None of us in the municipal market need to be reminded why infrastructure must be a top priority. We are immersed every day in the challenges of financing everything from roads to viaducts to hospitals. While we certainly apply the available tools that are well honed methods of the municipal market, we could use some more help from the federal level, whether it be in the form of grants or easing of more restrictive financing norms.
We are no longer anticipating some development in this regard with bated breath. Competing priorities have overwhelmed the attention and focus on infrastructure that existed at the beginning of the Trump administration. It is sad to note that in the one area where there is general agreement that something must be done there has been no progress. The blueprint that was provided to shape any forthcoming debate has been set aside. Certain of the elements of the plan, such as the expansion of PABs, have been cited in a hopeful manner. Most pundits now agree, however, that there is little hope for passage of such a plan before the mid-term elections. Perhaps, some elements may be approved piecemeal, but this approach hasn’t proved to be very effective of late. There is a threshold requirement for attention to this matter that needs to be addressed.
What has been of some import is the attention that has been paid to infrastructure by a variety of interest groups. One example that comes to mind is that truckers have come out in support of a federal gas tax increase. Here is a group that is ready to tax itself in order to make some improvements in the road conditions that are encountered by its members each and every day. This kind of expression is truly noteworthy. Even the administration has stated at one point that there is support for a federal gas tax hike. Or, perhaps as has happened with many other statements that have been made of late, there has been a change of conviction.
Major infrastructure projects require a Herculean amount of planning. Most projects require at least three to five years to complete. Ordering of construction materials may now become more complex and expensive due to the prospect of tariff changes and the related impacts on the cost of goods sold by suppliers around the globe. Specialty items by definition are not always easy to fabricate domestically if there are no ready suppliers in that industry.
In addition to the primary consideration of inflation in labor and materials for any large scale project, there is the matter of the financing costs. The Fed is poised to raise rates as many as four times this year. Although the tax exempt market doesn’t correspond exactly with the Treasury market, the clear momentum in rates is on the rise. The basic Bond Buyer RBI (Revenue Bond Index) has escalated from 3.92% on Jan. 4 to 4.44% on May 17. Furthermore, if any additional spread is added on due to the perception of risk in the project, the rise has been even greater. Of course, greenfield projects of the kind that would be favored in an infrastructure plan expansion would bear higher interest rate burdens.
Fortunately for projects that have come to market or that are about to do so, the market is quite receptive to taking on the paper. The reduction in supply has created a strong underpinning for all transactions that are tapping the market, but especially the larger and more complex transactions. Another aspect of infrastructure projects is that they tend to be more highly leveraged and are assigned lower bond ratings if ratings are sought. Since this is such a high yield hungry market, as recent tobacco transactions have amply demonstrated, it is a good time for bonds with these characteristics to come to market.
It is a sad state of affairs that we need to keep citing the various and sundry rationales for why this is a particularly good time for infrastructure to blossom.
Those who are feeling some pressure due to the ban on advance refunding are celebrating what was possible before Tax Reform. We do not want to be in a position where we are lamenting what could have been when rates were 50 basis points or more lower. Given that it is Infrastructure Week, we wish that we had more to celebrate in this essential market. We would even be pleased to share some of the upside in volume from a potential plan with the taxable market in a P3 or other format. We appreciate that in the capital stack view of the world, the tax exempt municipal market will always have a share of the pie.
Let’s reinvigorate Infrastructure Week by next year so that we may be able to celebrate some accomplishments in this regard with either large or more modest impacts. Multiple wins add up.