In times of volatility, information and transparency are critical
Pricing deals in today’s highly volatile market is not for the faint of heart. While historically low-interest rates provide an outstanding opportunity for issuers, buyers of bonds may not be so fast to bite as pointed out in this publication on March 13. As investors grapple with the human and economic implications of the coronavirus, the Saudi-Russia oil spat and contemplate what may be as we approach November’s Presidential election, one thing we know is volatility in the bond market has the potential to be with us for a while. As a result, investors will likely seek safe havens, including municipal bonds.
Treasuries, gold and a large proportion of municipal bonds fit the safe haven bill from a credit perspective. Treasuries and gold have liquidity — munis, not so much (again, see the March 13 Bond Buyer article). In the best of times, pricing municipal bonds is not so simple. In times of volatility, the challenge is magnified. While benchmark providers try to make sense of the market, each with their own model that professes to solve for the short-comings of the other models, the reality is that each transaction represents the unique characteristics of the issuer and its new issue and requires more analysis and transparency, especially now.
Whether you are an issuer, a municipal advisor, public finance banker or underwriter, efficiently accessing more data and information when pricing a new issue is critical. Now, more than ever, there is a need to efficiently identify and understand all comparable securities and trades to instruct your new-issue scale. This need is further amplified during the extreme volatility we are currently experiencing. Being able to find all meaningful comparable trades during the most relevant time period (recent days or longer) and observe how spreads and/or yields are trending is crucial. Being able to exercise professional judgment when evaluating this data is also key.
The exploration of alternative timing and/or structures, based on hard data and analysis, can have significant meaning to both Issuers and investors. Understanding the following questions can have real significance: “Can the issuer afford to pause and wait for relative normalcy?” “What structure is most beneficial to the Issuer?” and, “What structures are most attractive to investors?”
Where the deal cannot wait, the comparable securities and trades need to contemplate the current environment vis-à-vis yield, the structure, size and sector of your new issue and need to contemplate ratings and trade size as well. Incorporating these factors in any analysis allows for a comprehensive understanding of market forces and allows for full transparency amongst the issuer, MA and banker when contemplating “what’s next.”
As we grapple with the news of the day and daily ups and downs of the market, efficiently accessing more and timely information and data is critical as is the ability to be fully transparent internally and/or with your issuer clients. Depth of information, data and tools is a requirement, not a luxury.