Municipal bond buyers have a message for bond-issuing cities and states: pick up the phone when we call.
"We're not asking for any edge, but if one of your large investors is calling, please take our call," Dan Close, head of Nuveen's municipal fixed income department, said Monday at the Government Finance Officers Association's annual conference in Chicago, speaking to a roomful of issuers on a panel titled Strengthening Investor Relations: Effective Engagement with Municipal Investors.
"It's when we don't have that information that we'll internally say, next time that that issuer has a new deal out, 'Do we want to participate or what's the additional premium that we're going to have to have?'" Close said, adding that issuers who "consistently communicate have lower costs of issuance."
The issue of ample and timely disclosure comes as the investor base has shifted hard toward separately managed accounts. Issuers are increasingly going to be relying on the SMA buyers, said Matt Fabian, president and partner at Municipal Market Analytics. "These investors' demands are not hypothetical," he said.
Most SMAs use buy-and-hold strategies with small amounts of bonds held in thousands of accounts, Fabian said, and that makes the bonds difficult to sell.
"So it becomes highly incumbent on the [portfolio] manager to make sure that they don't put the wrong bonds in there," he said.
The SMA buyer that expects timely and sufficient disclosure is a "shoot-now, ask-questions later type of buyer base," Close said. "The knee-jerk reaction to a late audit is to sell and worry about it later, whereas [mutual] funds have more leeway."
Keeping up with disclosure is "just that much more important given that this investor base is here, it's growing, and I think it's going to clearly be the dominant investor base, more than mutual funds, for the next 20 years or so," he said.
Even as demand has been sufficient to absorb record-high bond issuance, data show that amid investor sentiment that can be described as "cautious optimism," buyers are being more picky, said Justin Marlowe, University of Chicago's Harris School of Public Policy professor and director of the Center for Municipal Finance. Investors are "being a little more selective .... treating different types of credits in different ways," Marlowe said.
Close agreed. "We're just being choosier on those issuers that are timely in their interactions and willing to pick up the phone, especially for smaller issuers that are willing to share," he said. "All of those really do matter in terms of who we are choosing."
Close cited an example of a California-based water and sewer credit that switched auditors and was late with its financial information, prompting S&P Global Ratings and Moody's Investors Service to suspend their ratings. That in turn prompted notification to thousands of accounts that hold the credit that the bonds no longer had ratings, and investors started to call, Close said.
"It was just a snafu," but the issuer's silence aggravated the problem, he said. "We can price risk on any metric ... but when there's no information, it drives the price of the bonds to the worst possible price."
When Nuveen analysts call issuers, they're not looking for nonpublic material information, Close emphasized.
"The moment we hear non-public material information, we're restricted from trading that bond until it's made public," he said. "There's no conspiracy of muni investors trying to trip up issuers and get information. It's just trying to get a better understanding," he said. "It's exceptionally helpful to just engage and it does end up helping with the rates you pay."
But issuers fielding a lot of calls from investors should see it as a "clue" about their disclosure, Fabian warned.
"If investors are calling you, then you should be changing your disclosure so they don't call you, right?" Fabian said. It's a possible signal that the investor "will never buy that bond again."
Talking to investors helps issuers better understand them and that can ultimately lead to more demand for the paper, said Illinois debt manager Paul Chatalas.
"Understanding your customer, understanding how they think about the bonds that they are offered, is important in expanding our base," Chatalas said. That "helps us, ideally, in a perfect world, create more demand and get a lower rate for your taxpayers and ratepayers."
