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Municipal Bond Supply Continues to Fall As Demand Picks Up…Issuance of new municipal bonds by states and local governments is poised to fall for a second straight year. In January, municipal bond issuance dropped 3% from prior month, and is 21% lower than a year ago. Last month, Texas issuers were most active in the primary market, followed by New York and Wisconsin. Transportation, higher education and U.S. state sectors are the most active issuers of new municipal bonds. Last year, $384 billion municipal bonds were issued, almost 20% lower than 2021. The downtrend in municipal bond supply, which started in 2022, is continuing. Meanwhile, investors put cash to buy municipal bonds last week. Four of six weeks in 2023 have seen inflows to municipal bond funds, reflecting strong investor demand for tax-free bonds.
New York Tops New Issue Municipal Bonds…New York bond issuers bucked the trend of lower primary market municipal bond issuance nationwide. Empire State bond issuers sold $50 billion of bonds in 2022, up 2.3% from a year ago. The biggest issuer across the United States last year is the New York City Transitional Authority, which sold $7.5 billion of bonds in 19 bond issues. New York Triborough Bridge and Tunnel Authority came in second place, selling $6.8 billion of bonds in 12 deals. The Dormitory Authority of the State of New York’s 3.09 billion taxable bond sale ranked as the single largest bond offering. New York City sold over $5 billion bonds last year. “We’ve financed through good markets and bad, high interest rates and low. We don’t really have the luxury to try to time the market,” a New York city bond issuer official added that the Big Apple needs to issue between $10 billion and $15 billion a year in new money just to keep the city capital program funded. New York State is the largest source of municipal bonds. A wealthy demographic and high taxes add to the allure of New York bonds.
Bond Trustee Slams Puerto Rico Electric Utility Settlement Offer…Responding to the settlement agreement sent to uninsured Puerto Rico electric utility (‘PREPA’) bondholders last week, U.S. Bank, the bond trustee said, “Individual uninsured bondholders have no ability to settle any part of the PREPA bond trustee’s claim and lien rights, which the PREPA bond trustee is litigating on behalf of all bondholders, consistent with the trust agreement’s governance and collective action provisions.” Terming the recent settlement offer as ‘gerrymandering’, Syncora Guarantee said, “Up until the moment the bondholder votes, there are no distinguishing characteristics between and among the bondholders as their legal entitlements are exactly the same. If classification rises and falls with whether or not a creditor supports a plan, then a debtor would always be able to buy off a settling creditor for purposes of artificially creating an impaired accepting class.”
Trustee, Bondholder Committee Oppose Puerto Rico Electric Utility Debt Plan…U.S. Bank, the Trustee for PREPA legacy bonds, bond insurers and the Ad Hoc Group of PREPA bondholders oppose the electric utility’s proposed debt plan filed in the Title III court by the oversight board. Objections state that the plan is unconfirmable for many reasons. Should the Title III court rule in favor of bondholders in revenue lien litigation, bondholders may be entitled to more than what the plan proposes. Assured Guaranty stated that the plan provides inadequate information. The Bond Trustee echoed that the proposed debt plan is incomplete and unclear. Bondholders complain that the board has not yet made public its settlement with National Public Finance Guarantee.
Conventions Get Busier…Convention attendance is projected to surpass pre-COVID-19 levels by 2024, a trade group forecasts. In 2022, convention attendance doubled relative to a year ago. Las Vegas is a bellwether for national convention and tourism trends due to its large-scale convention and hotel venues. Las Vegas visitor volume is just 9% short of pre-COVID-19 levels. Nationally, conventions attendance is about 30% lower than pre-COVID- 19 levels. Center of Exhibition Industry Research CEO stated, “With the lifting of travel restrictions around the world and the process for applying for a visa improving, more international attendees will attend trade shows, which will also help increase attendance figures.” Convention and tourism venues generate millions of dollars of tax revenue for states and local governments.
Connecticut Extends Fiscal Restraint…Fiscal safeguards such as spending caps and debt limits set in 2017, that led to credit ratings upgrades, have been extended for an additional five years. Lawmakers boosted deposits to Connecticut’s rainy-day fund to 18% of spending up from 15%, with excess to pay down pension debt. Capital gains tax above a certain threshold are deposited to Connecticut’s rainy-day fund. These covenants, enshrined in Connecticut bond documents, have led this outpost of the wealthy to amass a $4 billion rainy day fund and make additional contributions of $6 billion to underfunded pensions. Last week, Governor Ned Lamont presented a $50 billion biennial budget for fiscal years 2024 and 2025. Lamont highlighted that Connecticut’s fifth consecutive balanced budget plan is an outcome of sound fiscal policy and solid tax revenue growth, adding “One of the smartest actions the General Assembly has taken over the past decade is the enactment of the fiscal guardrails that have provided predictability and stability to our budget process.” Issuers in Connecticut sold 20% fewer municipal bonds in 2022 from a year ago.
ESG Trend Favors Municipal Bonds…The $ 4 trillion municipal bond market is well positioned to fit growing demand for socially responsible investments. Municipal bonds finance public infrastructure, serving a worthy cause for the public. Four out of five U.S. individual investors are interested in considering positive social and/or environmental impact, while considering market returns on investments per a 2021 Morgan Stanley survey. Large money managers are being forced to think about outcomes when putting money to work. The trend towards economic, social and governance (ESG) has caused a political rift nationwide. Many Republican state officials contend that ESG investments promote ideological interests at the expense of investment performance, while others declare far-reaching impacts of intentional investments in infrastructure. The variety of municipal bonds, with different sub-sectors and bond structures, provide multiple ways for investors to contribute towards sustainability outcomes. There are no uniform standards on labeling ESG bonds. Government issuers often label such bonds as green, social or climate bonds in the primary market. ESG bond examples include New York City tax-exempt. refunding ‘green’ bonds for Hudson Yards development in 2021 and California’s ‘social’ affordable housing bonds. Chicago’s first ‘social’ bond issued last month saw its yield cut up to 15 basis points relative to non-labelled bonds, reflecting investor demand for ESG investments, a tailwind for the municipal bond market.
Compare 30-Year taxable U.S. Treasury yield 3.79% to 30-Year tax-exempt muni bond yield “AAA” 3.34%; “AA” 3.77%; “A” 4.21%. For investors in the 35% tax-bracket, a 4% tax-exempt yield is equivalent to a 6.15% taxable yield. Top-rated long-term tax-free bonds yield 88% of comparable taxable U.S. Treasuries.