Banks are rethinking munis

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MIAMI — Bank and securities firm officials said Thursday that they expect to see fewer bank loans, banks rethinking their municipal securities holdings, and an increase in the issuance of variable rate demand debt in the future.

Speaking on a panel at The National Municipal Bond Summit here, they also said that market is currently experiencing “deal fatigue” after the end of last year’s rush-to-market of transactions to beat the new tax law and that it’s not clear yet which alternatives to advance refundings are going to become most widely used.

Both Alex Wallace, managing director and head of public finance at US Bancorp, and Guy Yandel, executive vice president and co-manager of the municipal finance division of George K. Baum & Co., talked about the slow first quarter in the muni market following the onslaught of deals done in November and December.

They told The Bond Buyer after the session that many of those transactions were bank loans because they could be done quickly. The rating agencies were back-logged and it was impossible to get a rating for bonds to be publicly offered, they said.

“We’re having to restart the new money market,” Yandel told conference attendees during the panel discussion.

Wallace said he expects the market will pick up later in the second quarter.

Yandel said the muni market’s loss of advance refundings was softened by the fact that “they were sort of trailing off anyway.” They represented 44% of the market in 2016, 34% in 2017 and had been expected to be roughly 25% or less this year, he said.

Wallace said that 2022 will present “the next real blip in refunding opportunities,” referring to alternatives to advance refundings. That’s because in 2012, a lot of high coupon bonds were sold in a lower interest rate environment with big premiums, he explained later.

Yandel told conference attendees that his firm has identified about 10 alternatives to advance refundings, five of which are derivative products, but added, “It’s too early to say” which of these will prove to be most widely used.

Scott Richbourg, head of public finance at Build America Mutual, said his credit team and attorneys have been taking a new look at how to price insurance on a forward basis, as forwards are expected to be used as alternatives to advance refundings.

Wallace said he’s starting to see shorter calls in the new issue market, some as short as three years.

“We do expect more variable rate demand debt going forward,” he said.

Yandel told the group that his firm sees bank loans in the muni market “slowing down hugely.” Banks are now offering issuers terms that are far less attractive than what they could get offering bonds in the public market. If bank loans represented 25% of the market in each of 2016 and 2017, one can expect a percentage of that amount in increased volume in the public offering market this year, he said.

“We’re also starting to see banks talking about wanting to divest themselves of their muni holdings as interest rates go up and it appears that they have other things they might want to do with their money,” Yandel said during the session. Some of that debt will go back into the publicly offered market, he said.

Wallace agreed, saying, “Banks are starting to look at how they’re invested in this market.”

He said that with the huge drop in the corporate tax rate to 21% from 35% and the potential for rising interest rates, both of which impact how banks value tax exemption, “we’re going to see the public market absorb some convergence from the private market” and “that will help supply in 2018.”

Tax-exempt munis are no longer as attractive as certain taxable investments.

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