Municipal Bond News 9/6/22

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Convention Centers Ramp Up… Chicago Airport Bonds Oversubscribed… Court Upholds Atlantic City Casino Payments…Online Casino Games Spurred… College Headwinds…PREPA Mediation Extended…Municipal Supply Drops… The Battle For Capitol Hill…

Convention Centers Ramp Up… More in-person events and more bond deals make convention centers a lot busier than a year ago. The bellwether of the convention business, Las Vegas convention attendance almost doubled this July from a year ago, while still 38% short of pre-Covid-19 attendance. Another convention hotspot, Texas is expanding at least Some America Rescue Plan funds are in play. Multi-billion dollar build-outs are in itself an economic engine, and high profile events help build regional economic prowess. “The taxes, jobs, and economic impact of the convention center provides a strong return on any costs associated with it,” a Dallas city official noted. Many argue that convention center activity peaked in 2016, and in-person events had been waning even before COVID-19 hit. After pledging the likes of sales tax, hotel tax or budget appropriation to finance large venue infrastructure, cities face taxpayer backlash from time-to-time when unanticipated slowdowns occur. Last week, newly issued Las Vegas convention center bonds fetched 4.2% tax-free yield, or about 150 basis points more than top-rated municipal bonds.

Airport Bonds Oversubscribed… Four times worth of orders came for Chicago O’Hare airport $1.8 billion bonds issued last week. Tax free 5% coupon bonds maturing in about nine years fetched 3.69% yield, while 35-year maturities fetched 4.74% yield. “We are very happy with where the pricing ended up,” Chicago CFO added “We garnered a lot of market attention over the course of the last few days, just given our relative size. Ultimately we were able to command a lot of attention on this transaction.” The Chicago O’Hare bond issue is the third-largest bond issue in Chicago history. Nationwide, airport bond issuance is 70% higher, as tax-free supply has languished with new municipal bond volume down 12% in 2022 from last year.

Court Upholds Atlantic City Casino Payments… A New Jersey court struck down a 2021 state law that cut down casino property tax bills as relief for pandemic-related casino- losses. “Although the record reflects casino revenue loss in 2020 due to brick-and-mortar closures at the early stages of the pandemic, the record also demonstrates that Atlantic City casinos experienced exponential growth in internet casino gaming and internet sports wagering in 2020 and 2021 which decreased the economic impact of the brick and mortar losses,” the court ruled that cutting back on property taxes is unconstitutional. The court upheld the 2016 Casino Property Tax Stabilization Act which mandated certain minimum property tax payments or PILOTs from casinos, that are barred from property tax appeals. Atlantic City has been under state oversight for six years. For Atlantic City, which depends on the casino industry, the ruling is credit positive.

Online Casino Games Spurred… Why leave money on the table when recession clouds loom, ask more U.S. states looking to online casinos for tax dollars. The nation’s fourth most populous state, New York, is vying for online casino games, just months after it legalized online sports betting in January 2022. Only six U.S. states including Connecticut, New Jersey, Pennsylvania, Delaware, West Virginia and Michigan have legalized online casino games, while 42 U.S. states have legalized brick-and-mortar casinos or mobile sports betting. States which legalized online casino wagers saw $970 million in tax revenue in 2021, compared with $560 million generated in the 30 states that currently have legal sports betting. In New York, legal sports betting was a runaway success that brought about $347 million in the inaugural six months. Online casino games could fetch even more per an independent study. Online gaming, which emerged stronger during the pandemic, is gaining ground.

College Headwinds… U.S. college endowments lost over 10% before fees for the twelve months ended June 30, 2022, the biggest decline since the Great Recession. Stark losses come just one year after colleges endowments returned a median 27% in 2021. Colleges usually count on at least 7% annual gains. Endowment spending is based on three-or-five year average returns, so a single year of investment losses is smoothed over time. Colleges received plenty of federal aid to cope with COVID-19. However, recession clouds dampen fundraising from donations, as well as affordability and enrollments. Investment losses and inflationary pressures are a double whammy for U.S. colleges.

PREPA Mediation Extended… “Seems they are close to an agreement in the PREPA plan,” an expert noted. Parties mediating the restructuring of $8 billion Puerto Rico electric utility debt are likely to come to an agreement by September 30, 2022.

Municipal Supply Drops… 23% fewer municipal bonds were issued in August relative to last year. Higher rates have led to an 81% drop in refunding bonds from last year. Governments have issued fewer taxable bonds this year. Higher education, housing, toll roads and pension obligation bond sectors have seen municipal bond supply tumble. Infrastructure federal funding and unutilized covid-19 relief funds allow governments to lower debt. Wall Street is debating if the coming months could see an uptick in tax-free bond supply. Most analysts have lowered 2022 primary market bond volume estimates to somewhere around $400 billion, but Citigroup believes 2022 issuance cold reach near $500 billion because of “inflationary pressure on govt balance sheets.” Typically, recession fears urge sates and locals to defer borrowing. California has issued 32% fewer municipal bonds this year, so this week’s Golden State $2.5 billion general obligation bond sale is eagerly awaited by retail High Net Worth investors.

The Battle For Capitol Hill… Government policy defining economy and inflation outlooks hinge on the midterm election, only two months away. A divided U.S. government is not a given. The outcome of the November election could be a close call per recent polls. Republicans need about five additional seats to gain the House and only one more seat to wrest control of the Senate. At present Democrats control the House with a narrow majority, and the Senate is a 50-50 split between Democrats and Republicans. New electoral maps in key states such as Florida and Texas could impact the outcome of the November 2022 elections. 43 U.S. states have completed the process of redistricting and redrawing electoral district maps for the U.S. House of Representatives. Redistricting has created deeper red and blue districts, as both parties stressed upon shoring up respective electoral bases. As a result, a smaller number of House seats are truly competitive. A spate of retirements from the U.S. Congress could bring change in the fortunes of political parties. The balance of political power on Capitol Hill could reset investor expectations.

Compare 30-Year taxable U.S. Treasury yield 3.39% to 30-Year tax-exempt muni bond yield “AAA” 3.44%; “AA” 3.95%; “A” 4.31%; “BBB” 4.27%. For investors in the 35% tax-bracket, a 4.27% tax-exempt yield is equivalent to a 6.57% taxable yield. Top rated long-term tax-free bonds yield 101% of comparable taxable U.S. Treasuries.