Record-breaking new issuance, a 31% surge in taxable volume and the ability of the municipal industry to rapidly adapt to a work-from-home environment shows the resiliency of the municipal bond market amid the COVID-19 pandemic.
The future of public finance is strong, three heads of public finance said at The Bond Buyer’s California Public Finance conference Monday afternoon on a panel moderated by Editor in Chief Mike Scarchilli, though headwinds still blow for issuers and investors.
Bob Spangler, head of public finance at RBC Capital Markets, said the record new-issuance in 2020 in the face of dealing with shutdowns, rapidly diminishing tax revenues and political unrest shows how resilient the industry is.
“It’s very likely we’ll be in the $465 billion to $475 billion market for the year,” Spangler said. And that doesn’t even include corporate CUSIP bonds, which have blown up in 2020, Spangler said. “From hospitals to higher education issuers, the nonprofit side has been outsized as well.”
Spangler said investors are getting pickier, though, and it’s not a “one-size-fits-all market” but from a macro perspective, munis are still attractive.
“Not every segment of the market is going to be as accepted as others," Spangler said. "The need for discernment is one of the reasons the bond insurance sector is up at 9%.” He added that the bond insurers have stepped up to absorb some of the risk that has infiltrated the market.
Spangler and Peter Hill, managing director and head of public finance at UBS, noted the surge in taxable issuance since the 2017 tax cuts were enacted. “What you’ve seen is a proliferation of taxables since then.”
Hill laid out the taxable picture, showing quite clearly that taxable issuance ballooned as issuers take advantage of extremely low rates and a growing investor base abroad.
In 2018, there was about $20 billion total taxable issuance, excluding corporate CUSIPs. In 2019, that figure jumped to about $55 billion. This year, that number climbed to well over $100 billion with more room to grow.
“While you’re exchanging premium coupons, 3s, 4s, 5s, and moving into the taxable space, issuers are paying themselves back,” Hill said.
As crossover buyers come into the municipal space, Gary Hall, partner, head of infrastructure and public finance at Siebert Williams Shank & Co. LLC, said from an objective standpoint, it is really important for issuers to be “less broad and more specific” with their disclosures. “We’re going to see CAFRs reflect the economic downturn,” Hall said.
It’s not just what issuers put in their offering documents that matter now, Hall said.
“Any statements you make publicly are true to your financial picture. We’re seeing investors really dig deeper on subjective factors, especially in regard to COVID.”
This has resulted in a dramatic shift in how bankers do business, Hall said. His firm has seen a “tremendous amount of one-on-one calls with investors and issuers.” "We’re working with our issuers a little bit more these days, holding their hands through these discussions, putting their credit attributes in the proper context” for investors.
Spangler said international buyers, particularly in Asia, are looking at munis and are keen to buy taxable blocks as large as $100 million. “But they don't have the ability to monitor disclosure,” he said.
“For the underwriters’ counsel out there, I certainly would include language for international investors," he added.
Hall, the former chairman of the Municipal Securities Rulemaking Board, urged that market participants make full use of the MSRB's EMMA disclosure website.
"You have the ability to input financial implications on a continual basis," Hall said. "It’s a really good way to have active engagement even when you’re not in the marketplace.”
Hall also said issuers should continually update their websites.
“Adding on these crossover buyers … to the extent that we can step up our disclosure, especially when we start thinking about sovereigns” is important for the market, Hall said.
Panelists agreed that if former Vice President Joe Biden wins the presidency and Democrats take the Senate the municipal market will benefit more than it would from a Republican administration. Democrats are generally friendlier to issuers and an increase in taxes would push investors toward munis.
Hill noted the Securities Industry and Financial Markets Association’s focus in Washington is to restore advance refundings, expand private activity bonds, introduce a Build America Bond-style direct-pay bonds and raise the small-issuer, bank-qualified limit. Hill, a former vice chairman of the MSRB, is currently chair of SIFMA’s Municipal Executive Committee.
“If we can get the Ways and Means Committee to create a BABs-like product, we’ll continue having that very high level of volume going into 2021,” Spangler, currently vice chairman of SIFMA’s Municipal Securities Committee, added.
The panelists agreed the Federal Reserve’s Municipal Liquidity Facility, while a nice backstop, is not going to prop up state and local government coffers.
“That’s not the solution," Spangler said. "These folks need real dollars to fill funding gaps. It doesn’t appeal to most issuers and doesn’t fill that gap.”
Hall said COVID-19 and work-from-home orders have “really altered the way we bank. People are sharing Wi-Fi with their kids going to school at home. I hope that the issuers in the audience know there is great thought going into the pitch books. We are communicating differently now. These are new modes of communication that will likely be here forever.”
Hall noted that requests for proposals from issuers have fallen this year as refundings have taken a larger chunk of the market. Hall urged issuers to put out RFPs. With some estimates of $10 trillion of infrastructure needs, the panelists said state and local governments need to put money to work and the market will absorb it.
Spangler noted that the third wave of COVID needs to be looked at through not only a political standpoint but also the economic costs in that and what it means for state and local governments going forward. Issuers are not in the clear going into 2021 and budgetary planning challenges abound, the panelists agreed.
However, all three panelists said the municipal market will absorb new debt and retail investors will be engaged.
Hill said that retail activity has been more muted, but as the stock market continues to be volatile, with the Apples and Microsofts of the world seeing large swings up and down, investors might take a step back and say, "Munis remain an attractive asset class."
