CARLSBAD, Calif. - As more time passes from last year's credit crises, market access for lower-rated credits is beginning to increase, according to some panelists at yesterday's final sessions of The Bond Buyer's California Public Finance Conference.
The conventional wisdom that only double-A issuers have market access has become outdated in recent weeks, said Brad Thiel, California syndicate manager for Wedbush Morgan Securities.
"Spreads are contracting dramatically now on a daily basis," he said. "The market has clearly got its head around the ability of A-rated credits and above to meet their obligations."
Piper Jaffray & Co. managing director Mark Adler took that analysis further down the credit charts, to triple-B credits and unrated community facilities district bonds.
"In the eye of the storm, credits in the Mello-Roos (CFD) market were trading at yields approaching 12% for projects that were in many cases largely developed or in some case fully developed," Adler said. Some new issues for fully developed districts were in the 9% to 10% range.
"In the last three to four weeks it has changed dramatically," Adler said. Unrated Orange County and San Diego County districts have been trading in the 6% range, he said, adding: "We believe the new-issue market is going to follow."
Neil Flanagan, managing director at Jefferies & Co., said the market has gone "back to the future" as retail buyers have assumed a dominant role, a category he subdivided into three categories.
"It's not just mom-and-pop, two-legged retail," he said. Mutual funds and bond funds have had a major impact because of major inflows. And he said the third major component of retail is money managers who are now seeing municipal bonds as a destination for a flight of safety.
"They finally have figured that out, that munis are safe, so money managers are really becoming an important part of the market right now," Flanagan said.
The sense of safety is highlighted by the prudent way California local agencies have acted in the face of major cutbacks in state support driven by the state-level budget crisis, according to David Johnson, head of the Western region for Wells Fargo Securities.
"I believe that investors have seen the state has acted, and have seen that locals have acted very responsibly," he said. "You have seen very few mentions of potential bankruptcies. I think it's also a flight to safety, not just cash coming in that was sitting on the sidelines."
The nascent taxable Build America Bond sector is beginning to move in the same direction as the traditional tax-exempt market, Flanagan said.
"It is starting to morph and feel like the tax-exempt market," he said. "You're starting to see the money managers, as well as direct retail. It is interesting to start to see that change in the BAB market as well."
Some things seem to have changed permanently after the recent dislocations, said Rita Ho, head of the short-term trading desk at Loop Capital Markets LLC.
Notes with MIG-1 ratings used to trade the same, she said.
"MIG-1s no longer price the same after the dislocation," Ho said, adding that the underlying long-term rating makes a big difference. "Investors are going to do their own credit research and they're going to decide what level they're going to buy your notes."
Another panel examined short-term market changes, looking at how issuers with variable-rate and swap portfolios adjusted to the crises of the last two years.
The good news, said Peter Shapiro, managing director of Swap Financial Group, is that interest-rate swaps themselves held up and performed as designed during the crisis.
Bay Area Toll Authority chief financial officer Brian Mayhew put it this way: "The swaps themselves didn't cause us problems. They kind of handcuffed us in dealing with it."
Shapiro said the problem is that nothing else around the swap structures worked as expected. "The false premise, as we've learned so dramatically, is that floating-rate bonds would be boring and predictable," he said.