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The New Watchword Is Flexibility

MIAMI - As they navigate the new market dynamic, municipal issuers and underwriters will have to adjust many of their normal processes in order to have the best chances of distributing bonds, market participants said during a panel here Friday.

Issuers will have to take more steps to encourage demand in the primary market, such as giving investors more notice of a new issue, providing more information about themselves, and offering longer retail order periods, market participants said at The Bond Buyer and Regional Bond Dealers Association National Municipal Bond Summit.

"Flexibility from the issuers side is something were going to have to get used to and that issuers are going to have to get used to," said Daniel L. Kiley, senior vice president at Wachovia Securities LLC.

In recent years, demand from hedge funds and tender-option bond programs drove new issuance to record highs. But with the exit of those programs as major buyers and the downgrades to bond insurers, issuers can no longer expect to simply stick a bond insurance wrap around a bond and sell it based on the perceived strength and liquidity the insurance provided.

In order to effectively distribute to the investors now supporting the market, issuers will have to adjust their strategies. This could mean breaking large deals into small offerings spread out over a number of months, extending retail order periods, and giving investors more lead-time so that they have more time to study the new issue, Kiley said.

Issuers will need to keep structure and credit stories of deals simple as they seek to draw in investors, according to JPMorgan executive director Angelia Schmidt. Issuers and underwriters need to prepare to do more marketing and be ready to accelerate or delay deals depending on market conditions, she said.

Investors will also expect to see more disclosure from issuers so they can better analyze deals. Technology should be used so that those selling bonds can provide end investors all the information they need, Kiley said.

Speaking at a panel Thursday, Pamela Peterson, associate general counsel at UBS Wealth Management, encouraged issuers to offer detailed disclosure in simple language investors can understand.

"If you want to get a loan from the public for 20 or 30 years, don't you think you owe them a postcard once a year?" Peterson said.

In his presentation Friday, Tom Doe, president of Municipal Market Advisors, said issuers must be aware of the market context into which they are trying to sell at any time. Understanding context, how it shapes investors' perceptions, and knowing the demand component of the market will be critical moving forward.

The profitability of tender-option bond programs led dealers to hold record number of municipal securities and loan assets, which helped increase liquidity in the market. But now, without them supporting the market, it has become more volatile and price discovery is more limited. Issuers and investors must differentiate between headline, liquidity, and default risks and see how those risks are driving the market at any given time to find potential opportunities.

Doe also pointed out that despite the rally that ran from mid-December to mid-January, market participants need to take care to note things like seasonal trends in data. Looking at market data from previous periods, MMA has noticed the market often hits it strongest point in mid-February.

"Issuers might want to come to the market soon, and investors might want to be cautious," Doe said.

Peter Delahunt, national sales manager at Raymond James, noted during a panel discussion Friday that the market benefited from coupon reinvestments and a high ratio between Treasuries and municipals that drew in cross-over buyers. Now that these ratios have lowered, these investors may look to cash out, adding extra pressure on the market, he said.

And when issuers seek to generate investor interest in some of the taxable bonds that may be issued following passage of the federal stimulus package, they may have to consider using structures uncommon in the muni market and more similar to corporate debt. Doing so would make new taxable munis more appealing to investors typically investing in the taxable markets, said JPMorgan's Schmidt.

This could include issuing so-called bullet bonds - where the entire principal is due at maturity - and perhaps using standard benchmark maturities at five-year intervals. She also said a more corporate-like bonds might go to market without a 10-year call option that is standard on most muni bonds.

Making these adjustments could be difficult, because many of the provisions for taxable bonds in the stimulus package only apply to those issued in 2009 and 2010. Issuers might have to be willing to make concessions in price if they want to issue the bonds.

"When you have any type of new product, it will have to come cheap to the market," Delahunt said.

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