Market Survey: Puerto Rico Will be Biggest Headline in 2016

NEW ORLEANS -- Almost 60% of market participants at The Bond Buyer and Bond Dealers of America 2016 National Municipal Bond Summit expect Puerto Rico to be the biggest headline in the market this year.

Of those voting in the Live Market Survey, 57% said the Puerto Rico will be the biggest headline in the municipal market this year, while 33% think it will be Chicago/Illinois. Pension reform came in third with 8% and rising interest rates garnered 2%. Pennsylvania was also an option but received no votes.

A panel of municipal bond market influencers at the conference in New Orleans commented on results as the audience responses were tabulated. Led by moderator Thomas Weyl, managing director at National Public Finance Guarantee, the panel was comprised of Anthony "Jim" Beard, chief financial officer for the city of Atlanta, Frank Fairman, head of public finance services and managing director at Piper Jaffrey and Ajay Thomas, head of U.S. public finance and DCM investment banking at William Blair.

"I see a political issue that can be fixed in Chicago/Illinois, while in Puerto Rico, there is no structure to fix it. They don't have the tools in their tool kit to fix it without federal help," said Beard. "It is going to be a long, slow churn for Puerto Rico and it will just keep dragging on. I think Chicago has the biggest implication."

Fairman agreed, saying that if Chicago/Illinois blows up, it will be the biggest story. "I hope it's not a trend for other issuers who have similar danger."

As far as how much the Federal Reserve will raise rates this year, 43% of people said rates will increase by 0.25% this year, while 36% said 0.50%. The panel was in agreement that the Fed will raise one time by 0.25%.

One of the more interesting questions was about the rising regulatory environment and whether it will cause smaller firms to continue to merge, cut staff or cease business. 55% said it will cause mergers, while 24% said cut staff, 10% said cease business and 12% said none of the above.

However, the panel believed that all of the above would have been a better choice.

"Sometimes pricing is too low as an issue, buying business is not a good thing and you need to have a good value proposition. Leading with price leads to doom at the end of the day," said Beard.

Fairman said that while regulations are hurting smaller firms and the market has been in a period of consolidation that will continue, there are other factors.

"The business environment, such as fee pressures, e-trading platforms cutting into business it is more than just regulatory environment issues. I think all of the above," he said.

In terms of regulations, 58% of the audience said that 2016 will see an increase in by the Securities Exchange Commission of enforcement actions with MCDC and others, while 34% said it will remain the same.

"I think it will increase. The SEC is looking to regulate munis and I don't see them taking their foot off the gas and I think they are going full force. It will keep increasing until the SEC get what it wants," said Beard.

Fairman added that he feels as though it is always increasing but it can't be worse than the "summer of pain in 2014."

The most overwhelming result came from the question of will the percent of municipal issuance covered by bond insurance will increase, decrease or stay the same – 75% feel as though it will increase.

"There has been an upward trend in the use of bond insurance, investors are all about credit and spreads are moving around. Investors are using wraps in secondary markets, if they don't use them in the primary. I think it will continue to increase," said Thomas.

Weyl believes the insurers are stronger today, have more capital and more leverage.

"We are also dealing in a fragmented market, so there is still room and need for more insurance," said Weyl.

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