MMA_Issuer_2015-04-20.pdf

4/20/2015

Heading into this week, the better dynamic for issuers around the 5

year part of the curve remains, while elsewhere the weak dyn

amic persists, although it is not as

noticeable as it was the previous week. Note on

page 3

how at least one issuer took advantage of the better pricing dynamic around the 5

year maturity.

LITTLE MOMENTUM IN THE MUNICIPAL MARKET:

Last week the municipal market offered mixed results for issuers as the tone

was more or less neutral, even as other U.S. bond markets had a more positive tone.

Figure 1

: Trading in the municipal secondary markets has reached a low

dating back to at least January 2013 by one metric. In the chart above

we track the weekly issuance (maroon area), the secondary market

trading (grey area) and divide the secondary by the primary (blue line).

This way we are looking at the amount of trading relative to how many

new bonds are being issued during the same week. This very low trading

volume complicates price discovery and can make it difficult to price a

bond deal but also it acts as a disincentive for dealers to trade the mar-

ket and can make for underperformance to other bond markets as was

the case last week.

BUYERS BITES:

WHAT IS TRENDING HOT:

1) Higher

rated competitive deals see aggressive bidding

2) Maturities of 10

years and shorter

CURRENTLY HARDER SELLS:

1) Chicago Board of Education

2) Large New York City issuers underperforming

WHO IS REPORTEDLY BUYING:

Large domestic banks, life insurance companies, SMAs

MMA

Independent

& Data Driven

APRIL 20, 2015

MUNICIPAL ISSUER BRIEF

MARKET UPDATE

MA CONDUCT RULE

: The MSRB sent an

updated proposal

to the SEC

to establish for Municipal Advisors core conduct standards, obliga-

tions and prohibitions associated with their federal fiduciary standard

to issuers, and duty of care and fair dealing criteria. The 700

plus

page document contains numerous provisions related to the relation-

ship between MAs and issuers, including documentation of the MA

relationship with clients, conflicts of interest, reasonable diligence

conduct standards when providing a recommendation, and a host of

other guidance that differentiates the role and relationship of MAs to

that of broker/dealers.

Next steps will be for the SEC to allow for pub-

lic comments, the timeframe of which has yet to be established.

INVESTORS & ISSUERS

: Several negative dynamics remain in place:



Municipal yields were more or less

little changed

last week, una-

ble to follow other bond markets into slightly lower yield ranges.



This is in part due to

retail resistance to a lower

than

average

yield range.



Mutual funds saw

investors exit municipals

on a net basis for a

third straight week

—

this is the longest period of losses in 18

months, but it is a historically seasonal time for this to occur.



On Wednesday the market saw the 2nd highest amount of bonds

offered by investors in the secondary market of the year

—

this

tends to “clog” the market and

hurts distribution of new

issues.



Some of these trends are seasonally related to people paying

their income taxes (and selling bonds as a result) but if they do

continue into the second half of the month, this

could imply a

more negative dynamic for issuers selling in the near

term



This week’s supply is again above the 2014 and 2015 weekly

averages

with the largest scheduled issue coming via competitive

markets from the state of California

—

a credit that has seen up-

grades and a positive trading tone of late.



A Federal investigation into the CEO of Chicago’s Board of Educa-

tion made for a sharp increase in yields as several large mutual

funds sold the city’s school district credit (see

illustration on

page 2

.) This is likely to increase the issuer’s borrowing costs in

this week’s deals (

MMA

noted to institutional clients on Friday

that its rates are likely to surpass 5.30% in 2035 and 2039 matur-

)

Bond Maturity

Strong or Weak Market for Bond Sellers

Strong

Weak

1.17

2.02

2.92

1.17

2.02

2.92

5yr

10yr

30yr

Muni Bond Rates (%)

4/10

4/17

10x

15x

20x

$100

$200

$300

$400

Jan-13

Jul-13

Jan-14

Jul-14

Jan-15

Secondary/Primary (x)

Par Traded ($B)

Municipal Trading Volume Trends

Secondary Market Par ($B)

Primary Par ($B)

Secondary/Primary (x)

4/20/2015

TOPIC OF THE WEEK: RATING TRIGGERS

MMA

Independent

& Data Driven

RATING TRIGGERS:

Recent fiscal, economic and pension

related challenges have plagued the city of Chicago and several of its oth-

er debt

issuing agencies in recent years. Lately, these have made headlines in the mainstream media. While Chicago’s problems in

many cases are unique in their breadth and origination, the recent downgrades of the city’s GO and its Public School District

off

items to consider for all public issuers of municipal debt. The downgrades made for a rating trigger, in essence an event tha

t i

s trig-

gered by a downgrade, like a posting of collateral, a swap termination payment or maturity acceleration. In the case of Chica

go,

the

recent swath of downgrades put the city and its school system in a difficult position. With the downgrades, the bank counterp

art

on the swaps has the ability to now chose an early termination payment and exit the contract. While the bank and the issuer c

agree to amend the terms to avert the payment, that has yet to occur and has been a closely watched negotiation for all inves

tor

in the school system and the city on a whole.

MMA

recently reminded investors that they

should seek additional compensation for

lending to any issuers exposed to a rating trigger of any sort

. This is largely because triggers are almost always detrimental to tradi-

tional bond investors. Triggers expose any issuer to a third

party that can exert power to be paid ahead of bond investors. Furt

her-

more, these remedies have the potential to exacerbate any financial problems municipalities may be already facing, which only

further puts the investor at risk. And

–

even if the contracts can be renegotiated

–

there is a cost of doing so that the issuer

will be

paying.

WHAT THIS MEANS FOR YOU

: When looking at the various

options associated with a bond financing,

it is prudent for

any issuer to consider what occurs in the event that its

credit rating is downgraded

. There can be many positives to

entering into a swap agreement, as far as managing the

interest

rates in a bond portfolio, but there can also be high

costs upon termination of the agreement. Further

–

in the

wake of the Chicago and Detroit headlines surrounding

rating triggers and swap agreements, investors are likely to

begin to penalize issuers to a certain extent if they are en-

gaged in such contracts.

For governmental issuers, the

most common rating triggers can be found in the financial

contracts associated with swaps, bank

support agreements

and direct loans

Q1 MUNICIPAL DEFAULT ROUND

INSURED BONDS IN THE DATABASE:

Of the $58.4 billion of

bonds in the

MMA

database for being in payment default, draw-

ing on emergency support, or another technical default/

violation, $12.8 billion are wrapped with a monoline bond insur-

ance policy. This relatively large number, however, is driven by a

handful of large impaired situations, not only including

PREPA

and

PRASA

, but also

Harrisburg

and

Detroit

: the latter two be-

ing situations that remain impaired/dependent on payments

from the monolines to cover a portion of debt service to bond-

holders. In

the chart to the right

, we show the amount of in-

sured par wrapped by each company in the database versus

their amount of total insured par outstanding. For the compa-

nies still writing new business, database bonds account for a

very low percentage (0-2%) of outstanding policies (this is good

for those considering wrapping a future deal), but note how

almost 22% of ACA-wrapped bonds still outstanding are being

tracked as impaired by

MMA

VINTAGE STATISTICS STILL LARGELY INTACT

MMA

also updat-

ed our “vintage” data that displays patterns between a bond’s

being impaired and the year in which the bond was issued. In

general, we continue to see a large amount of payment prob-

lems in the years leading up to the financial crisis with a peak in

2007. Many were land secured deals associated with the hous-

ing boom during that time.

See right

4.00

4.20

4.40

4.60

4.80

5.00

5.20

5.40

Yield (%)

Chicago Board of Education 2041 Bond Yields in 2015

Chicago Board of Education

Downgrades

Monoline

Wrapped Par In

Database

Wrapped Par

Outstanding

% Par In

Database

ACA

487

2,250

21.64%

AMBAC

1,861

130,616

1.43%

ASSURED

3,484

310,077

1.12%

BAM

15,355

0.00%

BHAC

4,175

0.00%

FGIC

1,501

16,595

9.05%

NATIONAL

4,519

236,959

1.91%

SYNCORA

930

21,548

4.32%

total

12,783

733,663

1.74%

Impaired & Insured Bonds ($B)

100

150

200

250

300

'90

'92

'94

'96

'98

'00

'02

'04

'06

'08

'10

'12

# of Bond Issues Disclosing Impairment, By Year

Issued

DEFAULT

Support

Other

4/20/2015

REGIONAL BOND ISSUES (Moody’s/S&P/Fitch)

MMA

Independent

& Data Driven

NORTHEAST

4/16:

Loop Capital Markets

priced $650 million future tax secured

subordinate bonds for the

New York City Transitional Finance Au-

thority

; Aa1/AAA/AAA; callable at par in 2/1/2025:

Notes: The +37 to MMA AAA Benchmark is wider than recent trades

MID

ATLANTIC

4/15:

Virginia

sold $215 million general obligation bonds to

Citigroup

Global Markets Inc.

; Aaa/AAA/AAA; callable at par in 6/1/2025:

Notes: Lower coupons outside of 10

years indicates insurance cos.

MIDWEST

4/14:

Dayton, Minnesota

sold $2.3 million general obligation street

reconstruction bonds to

Stifel Nicolaus & Co

.; NR/AA/NR; non

callable:

Notes: Bank eligibility played a role in this low

cost financing

SOUTHEAST

4/14: The

Florida Board of Education

sold $258 million public educa-

tion capital outlay refunding bonds to

Goldman, Sachs & Co.

; Aa1/

AAA/AAA; non

callable:

Notes: This issuer attempts to time the market with 18

hour notice

SOUTHWEST

4/15:

FirstSouthwest

priced $9.5 million unlimited tax refunding

bonds for the

Roma Independent School District, Texas

; A3/NR/A+;

PSF (Aaa/NR/AAA); non

callable:

Notes: PSF wraps have seen increased use with the states’ growth

FARWEST

4/13:

Wells Fargo Securities

priced $16.6 million water system reve-

nue bonds for

Tacoma, Washington

; Aa2/NR/NR; callable at par in

6/1/2025:

Notes: Issuer took advantage of strong pricing in short maturities

Maturity

Coupon

Yield

AAA 5%

2015

2.00

0.22

2020

4.00

1.54

+37

2025

5.00

2.28

+27

Maturity

Coupon

Yield

AAA 5%

2016

5.00

0.27

2020

5.00

1.34

+17

2022

5.00

1.71

+10

Maturity

Coupon

Yield

AAA 5%

2020

4.00

1.25

2025

5.00

1.91

2037

3.00

3.22

+49

Maturity

Coupon

Yield

AAA 5%

2017

2.00

0.60

+15

2020

2.00

1.20

2023

2.00

1.55

Maturity

Coupon

Yield

AAA 5%

2020

5.00

1.37

+20

2025

5.00

2.27

+26

2042

5.00

3.24

+37

Maturity

Coupon

Yield

AAA 5%

2017

4.00

0.88

+43

2020

5.00

1.61

+44

2025

5.00

2.36

+34



Three large deals that influenced the entire market and why (in yellow):



The

New York City Transitional Finance Authority

had to increase yields before closing the account in part because several

large New York issuers have come to market this month and many local investors did not participate in the deal.



Triple

Virginia

received aggressive bidding from Citigroup in large part because the underwriter had pre

orders from several

insurance companies. The following day several of the bonds traded cheaper in secondary markets because the general mar-

ket continued to struggle.



Once again the

Florida Board of Education

announced a competitive deal 18

hours before selling. The deal was mostly struc-

tured 10

years and in and did very well. Last week’s

MIB

noted value in the 5

year part of the curve because of the aggressive

value MMD benchmark had put there.