A survey of municipal bond market participants found a split on whether an adopted infrastructure plan will make a difference in kick-starting projects.
Attendees at The Bond Buyer's National Outlook Conference had the opportunity to vote in a live market survey, which was sponsored by Fitch Ratings.
“It has been a dynamic past few months for the U.S. public finance market, with the rush to issuance in late ’17 and then tax reform,” said Dan Champeau, head of global public and infrastructure finance at Fitch, who moderated the survey panel. “Given the current industry backdrop — the market survey and discussion, with a focus on market and credit developments, helps to crystallize the various opportunities and challenges facing the market in 2018 and beyond.”
Forty-one percent of the voters said an infrastructure plan will not make a difference — while 34% said yes and the remaining 25% said perhaps.
“It all sounds great, but I am a little cynical. I am anxious to see how the math plays out,” said Rick Kolman, head of the municipal securities group at Academy Securities.
Matt Fabian, partner at Municipal Market Analytics, said that he wishes federal programs would create incentives for infrastructure but in practice they are more about control.
“If we just needed money to build things, it would be easier but that is not the case,” he said.
One thing that the survey participants agreed on was the number of municipal defaults. 66% of the audience said that defaults will stay about the same, while 16% said they would increase and 18% said they will decrease.
“Last year was an historic low for munis, as there were 36 defaults if you exclude Puerto Rico,” said Fabian. “Expecting a big increase in 2018 or 2019 might be aggressive but longer out, there is worsening and more trouble on the horizon.”
Another topic that was agreed on, was whether Congress would take another run at private activity bonds. 60% said no, while the remaining 40% were fearful of PAB’s going on the chopping block once again.
“They checked the tax reform box and no need to go back, they have bigger fish to fry and already consider tax reform a win for them,” said Vikram Rai, head of municipal strategy at Citi.
Kolman added that while he wants to feel like PABs will be fine, there is not a lot of trust in Washington, despite hearing positives about PABs in last night’s State of the Union speech.
“There was a lot of thoughtlessness in the discussion of PABs and I am hesitant to say they will be safe forever,” he said.
In the most overwhelming response from all the questions, a whopping 85% said current refundings, VRDNs, swaps, and puts will increase due to the absence of advance refundings.
Having bonds come with shorter calls is also an option for issuers and underwriters but would come at a cost.
“As far as shorter call structures, the market could be in for a fairly significant change. Almost everything prices with 5% coupons, but that will change if the bonds come with two- or five-year calls, for example,” said Fabian.
Renee Boicourt, managing director at Lamont Financial Services Corporation said that it will be interesting to see how the market takes to and accepts shorter calls, as the muni market likes the standard 10-year call product and does not like change.
“The market will try to find right price for shorter calls, hopefully we can figure out the true value sooner rather than later,” she said.
