CHICAGO — As the market continues to cope with the near-disappearance of bond insurance, one effect is clear: the growing need for issuers to tout their stories to entice investors, panelists at the Bond Buyer’s Transportation/P3 conference here said Tuesday.
“Forty percent of my investor universe says no [general obligation bonds] at all — they’re looking for dedicated service, revenue bonds, stories they can dig into,” said Sean Fallon, head of taxable municipal trading at Raymond James & Associates Inc. For issuers, that means it has become increasingly important to differentiate themselves.
“Now my investors dig through every single product, and they want to understand every issue,” Fallon said.
Issuers are starting to do things like put up their own websites and increase financial disclosures to “build their brand,” Fallon said. “You have to prove that your bonds are worth looking at. Getting investors’ attention is harder and harder.”
The market is still grappling with the huge drop in volume of insured bonds. The percentage of new issues that are insured has fallen to 7% of the market year-to-date from around 50% in 2005, according to David Johnson, senior vice president at Mesirow Financial Inc.
“This is the biggest change the market has had to deal with,” Johnson said, adding that insurance often smoothed out differences among issuers and made small, unknown issuers more attractive to investors.
“We have thousands of fissures in the municipal market and the one thing that insurance did for the market was it commodified many, many issuers, and you don’t have that anymore,” he said. “By no means have we come to terms with the nature of that change.”
Issuers are more frequently offering shorter-duration products to take advantage of attractive yields on the short end and to attract the increasingly important retail investor, panelists said.
“As a municipal issuer, you have a precious license to issue tax-exempt debt,” said Peter Shapiro, manager director at Swap Financial Group. “If you issue on the long end, it’s almost like the tax exemption is being thrown out. If you issue on the short end, you’re getting a huge benefit.”
Issuers stung by a series of crises since 2008 continue their massive shift toward fixed-rate bonds away from floating-rate debt and shedding interest rate swaps, a move that often goes against their own economic interests, according to Shapiro.
Issuers can now save up to 228 basis points by entering into a swap, compared to 30 basis points in 2006, he said.
“People watched the market take a bullet to the head, and it’s going to take a while for them to come back,” he said. “There are clearly risks in the swap market, but when is the reward big enough to compensate for the risk?”