Municipal Bond News 7/17/23

Detroit ‘Social’ Bonds Oversubscribed…Top Ten Muni Issuers…Muni Bonds Steady Amid Market Volatility…Bond Markets Trim Rate Hike Odds…Hospital Mergers Gain Steam…Senior Housing Occupancy Lags…Affordable Housing Shortage…Island’s Economic Growth Defies Oversight Board Messaging…Puerto Rico Electric Utility Debt Talks Renewed…

Detroit ‘Social’ Bonds Oversubscribed…A flood of orders to buy Detroit’s $100 million bonds offered last week pushed down yields. Investors placed $900 million in orders for a $20 million slice with a 6% coupon maturing in 2039, the people said. The bonds were priced to yield 4.83%, down from an initial 5.33%. The bonds are rated one level below investment grade by both Moody’s Investors Service and S&P Global Ratings. Both companies raised Detroit’s credit rating in April to the highest level since 2009. The city’s “finances continue to strengthen and improve with each new year,” the CFO added “All major revenues have surpassed pre-pandemic levels and are projected to continue growing.” Last week’s bond sale marks the 10^th anniversary of Motor City’s historic bankruptcy. Since then, Motor City has shown eight years of balanced budgets, boosted budget reserves, and higher-than-expected tax collections.

Top Ten Muni Issuers…California has sold the highest volume of tax-free bonds in the first half of 2023, rebounding from 10^th place a year ago. Texas Natural Gas Securitization and New York’s Triborough Bridge and Tunnel Authority ranked second and third respectively based on the amount of municipal bonds sold this year. New York City rose to fourth place, with $3.4 billion muni bonds issued in the first half of the year. Illinois placed seventh among top volume bond issuers, having sold $2.5 billion municipal bonds, 56% higher than the amount of bonds Illinois sold a year ago.

Muni Bonds Steady Amid Market Volatility…Volatile market conditions rocked U.S. Treasury yields over the past two weeks. Amid peak tax-free reinvestment season, yields on state and local government bonds remained steady. Muni bondholders receive billions of dollars of tax-free coupon and principal payments between June and August and cannot find enough new muni bond offerings in the primary market. Excess demand for tax-free bonds led muni bonds to outperform comparable taxable U.S. Treasuries. U.S. Treasury bond yields slid 10 to 16 basis points last week, just days after nearing 2023 highs. Meanwhile, municipal bond yields have remained largely steady during this period.

Bond Markets Trim Rate Hike Odds…Consumer prices rose less than expected in June. Services prices excluding housing and energy, a category closely monitored by Federal Reserve Chair Jerome Powell, increased at the slowest annual pace for 18 months in June. Bond markets expect a 25-basis point rate hike on July 26, and trimmed odds of additional rate hikes.

Hospital Mergers Gain Steam…Mergers of hospitals and health systems reached a post-pandemic high. 20 hospital merger transactions, involving over $13 billion of revenue were announced in the second quarter of 2023. This included eight not-for-profit systems, four investor-owned health system, two religiously affiliated systems, four academic/university-affiliated organizations, one governmental organization, and one academic organization partnering with multiple not-for-profit organizations. Faced with high operating costs post-pandemic, mergers help hospitals to expand, gain economies of scale, and leverage resources.

Senior Housing Occupancy Lags…Occupancy at senior-housing facilities is 83% in the second quarter of 2023. That’s up from pandemic lows, but still below 87% pre-COVID-19. Rising prices, the housing market, and high interest rates have much to do with it. Prices of nursing homes and adult day care are up 4.5% from a year ago, though the pace of price hikes has lessened recently. Many seniors have seen home values decline, as high interest costs put a lid on renovations necessary for older home sales. The elderly aging in place is an outcome of post-COVID-19 trends. However, a historic surge in Americans turning 80 years old is expected over the next few years favoring long-term demand for senior-housing facilities.

Affordable Housing Shortage…Construction cost of new affordable housing is not keeping up with demand, as high interest rates and inflation are challenges. Construction cost spikes means fewer units cannot be built with existing government subsidies. Moreover, some 400,000 affordable housing converted to market rate rentals between 2019 and 2021 due to expiring tax credits. Since 1987, the federal government has financed more than apartments with Low Income Housing Tax Credits, a 30- year tax credit to encourage developers to build affordable housing. When these tax credit agreements expire, landlords have the option to charge market rates. Unless additional affordability agreements or subsidies are secured, about 100,000 units could expire every year. Although lawmakers are working to expand tax credits, strong demand for affordable housing units is favorable for bondholders.

Island’s Economic Growth Defies Oversight Board Messaging…The Island’s economy has picked up pace. Economic activity is 1.8% from a year ago and jumped almost 1% from last month per the Economic Development Bank of Puerto Rico. The private sector is growing, wages are rising, and labor participation is the highest in a decade. However, the oversight recently told the Title III court that the Island’s economy was weakening. The oversight board seeks reduced bondholder recovery on electric utility bonds, which the Trustee and majority bondholders plan to appeal in the First Circuit. A boost in economic growth favors payouts on contingent value instruments, also known as CVIs, as well as bolsters the sales and use tax secured COFINA bonds.

Puerto Rico Electric Utility Debt Talks Renewed…Judge Swain has extended the deadline for the electric utility’s amended debt plan by two weeks. The parties have been ‘actively negotiating’ in the past three weeks. The oversight board said, “While the oversight board cannot guaranty a new settlement will be attained with creditors holding a substantial percentage of the outstanding debt, it believes the prospects of such a settlement are sufficient to try to avoid filing an amended, proposed plan this week that might have to be amended again shortly thereafter.” Since Judge Swain’s recent ruling that dealt to blow to bondholder recovery, mediation talks have picked up. This is a change from a year ago when the parties failed to hold mediation sessions despite court orders.

Compare 30-Year taxable U.S. Treasury yield 3.91% to 30-Year tax-exempt Municipal Bond yield “AAA” 3.57%; “AA” 3.83%; “A” 4.24%. 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 91% of comparable taxable U.S. Treasuries.