector was education. For floating rate securities, healthcare debt was most heavily traded in the first quarter.

Among the top 50 traded securities, Puerto Rico bonds dominated the list with approximately one-third of the par traded. Puerto Rico issued $5.3 billion of debt in the first quarter of 2012, and investors traded $22.4 billion of its securities. This is a remarkable showing given that Puerto Rico has the lowest rating of any U.S. state or commonwealth. The island is an exceptionally heavy issuer, having floated 7.45 percent of all long-term municipal debt in the first quarter of 2012 even though its economy only represents 0.4 percent of U.S. GDP. I’ll be looking more closely at its balance sheet.

The two most actively traded municipal bonds in the first quarter of 2012 were industrial revenue bonds issued for Exxon Mobil. These are variable rate bonds paying the holder an interest rate that resets daily; lately it has been as low as 0.04 percent and as high as 0.20 percent. It’s a little unclear why these bonds are trading daily. That part of muniland is still a little murky.

Can revenue bondholders relax now?

Bond markets generally focus on who has rights to specific cash flows and control over assets. That was what Alabama federal bankruptcy court Judge Thomas Bennett was addressing when he issued an opinion Friday afternoon covering the insolvent Jefferson County sewer system.

To recap the situation in Jefferson County, re-read what I wrote in November:

Last year, amid the county’s fiscal and political meltdown, the Russell County Circuit Court appointed a water system professional, John Young, to take over the management and operation of the sewer system. This action came at the request of the bond indenture trustee, the Bank of New York, which wanted the bond payments protected. Now the county is fighting with the receiver and creditors for control of the sewer system in bankruptcy court.

The crux of Judge Bennett’s ruling related to whether the sewer receiver, John Young, could keep control of Jefferson County’s most important asset, the sewer system, while the county was trying to consolidate its assets in the bankruptcy process. Bank of New York and other bondholders argued that the federal bankruptcy proceeding could not trump judicial actions taken at the local level. In other words BoNY, representing bondholders, wanted to keep the control of the sewer system and its cash flows. Although revenue bondholders have a lien, or right, to the cash flows of the sewer system, they also wanted control of the asset.

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