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.

End municipal tax exemptions for private projects

There is a very blurry line in muniland between truly public activities and private activities that allegedly have some public good, and into this ill-defined space, for-profit and non-profit organizations have found ways to issue tax-exempt municipal bonds. This gray area should be a prime target for Congress to examine when it goes looking for ways to raise more tax revenue from muniland.

It’s easy to find these quasi-public projects. A quick look at the listing of today’s new bond offerings on EMMA immediately produces this $29 million bond offering at the private Rollins College in Florida to fund the renovation of its science center, campus center and one of its residence halls. There is an additional $15 million bond offering at the college to refund bonds previously issued at a higher interest rate. These bonds are being issued through Florida’s Higher Education Facilities Financing Authority, which is acting as public conduit for the private school. Rollins, an exclusive southern college, charges $50,400 per year for tuition, room and board. At these tuition levels it’s hard to see how much good the general population receives.

A more egregious example in today’s muniland bond offerings is the remarketing agreement for $14 million in bonds issued for Koch Industries subsidiary Georgia-Pacific to acquire and construct solid waste disposal facilities in the Parish of East Baton Rouge, Louisiana. In the case of the Koch bonds, the conduit authority is the Industrial Development Board of the parish. Koch Industries is not some small fish — just last year Forbes listed it as the second-largest privately held company in the country with estimated annual revenues of $100 billion.

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.

Getting paid for municipal risk

Another great chart popped up on Twitter today that shows the historical performance of the two primary types of municipal bonds: general obligation (GO) and revenue. The Bloomberg chart maps the difference in yield between these two categories, which have different legal rights to public revenues. Generally, revenue bonds pay more interest than GO bonds because they only have access to the revenue of the project that issues them. GO bonds (the white line in the Bloomberg chart) are currently trading at an average of 4.12 percent annual interest; revenue bonds (the orange line) are trading at an average of 5.09 percent at present.

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Muni sweeps: Muniland reins in the borrowing


Excellent chart from Barry Ritholtz’s The Big Picture. He uses data from the Federal Reserve’s Flow of Funds Accounts to map credit flows. State and local governments have become negative borrowers in the first quarter as the amount of bonds that have matured and the amount of principal that has been repaid exceeded new bond issuance. States and municipalities are making the hard fiscal choices and restraining borrowing and expenditures. It’s painful, but it must be done.

Delaware opens the procurement kimono

From Governingpeople.com:

Delaware has launched a new website to make it easier for entrepreneurs, small businesses, and other employers to do business with the State of Delaware. The new website will serve as a resource for companies interested in bidding for State contracts. The Governor hopes that the site will make the bidding process easier and more transparent for business owners so they can create jobs in the state easily…

…The public will also be able to see state spending trends and details of contract usage. The public can also access business development tools, customer satisfaction surveys and “I Found it Cheaper,” which allows individuals to submit suggestions on how the State can procure goods for less money.

The municipality of Exxon

Exxon Mobil is the third largest corporation in the world with 2010 revenues of $284 billion $383 billion and profits of $19 billion $30 billion. According to their 2010 annual report, they have returned $154 billion to their shareholders over the last five years through dividends and stock repurchases. (Exxon 2010 annual report -  page 14)

Now why would Exxon be issuing tax-exempt municipal revenue bonds? It’s simple. They want to pay a lower interest rate for the funds they borrowed for renovations at their Baton Rouge refinery, so they issued $500,000,000 worth of tax-exempt revenue bonds in 2010.

Here’s the description of the use of the proceeds from the Official Statement:

What is retail trading?

Bonddesk, an alternative trading system, has published an excellent report on what types of  muni bonds retail is trading.

Contrary to common wisdom revenue bonds, those NOT backed by taxing authority, were the clear winners as they captured 63% of retail trades.

Average yields in April are shown for bonds maturing in 10 years. (See the report for more yield data.)

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