In a first, Lansing utility deal prices bonds using BVAL
In what deal participants say is a first in the municipal market, Michigan’s Lansing Board of Water and Light last week priced its $325 million deal using the Bloomberg's BVAL AAA curve instead of the widely used MMD benchmark.
The issuer choosing to use BVAL was a “collective decision by the banking syndicate” led by senior manager JPMorgan Securities and co-senior Citigroup along with financial advisor PFM Financial Advisors LLC and the issuer’s chief financial officer, Heather Shawa’s team, said deal advisor Chris Lover, a managing director at PFM.
Primary market use of BVAL is a growing topic of interest in discussions among various market participants, Lover and other sources said. Other benchmarks including IHS Markit, BondWave S&P Municipal Bond Index and MBIS are used in various ways in the market, but not to the extent that MMD is to price new issues.
The vast majority of the industry uses the MMD Refinitiv AAA benchmark to price deals in the primary market and for trading in the secondary.
“The MMD AAA curve is available with intraday updates and is the common language used by leading industry partners for new-issue pricing in addition to secondary trades, news, risk, evaluated pricing models and more," said Domenic Vonella, head of U.S. municipals at MMD. Interdependent historical relationships between the 250-plus MMD curves help users track different structures. These interdependent MMD curves are "used to confidently build models and new-issue recommendations with great accuracy over long periods of time,” Vonella said.
“We've been hearing from investors that they are starting to look to BVAL more than MMD and we thought it was a good time to start working in that direction,” Lover said. “It's gaining momentum and using it on the Lansing deal could further discussions of the differences between the indexes and which one is the most relevant.”
Just how much of a threat BVAL poses to the industry stalwart MMD index is an open question and depends on whether others follow, market participants said.
Vonella said that MMD research and intraday analysis “helps sophisticated market participants reduce the amount of ‘noise’ and make timely and meaningful decisions based on real-time market activity.”
He said MMD has partnered with “best-in-class muni-centric data available on www.tm3.com and likewise MMD users can find the MMD AAA scale available on many external applications.”
Investors and other sources said choosing BVAL shows how technology is playing a larger role in the municipal market.
“I find it interesting only because MMD has had such a strong hold on new-issue pricing,” said Michael Pietronico, chief executive officer and senior portfolio manager at Miller Tabak Asset Management.
But “competition is always good,” Pietronico said.
Pietronico said he doesn’t have a preference between MMD and BVAL, and would prefer the “old-fashioned” method by which underwriters didn’t use a particular scale but set prices based on credit merits.
"MMD does a very good job and has a lot of respect. But like anything else, things change and technology is getting more ingrained in the day-to-day workings” of the market, Pietronico said.
For Bloomberg, whose market clients pay as much as $24,000 a year for a single terminal, it’s “only logical” that they’d move into the index space, as the company has “sort of a captive audience” and subscribers benefit by getting “something extra” from Bloomberg, he said.
The BVAL is populated with high-quality U.S. municipal bonds with an average rating of AAA from Moody's Investors Service and S&P Global Ratings. The yield curve is built using non-parametric fit of market data obtained from the MSRB, new issues calendars, and other proprietary contributed prices.
How Lansing chose BVAL
“We have been looking at BVAL over the past six months and saw that it tracked closely with other AAA benchmarks,” said Todd Fraizer, head of PFM’s Pricing Group. “There are a number of reasons that BVAL compares favorably with other benchmarks; it’s available publicly to everyone via the MSRB, it comes out hourly from 9 a.m. to 4 p.m. and if you have a Bloomberg terminal, it includes market observations that go into that read. You can see live trading that goes into the read.”
Fraizer said PFM had been discussing the idea with other market participants at various firms for four or five months. “As we know, everybody’s internal systems are set to use other benchmarks, so we needed to make sure that sales and trading desks were comfortable and they needed to make sure investors were comfortable with it.
“We found the right opportunity with the right client that trusted us and a broker-dealer that was willing to try it,” Fraizer said.
JPMorgan was the senior manager. Citi was the co-senior manager. BofA Securities, Goldman Sachs and Piper Jaffray were co-managers. Representatives from JPMorgan did not respond to requests for comment.
The Lansing deal offered a good candidate for the inaugural outing due to its size, structure with sizable term bonds with broad investor appeal and solid double-A level ratings. It was also accompanied by a good story, as the bonds are financing the public utility’s new natural gas-fired combined cycle generating facility known as Delta Energy Park, part of its continuing transition to cleaner energy away from coal-fired power.
PFM didn’t see any downsides in trying BVAL out as it was not expected to influence the pricing for better or worse. Shawa said after the finance team walked her and her team through the pricing with the assurance that there was little risk, she was comfortable and supportive in moving forward.
The deal was two times oversubscribed with the true interest cost landing at 3.6%.
It’s hard to gauge beyond anecdotal talk whether additional investors might have considered or ended up placing orders, Lover said.
On June 12, the day before the pricing, the MMD 10-year closed at 1.65%, the BVAL AAA callable level reading on the 10-year maturity was 1.63%. For the 20-year, MMD was at 2.16% while BVAL was at 2.15% and for the 29-year MMD was at 2.34% while BVAL was at 2.32%.
“In the pricing process, it was not much different than how we usually do a deal; it was just pricing off a different benchmark,” Fraizer said.
PFM also recently launched Munite, what the financial advisor calls a new comprehensive online investor relations platform that directly connects issuers to the buyers of their bonds. The platform provides benchmark data from all the benchmarks hosted on EMMA, including BVAL, IHS Markit, BondWave S&P Municipal Bond Index and MBIS. It does not currently host MMD.