Don’t just scrub your hands, scrub the data during coronavirus
The coronavirus has had a marked impact on the municipal market, with historical price deterioration on even some of the strongest, highest-rated paper. To understand buying opportunities or when making a decision to hold or sell an existing position, data-driven research on a municipality with a focus on key economic factors, relative to other municipalities, is critical to gain a greater understanding of the uncertainty that comes with this pandemic.
While the approach to fundamental credit research is multi-faceted, there is an old saying amongst municipal credit analysts that the “Economy is King.” While an analysis of a municipality’s financial condition and performance is certainly important and not to be overlooked, there are times when this is difficult due to a lack of timely financial data (financial filings are submitted to EMMA about 200 days on average after the close of the fiscal year).
As a result, current economic and demographic data can provide significant insight into which municipalities may be hardest hit, which may fare better, and which may be better- or worse-suited to recover. After all, it is the underlying economy and demographics that drive tax revenues, budget needs, policy decisions, and capital needs/debt issuance of governments. Economic data is objective and updated often which can be critical in times like these.
Driving down any “Main Street, USA” right now, it is easy to see the impact stay-at-home and essential-workforce-only restrictions are having on local economies. Restaurants, barber shops, fitness centers, car washes, and other “Mom and Pop” shops … all closed until further notice. In addition to providing goods and services to their respective communities, many of these businesses employ our families, friends, and neighbors all of whom will feel the impact — as will municipalities as they see declining tax receipts.
How do the realities of today impact municipal research and opinions? This is where timely economic and demographic data can make a significant difference. Using Lumesis’ proprietary obligor database that maps economic data to the obligor, issuer, and bond level, we can, for example, identify communities that have above- or below-average concentration in each of the eight services industry sub-categories, according to the U.S. Bureau of Labor Statistics.
The 10 counties that have the highest reliance on the leisure and hospitality sector which includes employment by establishments such as restaurants, bars, sports venues, and theaters and those communities reliant on such establishments for tax revenue are undoubtedly struggling in an environment where the community is being asked to stay at home.
Other geographies worth considering could be those that are reliant on the trade, transportation and utilities sector — another sub-sector of the services industry which, per the BLS, includes the retail establishments you are likely to now find “closed” on Main Street. The counties with the 10 largest concentrations to Trade, Transportation and Utilities.
The Lumesis obligor database brings together this geographically based economic and demographic data with obligors and bonds, allowing you to identify the different municipal issuers and their outstanding debt within that given locality. Let’s say your research has led you to take either a favorable or unfavorable view on Hendricks County, Indiana. In addition to the county’s $20-plus million in outstanding direct debt, Hendricks County is home to six school districts with $550 million in aggregate debt outstanding, four towns with $130 million outstanding, five library districts with $12 million outstanding, three water/sewer utilities with $45 million in debt outstanding, and numerous redevelopment districts with over $60 million in tax increment debt outstanding. There is even an assisted living community with nearly $20 million in outstanding municipal bonds; likely a relevant credit given the healthcare component.
All told, there is over $800 million in outstanding bonds secured by property taxes, water/sewer revenues, motor vehicle taxes, and tax increment revenues; all of which is impacted by the same available underlying economic data that would support the decision to buy, sell, or hold bonds issued out of Hendricks County.
The critical point is that the identification of key data points, such as industry concentration, can help investors and analysts better understand the impact that stay-at-home policies, closures, layoffs, furloughs and the like have on government revenue (tax receipts) and what impact, if any, help from
D.C. may have. The data can help identify communities that may have comparatively rough roads ahead or, conversely, may be relatively more economically balanced and better suited to recover more quickly. Either way, the goal is to use the data to complement your investment thesis and allow you to make educated investment decisions.