AUSTIN — Not yet a year after Build America Bonds began to lift municipal debt issuance to its second-highest volume on record, issuers and brokers are finding that they must commit more time to educating potential investors who make up an increasingly diverse base of buyers, experts told The Bond Buyer’s Texas Public Finance Conference yesterday.
The advent of taxable BABs and aversion to risk in corporate debt brought a flood of retail buyers onto the muni scene in 2009, but many of those investors needed a lot of reassurance about the peculiarities of fixed-income instruments, some said.
At USAA Investment Management Co., senior fixed-income analyst Dyer Greer said he used to talk to two kinds of buyers when discussing munis but now talks to six to 10, many of whom do not feel at home in the tax-exempt markets.
“I even had one guy tell me, 'Well, I can see that you aren’t blushing, so you must be telling the truth,’ ” Greer recalled.
Dennis Whittaker, vice president and fixed-income portfolio manager at Arvest Asset Management, said that while the financial markets have stabilized, the often mysterious world of munis still has some potential investors worried about headline risk, as states and cities struggle with shortfalls.
“I’d say there’s definitely a raw nerve out there where some people are afraid to come into the market,” Whittaker said.
Jeff Bosland, managing director and head of tax-exempt capital markets at JPMorgan, said he became convinced the distribution channels for munis had become too narrow, requiring a full-court press to reach a wider array of investors.
“The arbitrage investors fell off very quickly and probably will never return to where they were,” Bosland said. “We needed a renewed focus on distribution and renewed focus on basics. People are looking for a more simple product.”
Out of 500 transactions last year, 25% of the firm’s negotiated bonds went to the retail market, he said, and 65% of the 500 tax-exempt deals went to the firm’s top 25 institutional accounts.
JPMorgan is increasingly reaching out to foreign investors, particularly in Asia, Bosland said. However, he cautioned that overseas demand for taxable or tax-exempt municipal bonds will grow slowly.
“The international buyers definitely don’t understand the tax-exempt part of it,” he said. “They don’t understand things like serials. If you think about it, what they’re really investing is dollars. So, what do they care about? They care about liquidity.”
The importance of liquidity in the retail market has created an opening for the few bond insurance firms that are still standing, according to Bill Hogan, senior managing director at Assured Guaranty Ltd., which operates insurers Assured Guaranty Corp. and Assured Guaranty Municipal Corp., formerly Financial Security Assurance.
“The real value that bond insurance is providing is liquidity,” he said, noting that insured issues fell from 50% of par in prior years to 9% last year. “We’re a lot more focused on retail.”
Danielle Fox, a director for high-net-worth bond consulting at Fidelity Capital Markets, said that her clients are primarily in the northeastern United States and interested primarily in large issues. They are receptive to bonds from Texas and other states in the interest of diversification, she said.
“BABs are going to be a great opportunity for retail in general,” Fox said. “For the high-income individual, there’s a bit of a challenge in knowing how that fits with their goals and strategies.”
Now that President Obama has unveiled his plans for the next generation of BABs, with a lower subsidy of 28% of interest costs versus the current 35%, financial advisers and issuers will reconsider their opportunities, panelists said.
“I think more issuers will accelerate their bond deals,” said James Pass, managing director of Guggenheim Partners. “Now that the 28% is out, if they want to get the 35% [interest rate subsidy], they’re going to hurry to get to market.”
Kenneth Bentsen Jr., executive vice president for public policy and advocacy at the Securities Industry Financial Markets Association, cautioned that the president’s proposal has a long way to go through Congress in a harsh political environment.
“Just because the president says he wants to provide a 28% subsidy doesn’t mean it’s going to happen,” he said. “You have to weigh the risk that Congress stalls.”
For issuers, the increasing diversification of the investment class means that they must do a better job of building their brand image year around and work to issue their bond documents at least a week ahead of issuance, panelists said.
“I think issuers understand that they have to sell an investor on a new kind of issue,” Pass said.
For issuers such as Dallas, BABs were a godsend on deals that fell below the double-A category or that faced political opposition, said Corrine Steeger, treasury manager at the city’s controller office.
“We used BABs for our convention center hotel,” she said. “I don’t know that we would have been able to go to market without them.”