The Securities and Exchange Commission will likely seek legislation “sometime next year” to expand its authority over the municipal market, SEC chairman Mary Schapiro told reporters yesterday after speaking at the Securities Industry and Financial Markets Association’s annual conference in New York.
Legislation is needed to make the level of disclosure by corporate and municipal issuers more equivalent, she said, adding, “Not identical necessarily, but just more equivalent.”
Meanwhile, a California issuer known widely for embracing derivatives as an effective tool for lowering borrowing costs predicted that issuers will likely cease using derivatives in the future because the short-term market has collapsed.
Specifically, Brian Mayhew, chief financial officer of the Bay Area Toll Authority, speaking on a panel, said the market for variable-rate debt that issuers typically issue and then swap to a fixed rate has dried up as a result of the lack of affordable bank liquidity agreements and bond insurance for muni issuers.
“Absent insurance and liquidity, there’s nothing to back these things,” he said, referring to the underlying security on a synthetic fixed-rate swap. “I think you have a very, very limited world of derivatives going forward. At least from my standpoint, and I have $3 billion of [swaps].”
Not all issuers on the panel agreed with Mayhew, with Gene Saffold, chief financial officer of Chicago, saying he is “less pessimistic.”
Alan Anders, deputy director of finance for New York City’s Office of Management and Budget, said that the city is considering entering into a derivative, known as a synthetic floater, under which it would issue fixed-rate debt and then swap fixed payments for variable ones.
Anders said the idea is “very appealing.”
Sam Gruer, managing director at Cityview Capital Solutions LLC, who was not at the SIFMA conference, said in an interview that he is aware of several issuers that are considering such arrangements, but does not know of any that have entered into one yet. Still, he said a synthetic floating-rate structure can provide issuers with “attractive” floating-rate funding levels without the relative risks tied to obtaining and renewing bank liquidity facilities.
“Additionally, given the steepness of the yield curve, shorter-dated, fixed-to-floating-rate swaps can still produce attractive floating-rate interest costs while significantly reducing the mark-to-market risk associated with longer dated swaps,” he said.
Despite the problems in the variable-rate market, Anders said a comeback by the long-term market has enabled issuers to cope with short-term problems by issuing fixed-rate debt.
“The great untold story of 2009 is the resilience demonstrated by the rebound in the municipal bond market,” he said. Anders noted that before the financial crisis last September, the muni market was on track to raising close to $390 billion and that despite great uncertainty in the first quarter of this year, “it looks like we’re on track to raise another $390 billion.”
Anders also said the market is “back on track” for about 11,000 individual issuances this year, on par with previous years, which suggests that a variety of issuers — both large and small — have been able to access the market.
One impetus, he said, was the taxable, direct-pay Build America Bond program. By the end of the week, BAB issuance is expected to hit about $47 billion, representing 20% of new issuance, or 528 deals, since April, when the first BABs were issued.
BABs were authorized as a two-year program under the $787 billion stimulus law enacted in February. The program allows issuers to sell taxable debt in exchange for a 35% federal subsidy that they can elect to receive or give to investors. So far, all issuers have elected to receive direct payments from the federal government.
Noting BABs were touted by Congress as a way to expand the investor base for municipal issuers, Anders said that appears not to have happened, at least not yet.
For instance, in the $500 million BAB component of a New York City Municipal Water Finance Authority transaction that priced yesterday, the debt was sold mainly to 35 life insurance companies, the only new type of investor to show an interest in BABs, he said.
“You know what we had today — and I love life insurance companies — we had 35 life insurance companies that bought $500 million of BABs today, but that’s all we had, life insurance companies,” Anders said. “Where’s the participation there? Where are the pension funds? ... What about the retail?”
Though Schapiro told reporters that the SEC would likely seek legislation to enhance its authority over the muni market, those comments were not part of her prepared remarks and she was vague about the specifics of her proposal.
When asked by a reporter if she would seek a repeal of the so-called Tower Amendment or other exemptions in the securities laws for municipal issuers, she would only say: “We want to look at the whole area of muni disclosure.”
The Tower Amendment was added to the Securities Exchange Act of 1934 and restricts the SEC and the Municipal Securities Rulemaking Board from collecting disclosures prior to bond sales. Issuers strongly oppose repealing the amendment.
While Schapiro and the SEC staff have previously said that they would seek legislation to boost their authority, they have not offered any details on timing.
“We’ve maxed out our existing authority,” Schapiro said yesterday.
She also said that she was not sure when the SEC would consider an existing rulemaking proposal, floated this summer, to expand the types and frequency of continuing disclosures made by issuers.
The SEC has long sought direct authority over the municipal market in general and issuers specifically. It currently regulates the market indirectly, by prohibiting dealers from underwriting most bond deals unless the issuer has contractually agreed to disclose annual financial information and material events as they occur.
