Survey Sees More Taxable Supply

A greater share of municipal bonds will be taxable in 2010 than this year and credit quality is expected to decline over the next five years due to pressure from the economy and rising pension and health care costs, according to results of a new survey conducted by The Bond Buyer and the Securities Industry Financial Markets Association.

Respondents to the survey, conducted by e-mail and online in the first two weeks of December, said municipal market volume in 2010 is expected to be about equal to this year's. However, next year the taxable borrowing programs created in the American Recovery and Reinvestment Act are likely to be responsible for more than 22% of the total, up from the 19.6% they accounted for in the first 11 months of 2009.

Nearly 90% of the 107 respondents to the 17-question survey self-identified as working as either investors, issuers, public finance bankers, in sales or trading, or as members of the municipal legal community. In addition to the 13 multiple choice questions, the poll included four questions where those surveyed could write longer, anonymous answers.

The questions addressed the impact of the Build America Bond program; how much federal stimulus should be provided to states and localities after 2010; the costs and benefits of increased Securities and Exchange Commission regulation of financial advisers; and how municipal ratings practices should change. Some of the answers to those questions are quoted below.

The survey results show that respondents expect the market to be 89% fixed rate next year, roughly even with the 88.9% of the market that is fixed rate so far this year. The 2010 market will be about 9% insured, the survey found, roughly even with the 9.1% insured year to date.

In addition, 66% of those surveyed said credit quality will be weaker in the next five years due to the economy and rising pension and health care costs. In response to a different question, 45% identified economic conditions as the greatest threat to credit quality, while 36% said pension and health care for retirees and only 5% cited revenue declines dues to tax policies as posing the greatest threat.

Regarding the ARRA's tax-credit bond programs, 59% of those surveyed said issuers will not have issued all the tax-credit bonds authorized, including $22 billion for qualified school construction bonds, before the program's scheduled expiration.

Beyond the questions about the size and scope of the market and credit quality, the survey asked market participants a variety of questions about topics involving Washington lawmakers' and regulators' impact on municipal finance and the muni securities business.

Regarding regulating financial advisers, 77% said they should be required to register with the SEC while 33% said they should not. The costs and benefits of registration varied. Many indicated registration could increase transparency, though many said it would also increase costs to issuers.

The responses show that 45% of those surveyed believe the Build America Bond program should be renewed in its current form beyond the current Dec. 31, 2010, expiration, while 30% said it should be renewed but with a reimbursement rate lower than the 35% of interest costs that the program currently pays issuers of the taxable bonds. Another 26% said the BAB program does not need to be renewed.

More than 50 of the people responding to the survey offered thoughts on how the BAB program has changed the municipal market. Of those answering the question, 30 said in a variety of ways that itg has been positive for muni issuers because it expanded the investor universe for municipal securities, broadening distribution and lowering borrowing costs. Among the 20 other answers, responses varied, but included several that indicated that underwriters were the biggest beneficiaries.

One said that BABs are not being allowed to work as efficiently as they should. "If BABs were priced accurately, the market for tax-exempts would dry up, because they would be too costly for issuers," the response said.

Another indicated that the bulk of the benefit has gone to issuers. "The market is more fragmented and does not function as well for buyers and intermediaries," that respondent wrote.

Asked about direct federal aid to states and localities after 2010, about 50% said they expect there will be need for such aid in 2011 and beyond. Another 20% said grants should not be extended.

The reasons for cutting off such aid varied, but included some who said the money should instead be directed to reducing the federal deficit and one who indicated "providing more will not promote responsible fiscal management" on the part of state and local governments.

Regarding ratings, 58% said they are not satisfied with the current rating criteria for municipals; 42% said they are satisfied.

But when asked a follow-up question about the proposal pending in Congress that rating agencies be required to rate all municipals solely on default risk, 65% said that should not be required and 35% said it should be.


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