'Remain calm, all is well'
As we contemplate the state of the municipal market today, issuance and the strong demand for many types of municipal bonds provide an “all is well” feeling.
Many of us recall that scene from Animal House where Chip Diller (aka Kevin Bacon), dressed in his auxiliary police uniform, implored all to “remain calm, all is well.” While not suggesting a tidal wave of bad news is on the horizon, caution and closely monitoring filings may be warranted as we manage through COVID and the recovery once a vaccine is widely available.
Let’s start with credit spreads. Credit spreads are pointing to increased credit concerns in certain corners of the market. Using the DIVER Pricing & Scales platform, we explored tax-exempt curves for AA City GOs, A-rated Acute Care Hospitals and, at the obligor level, the TBTA (MTA Bridges and Tunnels) to see how credit spreads have changed over the past 12 months.
For the AA City General Obligation curve, the focal point was the 10-year point on the curve and we found no appreciable change in credit spreads from one year ago to today (about seven basis points over benchmark curve with nominal yields down about 100 basis points).
For the Single A Acute Care Hospitals curve, again, the focal point was the 10-year point on the curve where we found credit spreads about 33 to 35 basis points wider today than one year ago (about 80 basis points over benchmark curve and nominal yields down about 35 basis points).
And, for our single obligor, the Triborough Bridge & Tunnel Authority (MTA Bridges & Tunnels), the focus was the 5-10 year segment of the curve, where we find credit spreads to be 40 to 60 basis points higher from one year ago today (55 basis points over benchmark curve).
Next up, rating changes are worth a close look. Using our obligor database, we looked at ratings actions over the last 12 months (November 2019 to November 2020) by the three largest rating agencies on the underlying credit rating of all municipal obligors. We found that about 600 unique obligors were upgraded during that time and about 90 were downgraded. As one colleague noted, “nothing too concerning there.”
We also looked at a tally of the aggregate number of obligors placed on positive outlook or watch and those placed on negative outlook or watch by the three largest rating agencies over the past 12 months. That tells a very different story (let’s not forget most obligated parties provide annual financials but once per year and, on average, about 200 days after the close of the fiscal year).
- Total # of unique obligors placed on positive outlook or watch: about 200.
- Total # of unique obligors placed on negative outlook or watch: about 2,300 (with about 2,000 occurring from April to October).
Finally, we looked at certain categories of continuing disclosure filings with the MSRB that are indicative of potential credit issues and found that since the beginning of May 2020 through December 9, there have been significant upticks in the number of disclosure filings in three telling categories: Bankruptcies 64 filings (+113% vs. the period of November 2019 to April 2020), principal and interest payment delinquencies 260 filings (+53% vs. the period of November 2019 to April 2020) and substitution of a credit or liquidity provider or its failure to perform 43 filings (+54% vs. the period of November 2019 to April 2020).
Numbers worth taking note of.
As we turn the calendar to 2021 and continue to wait for a return to normalcy, we are reminded to “remain calm.” That said, one must be mindful of and pay close attention to obligor filings, credit spreads and, of course, rating actions whatever chair you sit in.
Gregg Bienstock, Tim Stevens and Jane Ma.