Normal for Munis Is Hard to Define, Says Bernard Beal

The "new normal" in the municipal bond market isn't, well, normal.

That, at least, is what Bernard Beal, chief executive officer of M.R. Beal & Co., plans to tell muni market participants this morning at the Securities Industry and Financial Markets Association's municipal bond summit in New York.

Beal, SIFMA's vice chair and a member of its municipal division's executive committee, is moderating a panel called, "Defining the new normal in the municipal bond business." In an interview last week, he said it will address the challenges of accessing the market in this new environment, which will force issuers to come up with innovative ways to sell their bonds, especially as the market begins to cater to different types of investors.

"If you look at our business, it's been in a constant change in flux since '07," Beal said, noting that the changes began with the rating downgrades of monoline insurers and the collapse of the auction-rate securities market.

Not long ago, there were seven triple-A rated monoline bond insurers, he noted. Soon, there will be just two: Berkshire Hathaway Assurance Corp. and Assured Guaranty, which is merging with Financial Security Assurance. But those insurers only have AAA ratings from Standard & Poor's.

In the not-too-distant past, as much as 70% of new municipal issues were insured, but now less than 30% are, Beal said.

Banks used to charge municipal borrowers 10 to 15 basis points for liquidity facilities, but they now they charge muni issuers up to 15 times that amount and have diminished capacity these facilities.

And while a handful of large underwriting firms used to dominate 80% of the new-issue market, never before in recent memory has there been so many opportunities for regional firms as well as those, like his own, that are minority owned, Beal said.

On the other hand, taxable Build America Bonds and taxable tax-credit bonds authorized in the $787 billion stimulus package should introduce a new classes of buyers into the municipal market that have typically only purchased taxable debt, he said.

Meanwhile, legislation proposed in the House Financial Services Committee also could "change the landscape," he added, noting in particular a bill that would require all financial advisers to register with the Securities and Exchange Commission - a move supported by SIFMA - as well as another piece of legislation requiring rating agencies to rate munis and corporate bonds based on the likelihood that the investor will not be repaid. The rating legislation could lead to widespread upgrades for many issuers, though SIFMA has not taken an official position on it.

Turning to two additional proposed bills that would authorize temporary Federal Reserve-financed liquidity facilities and a Treasury Department-run reinsurance program for muni bonds, Beal stressed he is speaking for himself and not SIFMA when he says he is skeptical of the measures.

"As a taxpayer, I really wouldn't want the government providing liquidity facilities for something that the private sector isn't willing to provide a liquidity facility for," he said. "I don't think they could make the same type of open, market-driven decisions."

Instead, he said, the federal government should consider intervening in the muni market by only backing a portion of liquidity facilities originated by private banks. The government also should make assurances that their intervention will be temporary, Beal said, joking that he could not name a single "temporary" federal program that ended when it was supposed to.

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