Kuhn Urges Research for Buyers, Better Info From Issuers

WASHINGTON — Mega muni investor Peter Kuhn is bullish on muni bonds, but says investors should be very careful about what they buy and issuers should provide more timely and informative secondary market information.

This will be Kuhn’s message at the Securities and Exchange Commission’s first field hearing on municipal securities in San Francisco Tuesday. He is slated to speak on an afternoon panel about investor experiences.

By his own account, Kuhn, 49, owns several million dollars of municipal securities, almost all of them zero-coupon general obligation bonds issued by California governments that have relatively high yields and are exempt from both federal and state taxes. He typically likes smaller issuers, such as school districts. He has laddered his portfolio so that the bonds will mature between 2015 and 2045.

The San Jose-based Kuhn, founder and principal of IBP Insurance Services, an employee benefit consulting firm, turned to munis roughly 15 years ago for capital preservation after watching his stock holdings tank during the 1987 crash and then continue to show volatility in subsequent years, he said in a recent interview.

“I said, 'You know, there’s got to be a better way, I worked too hard for my money. What can I do to protect it?  Where can I put it?”

Kuhn said he began investing in municipal bonds “because they had a reputation of being safe.”

Initially, he didn’t pay that much attention to what he bought, as long as the yield was good and it was insured. But when the current financial crisis ravaged the muni bond insurers, he had to rethink his portfolio.

“All of a sudden, that insurance protection became worthless,” he said. “I had to look much more at the underlying credits.”

Kuhn decided to focus on GOs, which he says “are pretty bullet proof” and “not subject to the nuances of the budgetary process” because they typically are backed by property taxes and pledges from state and local issuers that keep the tax rates at a level that ensures continued payment of debt service.

“I’m not comfortable with some of the revenue, redevelopment, or industrial revenue bonds or bonds based on raw land. I think some of those pose a significant risk,” he said, adding, “I do think there’s a ton of exposure for post-retirement liability on behalf of municipalities. That’s a huge number that needs to be addressed.”

“I primarily buy zero-coupon bonds and the yields that I’ve been getting until 30 to 45 days ago was over 7% consistently.”

Kuhn typically purchases primary market bonds through California-based Stone & Youngberg, but makes his own secondary market purchases using a Zions Bank affiliate’s online brokerage system. “It’s hard to get a broker engaged in secondary market trades because I don’t think there’s a lot of money in it for them,” he said.

Kuhn researches everything he buys. “I think you need to do some research,” he said. “I think you need to know what you’re purchasing.”

He uses the Municipal Securities Rulemaking Board’s EMMA system and the Securities Industry and Financial Markets Association’s investinginbonds.com site to pull up issuers’ official statements and annual financial information and he pays particular attention to such things as the top 20 taxpayers and property vacancies versus occupancies.

But Kuhn worries that most of the secondary market information he is looking at is stale because it was released six or more months after the close of the issuer’s fiscal year. “I feel like I’m blind on most of my holdings as far as current financials,” he said. “It’s not scaring me away but it is a big concern.”

He also complains that material event notices often do not contain enough detailed information to understand what is going on. “It’s very hard to get to what the material event is,” he said.

Kuhn cites as an example some ­Hayward Unified School District, ­Calif. GOs he bought in the secondary market two or three weeks ago. Last week, Moody’s Investors Service downgraded the school district’s outstanding 2001 certificates of participation to reflect a severe deterioration in the district’s financial health and projected negative general fund balance at the end of ­fiscal 2011.

While Moody’s affirmed the district’s A2 GO rating, Kuhn said he might not have bought the GO bonds if he had been aware of the severe deterioration of the district’s finances.

Kuhn was born in the Bronx in 1960 but soon moved to Yonkers and later, at 12, to California. He received a bachelor’s degree in commerce and accounting from Santa Clara University. He worked as an accountant at Price Waterhouse & Co. from 1983 to 1986 and then became an account executive at CIGNA. In 1987 or 1988, he founded IBP Insurance Services.

“I’m probably not the typical investor,” he said. “I have a passion for municipal bonds. I think I have a good strategy.”


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