Bonds

A suburban Chicago senior living retirement facility is on track to exit bankruptcy next month with creditor voting now underway and conduit issuer approval for its restructuring bonds in hand. The restructuring gives the facility more breathing room by requiring bondholders to take a haircut and wait longer to recoup their investment. The Park Place of Elmhurst, in the western Chicago suburb of Elmhurst, filed for Chapter 11 bankruptcy in December after reaching agreement on a restructuring with holders of a majority of principal from the $141 million remaining from $146 million of bonds issued in 2016 through the Illinois Finance Authority. The COVID-19 pandemic, which has hit many retirement communities hard, hasn’t helped the facility’s fiscal woes but it’s not blamed for the restructuring, its second since opening in 2012. Park Place, which has 300 residents, has fared well compared to many peers. The 2016 bonds were issued to exit its previous bankruptcy in exchange for the remaining principal from the initial $175.5 million unrated 2010 issue. The court approved the facility’s disclosure statement at a hearing late last month and the IFA signed off on the restructuring bonds at its monthly meeting earlier this month. Creditor voting, which includes bondholders, ends March 5 and a confirmation hearing is set for March 16 in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division, according to trustee filings. Holders of more than 84% of the 2016 A Bonds, more than 83% of the 2016 B Bonds and more than 62% of the 2016 C Bonds, previously agreed to the new restructuring. “The proposed refinancing will reduce the borrower’s total debt outstanding, while lowering coupon rates and extending the maturity date of the new series 2021 Bonds, resulting in lower debt service payments,” IFA executive director Christopher Meister wrote in his board message. “Despite its challenging debt structure, the borrower has maintained the quality of life for its residents – a very beneficial outcome.” The bonds have recently traded at 73 cents to 76 cents on the dollar, according to data on the Municipal Securities Rulemaking Board’s EMMA website. The replacement bonds are expected to be sold in early April. The restructuring will cut debt to $107.27 million from $141.11 million “significantly deleveraging the project” with annual debt service dropping by $1.2 million, according to IFA documents. The holders of $103.7 million Series 2016A and $15.5 million Series 2016B Bonds will receive a settlement of approximately $107.27 million, a 90% payout of their remaining principal. Accrued and unpaid interest on the Series 2016A and Series 2016B Bonds will be paid by the Series 2016 bond trustee out of funds related to the Series 2016 bonds. The restructuring extends the maturity date to 2060 from 2055 and lowers interest rates with the new coupon rates set at 5.125 % compared to rates ranging from 5.625% to 6.44% on the existing bonds. The payments will be interest only for the first three years and the principal will then be amortized over the next 37 years with the first annual principal payment to bondholders occurring on May 15, 2024. The Series 2016C Bonds will be repaid by the sponsor in a pro-rata share of $725,700 which amounts to a meager 3% of the approximately $21.92 million of outstanding principal plus 3% of the accrued but unpaid compounded interest. The Series 2016C Bonds were issued as a “hope” note approved in connection with the Series 2016 Restructuring, payable only from excess cash and to date only one payment of approximately $24,000 in interest has been triggered and paid, IFA documents said. Park Place’s sponsor is Rest Haven Illiana Christian Convalescent Home which does business as Providence Life Services. The 2016 restructuring was blamed on the real estate market, leading to struggles to fill units, and the facility now says it fell short of fixing its structural financial problems. The 2016 C bonds mature in 2055 and represented a 15% principal payment of the 2010 bonds while the original 2010 holders received 85% of principal in the 2016 A and B series. The primary benefit of the 2016 restructuring for the facility was that it eased payment demands by extending the maturity to 2055 from 2045. Park Place turned to a consultant in 2019 to review appropriate estimates on morbidity and concluded residents at Park Place “were living longer than expected, which is an altogether good thing which happened to have a negative impact on Park Place’s cash flow” as new entrance fees fall short of expectations, court filings say. Park Place currently has a waiting list. That led to a May payment default reported by bond trustee UMB Bank. Bondholders granted the facility a forbearance against action on the defaults in May and it was later extended to November as restructuring terms were negotiated. Park Place is a not-for-profit established to construct, own and operate the continuing care retirement community. The facility operates 181 units of varying sizes for independent living, 46 assisted living suites, 20 memory support assisted living units, and 37 nursing beds in its health center. Park Place is represented by Dopkelaw LLC. UMB is represented by Mintz Levin PC and Burke Law. The number of retirement projects defaulting for the first time last year increased by 150% to 30 from 12 in 2019, according to a Municipal Market Analytics default report published this week. The 30 first-time defaulters in 2020 represented 2.95% of all outstanding senior living sector par as of Jan. 1, 2020. In 2019, the 12 defaulters accounted for 2.22% of outstanding par on Jan. 1, 2019. There have been nine first-time defaults so far this year.
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While lawmakers on both sides of the aisle are optimistic that highway spending has the bipartisan support it needs to pass this year, there is growing concern about the viability of broader infrastructure spending moving on the same timetable. During a Senate Environment and Public Works Committee hearing Wednesday, EPW Chair Tom Carper, D-Del., said he plans to get a surface transportation bill marked up by Memorial Day and work across the aisle with ranking member Sen. Shelley Capito, R- W.Va. Rep. Peter DeFazio, D-Ore., expects policy changes in a surface transportation bill. Bloomberg News “Senator Capito and I, along with our staffs, are already getting to work,” Carper said. “Last week, we invited all of our Senate colleagues to share their states’ policy priorities with us so we can begin drafting legislation this spring.” In 2019, the EPW committee unanimously passed a bipartisan highway bill, but it never had a finance component and never received further consideration before expiring when the new Congress began this year. Lawmakers can agree that infrastructure needs improvement, it’s worth paying for and that those who use roads, highways and bridges have a “responsibility to pay for them,” Carper said. Carper advocated for a national vehicle miles traveled fee, which his committee called for back in 2019. “Last Congress, EPW led by example—we unanimously approved our bill to improve and expand our surface transportation programs, and we did it 18 months before the last five-year surface transportation reauthorization bill expired,” Carper said. The current law expires on Sept. 30, 2021. The House Transportation and Infrastructure Committee has plans to move a surface transportation infrastructure bill similar to the highway funding component of a bill passed by the House but not the Senate in the previous Congress. The surface transportation element of that bill was combined with an overarching infrastructure bill and included many municipal bond provisions such as reinstating tax-exempt advance refunding, increasing the bank-qualified bond cap and creating a new kind of direct-pay bond. During an American Association of State Highway and Transportation Officials webinar Wednesday, both House T&I Chair Peter DeFazio, D-Ore., and Rep. Sam Graves, R-Mo. promoted bipartisanship for a surface transportation bill. Graves said the committee plans to put together language this spring for a multi-year bill. Capito said the bill would likely be a five-year authorization. DeFazio plans to focus on climate change and resilience projects in a surface transportation bill. “We’re going to do real infrastructure investment, but it is also going to be very transformative,” DeFazio said. However, some lawmakers worry about a push to pass a broader infrastructure bill via the budget reconciliation process meaning only a simple majority in the Senate would be needed to pass the bill. “The strong bipartisan support that exists for a surface transportation reauthorization bill and other infrastructure legislation will not extend to a multi-trillion dollar package that is stocked full with ideologically driven, one-size-fits-all policies that tie the hands of states and communities,” Capito said. On Tuesday, Sen. Bernie Sanders, I-Vt., who is Senate Budget Committee chair, told Axios that the reconciliation process could be used to get a broader infrastructure bill through. The House is already moving towards passing a COVID-19 relief bill through the reconciliation process. Reconciliation could be used one more time before Sept. 30, 2021 for infrastructure, if so, that bill would have a more stimulus-like approach. “There is one train of thought that they use that as the stimulative bill and then they follow that later in the year with a more traditional surface transportation authorization,” Ed Mortimer, the U.S Chamber of Commerce’s vice president of transportation and infrastructure told The Bond Buyer in a separate interview. New policies, such as reauthorization, cannot be created in the reconciliation process. The Chamber is not advocating for reconciliation to be used for infrastructure, Mortimer said. “We’d like for infrastructure to come to an agreement on this in a bipartisan manner where we don’t need to use reconciliation,” he said. If lawmakers do decide to go that route, Mortimer predicts increasing funding for programs such as water and broadband and increased investment levels for discretionary programs such as Infrastructure for Rebuilding America grants. Climate change initiatives could also be included through increased funding, instead of changing policy, Mortimer said. “Any policy change that Congress makes, you’re going to need to get 60 votes in the U.S. Senate and that’s obviously a challenge in the current environment,” Mortimer said.
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Some influential advocacy groups and think tanks are questioning whether the proposed $350 billion in federal aid to states and localities Congress is considering should be scaled back or refocused. The House is expected to approve a $1.9 trillion package of COVID-19 emergency aid this week that is expected to also pass the Senate by March 14. But doubts about the necessity and the focus of aid for state and local governments appears to be mounting. The bipartisan Committee for a Responsible Federal Budget said Monday that the $350 billion for state and local governments “appears to be excessive” noting that "many states" now expect budget surpluses or are experiencing strong revenue gains. Others are "experiencing fewer losses than expected.” The National League of Cities is “very much opposed to any scaling back” of federal aid, according to Michael Wallace, NLC’s legislative director for housing & community and economic development. National League of Cities Economists at the right-leaning American Enterprise Institute, another Washington think tank, have estimated that the aggregate revenue losses among states and local governments will be around $130 billion between the second quarter of 2020 and the second quarter of this year. “That’s nowhere near what people expected last year,” said AEI Resident Scholar Stan Veuger. “Revenue losses are pretty limited.” Veuger said previous emergency spending bills have already provided enough funding although some additional aid could be justified. “Maybe $100 billion or $200 billion seems reasonable,” he said. The U.S. Chamber of Commerce, among the largest lobbying groups in Washington, is supporting the $350 billion in direct aid to state and local governments. But a senior official there has suggested refining the distribution formula. Neil Bradley, vice president and chief policy officer for the Chamber, told members of the National Association of State Treasurers earlier this week the money should go where the need is the greatest. States and the District of Columbia would receive $195.3 billion or 60% of the $350 billion while local governments would get $130.2 billion, or the remaining 40%. Each state is guaranteed a minimum allocation of $500 million with the remaining $169 billion based on the state share of total unemployed workers. The $130.2 billion for local governments would be divided evenly between cities and counties. The share for counties would be based on population while the share for cities would be divided two ways. The Community Development Block Grant formula would be used to distribute $45.57 billion for municipalities with populations of at least 50,000. The remaining $19.53 billion would go for municipalities with populations of less than 50,000. “That's the formula that Congress is comfortable with,” Bradley said. “It's not a formula that matches where the needs are right now, based on the pandemic.” Bradley said the hardest hit states generally are those with economies heavily reliant on tourism or the oil and gas industry. Five states -- Florida, Texas, Oregon, Alaska, and Hawaii -- had revenue losses of more than 9% from the onset of stay-at-home orders in March through the end of December, according to the State and Local Finance Initiative of the Urban Institute. Some states had revenue gains or smaller than expected declines over the same period, the Urban Institute initiative found. On average state revenues declined by 1.8% over that period. But state and local government groups have countered that analyses that solely focus on revenues miss the expense side of their budgets, which suddenly and unexpectedly rose because of the pandemic. Additional public spending has been needed for county coroners to ambulance squads and the public health officials who are running testing and vaccination clinics. “COVID-19 response costs are outpacing revenues,” said Teryn Zmuda, chief economist of the National Association of Counties. “The nation’s local governments, including the 3,069 counties have taken the lead on the local response to the pandemic.” Senate Majority Leader Chuck Schumer, D-N.Y., said Tuesday there’s an agreement among “mayors, governors, and economists from across the political spectrum” that a sizable federal effort is needed. “Treasury Secretary Yellen told us that the smartest thing we can do is act big,” said Schumer. The Committee for a Responsible Federal Budget pointed out that the new federal aid package will include over $500 billion in money for state and local governments. They list $130 billion for public schools, $30 billion for transit aid, and $350 billion in direct aid to state and local governments as part of the total. “We suggest policymakers reduce total aid to roughly $200 billion by shrinking direct aid to $100 billion and aid to public schools to $70 billion,” the bipartisan group said. The National League of Cities is “very much opposed to any scaling back” of federal aid, according to Michael Wallace, NLC’s legislative director for housing & community and economic development. “We track at least 6,000 cities that still have not received any amount of federal aid,” said Wallace. “The CARES Act Coronavirus Relief Fund just sent funding to the 36 largest cities and left it up to the states to decide how much and if they wanted to share with localities. And the political situation in each state meant there were lots of potential outcomes.” Thousands of municipal governments, as a result, were left out of receiving any federal aid. This pending legislation is the only bill that would provide direct federal aid to all of the nation’s local governments. The bill also sets no deadline for communities to spend their federal aid, allowing cities, counties, towns, and villages a buffer to deal with eventual drops in property values because of office vacancies or other lagging effects of the pandemic. “It’s going to take multiple years to dig out of this decline,” said Wallace. The legislation also may be the sole bill that passes Congress with emergency aid to local governments. Quantifying revenue losses at the local level among 19,000 municipal governments is more difficult than at the state level and Washington think tanks don’t have much data on that, Wallace said.
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Gov. Phil Murphy’s call for New Jersey to make its first full pension contribution in 25 years is generating questions about retirement-system overhaul in one of the nation's lowest-rated states, and how might the capital markets respond. Murphy on Tuesday revealed the proposal to pay toward pensions roughly $6.4 billion, or about 14% of his $44.8 billion fiscal 2022 budget proposal to lawmakers. Overall spending would rise 10%. Democrat Murphy's election-year budget would increase aid to schools and provide income-tax rebates to low- and middle-income families. Making the full actuarially required contribution will need an additional $1.6 billion expense, according to Murphy. New Jersey was initially scheduled to earmark 90% of its full contribution this year under a ramp-up plan. “We’re now on the road to fixing one of the biggest financial problems of any state in America,” said New Jersey Gov. Phil Murphy. Bloomberg News “We’re now on the road to fixing one of the biggest financial problems of any state in America,” Murphy said during his fourth budget address, this time pre-recorded in an empty Trenton War Memorial. He bypassed the traditional speech to lawmakers because of COVID-19 protocols. “And when we keep making this pension payment, we will go from a pension system that many said was destined for bankruptcy to one that is solvent, healthy and sustainable.” Postponing or reducing pension contributions would risk a collapse of New Jersey's retirement system, Pew Charitable Trusts said last October. Pew showed New Jersey’s pensions 38% funded, with lllinois only slightly better at 39%. Illinois is the only state with lower ratings than New Jersey, and pensions are the big drag on both. "Pew was not overstating the reality," said Tom Kozlik, head of municipal strategy and credit at Hilltop Securities. "New Jersey's pension plan remains in dire need of funding." Murphy said his plan projects $861 million in savings over 30 years. Administration officials say under Murphy, New Jersey's contributions over four years will have reached $18 billion, or $9.4 billion more than Republican predecessor Chris Christie contributed over two terms. New Jersey officials and observers await reaction from the rating agencies. "It is what they have harped on for about a decade, through the downgrades and the negative outlooks," said Regina Egea, a Christie administration veteran who is president of think tank Garden State Initiative. Of Murphy's plan, she said: "How sustainable is it?" While praising the initiative, Ralph Albert Thomas, executive director for the New Jersey Society of Certified Public Accountants, urged that “real reforms be made to public worker pension and benefits plans so that we don’t have to continue to dedicate such a large chunk of the budget to pay for these benefits.” NJCPA supports a package of bills by Senate President Stephen Sweeney, D-Gloucester, that would shift from the current defined-benefit system to a hybrid system and change benefits for new public workers. The organization said the change would save the state hundreds of millions of dollars a year. Unfunded pension liability has been long a sticking point for the rating agencies. The multi-year burden of rapidly-rising pension contributions is "the result of significant historic pension underfunding,” Moody’s Investors Service said in November, when the Garden State issued about $4 billion in COVID-19 emergency general obligation bonds. Moody’s rates New Jersey’s GOs A3. S&P Global Ratings downgraded New Jersey to BBB-plus from A-minus right before that sale. Fitch Ratings and Kroll Bond Rating Agency rate Garden State debt A-minus and A, respectively. The pension payment “might sound like good news, but it is anything but that in the absence of genuine pension reform,” said Steven Malanga, a senior fellow with the Manhattan Institute for Policy Research, a longtime critic of government employee pension plans. Together with employee healthcare costs, he said, the two benefits alone would consume about 25% of the budget. “A single one-time payment of $6.4 billion doesn't solve the pension problem,” Malanga said. “New Jersey would have to devote at least that much every year for the next 20 years, at least, to stabilize its deeply underfunded pensions. That's why cost-saving reforms remain essential.” State-level funding is just part of the dilemma, according to Villanova School of Business professor David Fiorenza. "There is also the amounts of cities, counties and local municipalities that may come forward with unfunded liabilities," he said. "These other taxing authorities will look to both the state and federal government for assistance. Gov. Murphy wants to be re-elected so he will be treading water and trying to please unions and the citizens, a very hard balance." The spending plan calls for no new broad-based taxes, according to Murphy. The $44.8 billion assumes 2.4% growth in total revenue and includes a surplus of $2.193 billion, or just under 5% of budgeted appropriations. Murphy cited improving revenue projections partly due to record-high stock markets, federal stimulus that directly aided individuals and businesses, and a so-called K-shaped recession under which middle and high-income households recover more quickly while low-income households continue to struggle. His proposal includes $319 million in direct tax relief for middle-class families, which he said resulted from last year’s millionaires tax enactment, and features $1.25 billion in funding to support various property tax relief programs. Separately, Murphy on Monday signed three bills establishing a framework for legalized marijuana. Murphy's fellow Democrats control the legislature but the relationship hasn't always been harmonious. Paul Sarlo, D-Wood-Ridge, who chairs the Senate’s Budget and Appropriations Committee, struck a cautious tone. “The economy continues to be fragile so we should not be near-sighted about fiscal conditions,” he said. “Because we have been relying on federal aid with a limited lifespan and on long-term borrowing to bridge the gap, we should put this spending plan into a two-year perspective so we avoid a ‘fiscal cliff’ with the drop-off of revenue in the near future.” Republicans accused Murphy of election-year posturing. “The governor’s budget is increasing spending by 11% since last year and by about 30% since he took office three years ago,” said Sen. Declan O’Scanlon, R-Little Silver, who sits on the budget committee. “It’s fueled by one time windfalls of federal revenue, massive one-time borrowings, and spending down surplus.” Egea criticized Murphy for balancing the budget through one-shot maneuvers such as borrowing and federal cash. “[It] bodes poorly for all New Jerseyans in the very near future,” said Egea, former chief of staff under Christie. “Unless there’s more borrowing or further federal bailouts, get ready New Jersey, you just got stuck with the bill.”
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The municipal high-yield sector is outperforming all others as rates globally are at historic lows, municipal ratios to U.S. Treasuries dip to near 20-year lows and investors clamor for any incremental yield. High-yield — despite its inherent risk — is returning above 1.75% so far in 2021, following a strong end to 2020 at a 6% return. Record high inflows into high-yield municipal bond funds over the past 11 weeks as of Jan. 25 demonstrates the overwhelming appetite for yield paper on the buyside, according to Refinitiv/Municipal Market Data. Most recent deals “fit right into the buyer wheelhouse offering some size and varied credits, most of which will offer wider spreads than what is available today,” Refinitiv analyst P. Franks said in a Jan. 25 report. Municipal performance compared to U.S. Treasuries posted the best outperformance for tax-exempts in the 30-year slope, according to Eric Kazatsky, senior strategist at Bloomberg Intelligence. Though Kazatsky said investment-grade returns pale in comparison to those for municipal high-yield. The Bloomberg Barclays Municipal Index, with a double-A credit quality, has year-to-date returns of just 0.25%, which trails longer-dated municipals, with returns of 0.40%. Triple-B municipals are returning at 1.09%. The Bloomberg Barclays Municipal High Yield Index has posted historic returns of 1.77% so far in 2021, a record. “Prices for municipal high-yield bonds continue to hit new highs, despite the havoc COVID-19 has caused in the muni market and unknown risks over the next year,” he said in a report. The low default rate and high performance of municipal high-yield paper in 2020 translates into potential value and opportunity ahead in 2021, said Phil Toews, chief executive officer at Toews Asset Management, in a recent interview. “Because high-yield bonds typically move lower along with equities, we haven't suffered a lot of default risk for high-yield muni bonds,” he said. Toews manages $2.2 billion of total assets under management, including $800 million of high-yield bond assets in its funds. The firm offers high conviction tactical models, most of which have some exposure to high-yield bond instruments. When in a bullish posture, they attempt to track market indices and may gain some exposure through high-yield bond exchange-traded funds. He is optimistic on the sector, especially since investment-grade bonds “are a very poor source of returns because we are in a negative real return environment with interest-rate risk.” Toews referenced the 3% to 4% spread between the high-yield and investment-grade sectors. His expectations for returns are much higher on a 12- to 24-month forecast, especially since municipals are outperforming taxable bonds so far in 2021. High-yield has been trading with attractive spreads in the secondary market of late, according to the Refinitiv data. A $5 million block of New Jersey general obligation emergency COVID-19 bonds traded recently with a 4% coupon due in 2032 at a 1.50% yield. New Jersey is rated A3/BBB+/A-/A, one of the lowest-rated states. That spread was 64 basis points over the generic, benchmark, triple-A GO scale at the time, even though it was slightly tighter than where it traded at 68 basis points a week earlier, the data showed. In addition, a $5 million block of New York State Metropolitan Transportation Authority revenue bonds were sold at a 2.31% yield. The spread was 93 basis points higher than the generic triple-A scale, which was on top of recent levels, though more than 50 basis points tighter than where it traded in December 2020, Refinitiv data showed. The MTA, rated A3/BBB+/A-/AA-, is facing severe budgetary pressures from knock-on effects on ridership from COVID-19. Phil Toews, CEO of Toews Asset Management Yields are attractive when compared to the low absolute yields in the high-grade market and performance continues even after the volatility last spring, analysts noted. “For an outsider looking at risk pricing in our market, it appears the pandemic never happened,” Kazatsky said. “While some of this is based on the resiliency of the muni market, much of the price improvement has been technical in nature as strong inflows and little yield have dictated the direction and strength, especially when it comes to more bespoke trading credits with low or no ratings." Others agreed that the high-yield sector offers value for yield-starved investors in the current market. “We remain constructive on high-yield municipals for their diversification benefits, high levels of income, and the potential to be rewarded for superior security selection,” Peter Hayes and Sean Carney of BlackRock Inc. wrote in a Jan. 19 municipal market 2021 outlook report. The high-yield sector finished 2020 with a strong gain of 6% and outpaced the broader S&P Municipal Bond Index by 1.05%, even though that performance came on the heels of a dramatic drop of 11.2% last March and April by the S&P Municipal High Yield Index, the analysts pointed out. “We anticipate that high-yield will outperform again in 2021 with the tailwinds of low rates, limited supply, improving fundamentals, attractive credit spreads, and the reversal of flows alongside investors’ increased risk appetite,” Hayes and Carney wrote. Looking at the potential value in the sector, the pair recommend credits with measurable cash flows, such as tobacco, Puerto Rico Sales Tax Financing Corporation [COFINA], corporate bonds, and established retirement community bonds. "We remain constructive on high-yield municipals for their diversification benefits, high levels of income, and the potential to be rewarded for superior security selection,” Peter Hayes and Sean Carney of BlackRock Inc. wrote in a 2021 outlook report. “We believe there is significant value in the Puerto Rico general obligation and Puerto Rico Electric Power Authority [PREPA] bonds, which are expected to be restructured this year,” they said. But, the sector is not without risk, analysts warned. “There is a very good reason to look to high-yield muni bonds for additional yields, but you need to approach that marketplace with reasonable agility,” Toews said. He said the proxy risk in the high-yield municipal sector can be gauged by looking at the valuation of stocks because they are similar to corporate high-yield. “When stocks are falling, the proxy risk is relatively high, and when spreads are low and equity valuations are higher, the risk is higher in municipal high-yield bonds,” Toews said. Since high-yield corporate and municipal bonds move similarly during risk events, investors need to be selective when searching for opportunities in the high-yield municipal sector, he noted. “With the forward valuation on the S&P 500 over the next year near 23, we feel there is a significant possibility of an equity deflation risk event and, therefore, the risk to principal on high-yield bonds, including high-yield muni bonds, is high as well,” he said. Looking back at the fourth quarter, Toews said high-yield spreads were around 7% to 8% above investment-grade bonds. “What that tells you is the return potential is higher historically when spreads have been 8% or more,” Toews said. “That has led to strong returns for high-yield bonds, but at the same time, high-yield spreads are under duress.” Meanwhile, the pandemic’s impact on the municipal high-yield sector should also be considered a potential risk, according to Hayes and Carney of BlackRock. Extra due diligence is needed on credits affected by COVID-19, such as long-term care facilities, small universities, and highly speculative start-up projects, the BlackRock analysts warned. Both stock and economic risk could creep up over the next 12 months and impact municipal high yield, Toews added. “If the momentum ebbs for the equities market and we see a bear market play out in 2021, then high-yield munis will be directly affected by that,” Toews said. “They will realize the equity proxy risk and move lower along with stocks.” “If the economy continues to grow and the vaccine continues and there is no risk event that affects equities over the next 12 to 24 months, we will see spreads continue to narrow and a mild appreciation in high-yield municipal bonds and decent yield relative to the investment-grade marketplace,” he said. Toews’ advice to high-yield municipal investors going forward? Be agile. “Understand that while yields are at an acceptable level, you’re accepting economic risk and with that having the ability to de-risk and change allocations is highly desirable,” he said. “Now is a good time to think unconventionally,” he suggested, adding that investors should include “loss avoidance strategies that help address falling markets.” “We believe we are 95 basis points away from a range where we would move to a more defensive posture,” such as Treasuries or short duration investment-grade bonds or cash instruments, he said. If, for instance, high-yield bonds move lower by 50 basis points that would be an exit signal for de-risking municipal high-yield positions, Toews said. But, for now, he doesn’t see an immediate or short-term impact from negative interest rates in municipals or corporate bonds. For the remainder of the quarter, Toews expects to continue his existing strategy of staying fully invested with a bullish posture in all of his high-yield municipal allocations, barring any change or loss in momentum or trend in the sector.
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After the Nov. 4 to 5 Federal Open Market Committee meeting, Federal Reserve Board Chair Jerome Powell noted the panel had discussed the asset purchases and would continue to monitor them going forward. That statement attracted market watchers' attention and it will be their focus as they pore over the FOMC minute from that meeting, which will be released Wednesday afternoon. With rates at the effective lower bound, increased asset purchases will be the Fed’s main monetary policy easing tool going forward. “The minutes will likely show that several members of the FOMC are worried that near-term risk to the economy has increased due to rising virus cases (as the meeting came before vaccine news), and as such there was increased discussion around altering bond buying programs to ensure financial conditions remain as accommodative as possible,” said Gautam Khanna, senior portfolio manager at Insight Investment. “The most obvious move would be an Operation Twist 2.0 where they focus their $80 billion/month purchases on the 10- to 30-year part of the curve.” “It will also be interesting to see if the FOMC reveals any criteria or factors that would lead to a change in the program,” said Gautam Khanna, senior portfolio manager at Insight Investment. As such, he will be looking for “any insight/perspective” about changes to the program and the timing of such. “It will also be interesting to see if the FOMC reveals any criteria or factors that would lead to a change in the program,” Khanna said. Going longer, he added, “could be thought of as insurance against potential deteriorating economic conditions and as a yield and curve shape cap should the Democrats win the Senate and/or a larger-than-expected fiscal package be announced with funding to come via UST issuance.” While the last meeting occurred right after the elections, and the statement offered no new information, Gary Pzegeo, head of fixed income at CIBC Private Wealth Management, said, “Powell noted that the committee had a full discussion around the options of the asset purchase program. It will be interesting to see how the committee plans to use its balance sheet going forward and if those plans include an extension of duration.” And while Treasury has told the Fed to end most of its emergency lending facilities by year-end, and “Powell noted the success of these programs at his press conference,” the minutes could show how the panel viewed “the facilities as a policy tool.” Similarly, Steven Friedman, managing director of global fixed income at MacKay Shields LLC, said the release could “provide insights into how participants view the efficacy of different options for their asset purchases.” Among the options he cited were: “explicitly tying the continuation of purchases to specific economic outcomes, changing the pace of monthly purchases, and extending the maturity of the purchases to remove more duration risk from the market.” Also, the minutes could offer details about the “circumstances that would lead the Committee to ease further through balance sheet policy,” including gridlock over another stimulus package, or the rising number of coronavirus cases. In data released Monday, the Federal Reserve Bank of Chicago’s National Activity Index rose to 0.83 in October from 0.32 in September, suggesting a pickup in growth, as three of the four components of the index were positive in the month. The CFNAI-MA3, the three month moving average, dropped to 0.75 from 1.37 a month earlier, while the Diffusion Index, also a three-month moving average, dipped to 0.51 in October from 0.55 in September. Production, employment, and sales, orders and inventories were all positive in October, while the personal consumption and housing component made a negative contribution in the month.
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New Jersey COVID-19 general obligation bonds broke free to trade in the secondary market richer by as much as 45 basis points, swings that when compared to Monday's price talk equate to 75 basis points lower, as the broader market saw yields fall. In large blocks, New Jersey's 10-year with a 4% coupon traded as low as 1.64%, down from the 2.08% original yield while 4s of 2032 traded as low as 1.80% from 2.25% original pricing levels. GOs in 2032 with 3 handles traded nearly as low to 1.84% from 2.25%. The 5-year with a 5% coupon traded below 1% from the original 1.27% yield. Spreads to triple-A benchmarks fell below 100 basis points on the state's 10-year. The state, rated A3/BBB+/A-/A, is the second lowest-rated below Illinois. Massachusetts GOs were also trading up in the secondary by 4 to 5 basis points, though nowhere near the Garden State. Massachusetts' long bond, 5s of 2050, traded at 1.64% from 1.68% originals. The municipal market strengthened, following U.S. Treasuries, on Thursday with yields on top-quality bonds fell as much as five basis points on the AAA scales as more news surrounding COVID's surge pushed investors to a flight-to-quality bias. "Treasury yields go lower once again, stocks take a stand-by approach and munis show a positive bias once again with leadership from Treasuries and an insatiable demand that saw $4.6 billion of bonds (New Jersey and Massachusetts) gobbled up like a turkey dinner," said Peter Franks, senior market analyst at Refinitiv MMD. "The Jersey trades showed not only the demand for yield in the muni space but also the stark contrast of how the market is handling the coronavirus effects this time," compared to March, a New York trader said. "COVID is just not as large a shock to the system as it was when it first hit. Not to say it isn't real. I think participants are better prepared for the psychological effects. "It also shows that combined with inflows, this market has money to put to work," the trader said. Investors continued to pour cash back into tax-exempt mutual funds, with Refinitiv Lipper reporting Thursday that muni bond funds saw over $1.3 billion of inflows in the latest reporting week after $1 billion-plus of inflows in the prior week. Primary marketBofA Securities priced the Port of Oakland, Calif.’s $527 million deal consisting of $343.77 million of Series 2020R (A1/A+/A+/NR) taxable senior lien refunding revenue bonds and $183.185 million of Series 2021H (A2/A/A/NR) forward delivery intermediate lien refunding revenue bonds, subject to the alternative minimum tax. The Series 2020R taxables were priced at par to yield from 0.669% in 2022 to 2.349% in 2033. The Series 2021H forward delivery bonds were priced as 5s to yield from 0.66% in 2022 to 1.43% in 2029. BofA also priced Hawaii’s (Aa3/NR/AA-/NR) $268.945 million of harbor system revenue bonds, consisting of Series 2020A AMT bonds, Series 2020B taxables and Series 2020C non-AMT bonds. The $148.985 million of Series 2020A AMT bonds were priced to yield 0.57% with a 5% coupon in 2021 and to yield from 0.70% with a 5% coupon in 2024 to 2.06% with a 4% coupon in 2037. The $15.695 million of Series 2020B taxables were priced at par to yield from 0.60% in 2021 to 1.15% in 2024. The $104.265 million of Series 2020C non-AMT bonds were priced to yield from 0.87% with a 5% coupon in 2028 to 1.88% with a 4% coupon in 2040. In the competitive arena, Richmond, Va., (Aa1/AA+/AA+/) sold $155.09 million of general obligation bonds in two offerings. Piper Sandler won the $103.54 million of Series 2020A public improvement and refunding GOs with a true interest cost of 1.4195%. Raymond James & Associates won the $51.55 million of Series 2020B taxable public improvement refunding bonds with a TIC of 1.4908%. Davenport & Co. was the financial advisor. Orrick Herrington and Lewis Munday Harrell were the bond counsel. Oppenheimer & Co. received the written award on the National Finance Authority’s (A3/NR/NR/NR) $135 million of Series 2020 taxable federal lease revenue bonds issued for the VA Butler Health Care Center Project. The bonds were priced at par to yield 3.278% in 2037 with an average life of 14.87 years. On Wednesday, Siebert Williams Shank priced California’s (Aa1:VMIG1/AAA:A1+/AA:F1+/NR) $100 million of Series 2020A variable-rate general obligation bonds. The bonds were priced at par to yield 0.11% in 2048 with a weekly reset mode that will be determined by the Clarity BidRate Alternative Trading System. California State Treasurer Fiona Ma said the bonds, which are secured by an irrevocable direct-pay letter of credit from State Street Bank and Trust Co., will fund projects authorized by the state’s Water Quality, Supply, and Infrastructure Improvement Act. “I strongly support Clarity’s goals to democratize the variable rate market by creating an investor controlled marketplace that maximizes transparency, leverages technology, and helps to promote a broader and deeper distribution of bonds which could lead to improving overall risk for issuers and investors alike,” Ma said. Refinitiv Lipper reports $1.3B inflowIn the week ended Nov. 18, weekly reporting tax-exempt mutual funds saw $1.328 billion of inflows. It followed an inflow of $1.167 billion in the previous week. Exchange-traded muni funds reported inflows of $558.107 million, after inflows of $617.748 million in the previous week. Ex-ETFs, muni funds saw inflows of $769.931 million after inflows of $548.860 million in the prior week. The four-week moving average remained positive at $530.749 million, after being in the green at $350.497 billion in the previous week. Long-term muni bond funds had inflows of $959.868 million in the latest week after inflows of $911.719 million in the previous week. Intermediate-term funds had inflows of $6.401 million after outflows of $73.234 million in the prior week. National funds had inflows of $1.234 billion after inflows of $1.130 billion while high-yield muni funds reported inflows of $369.196 million in the latest week, after inflows of $526.256 million the previous week. Informa: Money market muni funds fell $546MTax-exempt municipal money market fund assets fell $545.5 million, bringing total net assets to $110.28 billion in the week ended Nov. 16, according to the Money Fund Report, a publication of Informa Financial Intelligence. In the prior week, assets fell $1.27 billion to $110.82 billion. The average seven-day simple yield for the 186 tax-free and municipal money-market funds remained at 0.01% from the previous week. Taxable money-fund assets increased $3.24 billion in the week ended Nov. 17, bringing total net assets to $4.154 trillion. The average, seven-day simple yield for the 778 taxable reporting funds remained at 0.02% from the prior week. Overall, the combined total net assets of the 964 reporting money funds rose $2.7 billion in the week ended Nov. 17. Secondary marketHigh-grade municipals were stronger Thursday, according to final readings on Refinitiv MMD’s AAA benchmark scale. Short yields fell one basis point to 0.14% in 2021 and 0.15% in 2022. The yield on the 10-year muni dropped four basis points to 0.73% while the yield on the 30-year fell five basis points to 1.43%. The 10-year muni-to-Treasury ratio was calculated at 85.8% while the 30-year muni-to-Treasury ratio stood at 90.8%, according to MMD. The ICE AAA municipal yield curve showed short maturities dropping one basis point to 0.14% in 2021 and 0.15% in 2022. The 10-year maturity fell four basis points to 0.72% and the 30-year yield fell five basis points to 1.44%. The 10-year muni-to-Treasury ratio was calculated at 85% while the 30-year muni-to-Treasury ratio stood at 91%, according to ICE. Muni to Treasury ratios are becoming more relevant with the current rally and flattening curve, said Kim Olsan, senior vice president at FHN Financial. She noted that the one- to 30-year slope is 139 basis points compared to 157 basis points at the end of October. “On a technical level, the recent push to lower yields and outperformance to USTs has pushed cross-market AAA/UST ratios much lower,” Olsan said. “The only spot where fair value exists is in the one-year rate, where the ratio is 142%. This range is where strong bids wanteds flows exist so supply is of less concern.” She noted that in the two- to three-year range, defensive demand has pushed ratios lower, although two-year high-grades are trading above 90% to their UST counterpart. In the five- to seven-year part of the curve, the advantage goes to sellers, where ratios are now below 70%. Olsan said both the 10- and 30-year AAA spots are trading at three-month average lows. “While these are well away from the annual lows (72% 10-year and 86% 30-year in January), real rates are lower by about 50 basis points,” she said. The IHS Markit municipal analytics AAA curve showed short yields falling to 0.13% and 0.14% in 2021 and 2022, respectively, and the 10-year dropping to 0.72% as the 30-year yield fell to 1.46%. The BVAL AAA curve showed the yield on the 2021 maturity unchanged at 0.15% and 0.16% in 2021 and 2022,while the 10-year dropped three basis points to 0.73% and the 30-year fell four basis points to 1.48%. Treasuries were stronger as stock prices traded up. The three-month Treasury note was yielding 0.08%, the 10-year Treasury was yielding 0.85% and the 30-year Treasury was yielding 1.58%. The Dow rose 0.10%, the S&P 500 increased 0.30% and the Nasdaq gained 0.90%.
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Referendums to build casinos appear to be on course for approval in four Virginia cities, a credit positive because the projects have the potential to increase local tax revenues and create jobs, according to Moody's Investors Service. In the four cities, votes in all precincts were counted by Wednesday morning, and combined those voters overwhelmingly approved plans to build casinos by an average of 67.8%. The election results are unofficial, however, because of absentee ballots, according to the Virginia Department of Elections. Voters in Bristol, Virginia, precincts Tuesday approved building a Hard Rock Hotel and Casino. Bloomberg News Bristol, which has an A3 bond rating from Moody's, Danville, whose bonds are rated Aa3, Norfolk, which has an Aa2 bond rating, and Portsmouth, whose debt is rated Aa2, all stand to benefit from the receipt of local fees and taxes, including property, sales, hotel occupancy and meal taxes, Moody's said Wednesday. "Each city will receive a portion of the gaming tax revenues to be collected by the state," Moody's analyst Evan Hessalso said. "These new revenues likely will not be realized until 2023 at the earliest, which is when the casinos are tentatively slated to open." Virginia will levy a gross receipts tax on casino activities and a portion of collections will be allocated to the cities based on a formula. Danville, Norfolk and Portsmouth can keep their full allocation, while Bristol must share a portion of gaming revenues with neighboring jurisdictions, Hessalso said. The proposed casino development in Bristol, to be operated by Hard Rock International, would potentially create about 3,000 construction jobs and 2,000 permanent jobs in its first year of operations, based on the developer's plans and a local economic impact study, Moody's said. The city projects the casino — to be located at the site of the Bristol Mall, which has been closed since 2017 — will generate about $16 million in new recurring local tax revenue and about $700,000 of state gaming tax revenue. Neither representatives for the developers or people involved with the Vote Yes For Bristol Referendum Committee could immediately be reached for comment about the election results. Danville’s proposed casino has the potential to generate new annually recurring revenues of more than $30 million within three years of opening, Moody's said, citing city management estimates. Danville also would receive $20 million in up-front payments from the operator, Caesars Entertainment, within 30 days of the referendum, including $5 million to acquire the property from the city. The project would potentially create about 900 construction jobs and 1,300 permanent, full-time equivalent jobs, representing a 7.6% increase over the city's August 2020 employment total. The casino will be located at the site of the former Dan River Mills Schoolfield Division, vacant since 2008, and will improve a blighted portion of the city, Moody's said. Norfolk’s casino, to be located on Harbor Park Waterfront, would potentially create 2,000 construction jobs and 2,415 permanent jobs, based on the developer's plans and an economic impact study. The city estimates the development will bring in $25 million to $45 million in recurring tax revenues. The Pamunkey Indian Tribe, which will operate the casino in Norfolk, will be responsible for infrastructure, flood mitigation and utility improvements. In addition to recurring revenues, the city will receive a $10 million upfront payment for the purchase of the land, plus local taxes and fees. Portsmouth projects that its casino, to be operated by Rush Street Gaming, will generate $16.3 million in new taxes and revenues annually. The casino would potentially provide about 1,400 construction jobs and 2,000 permanent new jobs, said Moody's. The General Assembly passed legislation in April providing for the referendums, outlining how the casinos will operate, as well as funding an expansion of the Virginia Lottery Board to oversee casino operations and gaming tax collections. Prior to this week's election, Moody's said Virginia was one of nine states that prohibited casino gambling. Also in the general election, all 12 bond referendums on ballots across the state totaling a combined $742.63 million were overwhelmingly approved by all precincts, though mail-in ballots make the count unofficial. Fairfax County had the largest-single amount of bonds approved by its voters, $160 million to finance its share of transportation improvements under the Washington Metropolitan Area Transit Authority Compact.
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Virginia is moving forward with its largest-ever infrastructure project, bucking a trend developing in other areas of the U.S. where capital funding is being cut amid the coronavirus pandemic. Officials from the Old Dominion State broke ground on the long-planned $3.8 billion Hampton Roads Bridge-Tunnel Expansion Oct. 29. It will widen a 10-mile stretch of Interstate 64 that link Hampton and Norfolk across the Hampton Roads to six lanes from four lanes, and add two new, two-lane subsea tunnels to the existing bridge and tunnel. The Hampton Roads Bridge-Tunnel sees more than 100,000 vehicles at peak times creating severe congestion; Virginia hopes to ease that problem with a major expansion project. Virginia DOT More than 100,000 vehicles use the bridge and tunnel during peak travel periods, creating severe congestion even today as the region deals with the coronavirus that causes COVID-19, according to state officials. “For too long, traffic in the Hampton Roads region has bottlenecked at the tunnel,” Gov. Ralph Northam said on the day of groundbreaking. “Folks in this region deserve an easier, more reliable commute. This is the largest project in our history and it will ensure that people can move around faster [and] that commerce flows more easily." The Hampton Roads Transportation Accountability Commission issued $614.6 million of tax exempt, 40-year, senior-lien revenue bonds on Oct. 6, its third financing for the mega project since 2018. The bonds are rated Aa2 by Moody's Investors Service and AA by S&P Global Ratings, both with stable outlooks. The commission's plan of finance calls for spending cash and issuing bonds annually through 2026. The design-build project is expected to be completed in 2025. Virginia's decision to move forward with such an expensive project at a time when stimulus and jobs are needed is heartening, experts say, as it comes while many local and state governments see expenses rising to fight the coronavirus. "It's very encouraging that Virginia is going ahead with this even though they've trimmed back on some other projects closer to the Washington, D.C. area," said William Glasgall, senior vice president and director of state and local initiatives at The Volcker Alliance. "The fact that a lot of the funding is based on dedicated revenues and not on legislative appropriations is very encouraging for any investor," Glasgall continued. "That highway is just as close to a monopoly as you want. There's no free route essentially." The HRTAC will pay $3.55 billion of the bridge and tunnel expansion cost, using debt and cash. Between $345 million and $575 million is expected to come from toll revenue bonds, according to the official statement for the October sale. The commission funds its program with a motor vehicle fuels sales tax at a rate of 7.6 cents per gallon on gasoline and gasohol, 7.7 cents per gallon on diesel, and a 0.7% retail sales and use tax collected in the cities and counties that are members. The tax on fuels is subject to annual adjustment in accordance with the Consumer Price Index starting July 1, 2021. The Virginia Department of Transportation plans to contribute $108.5 million from its budget and another $200 million from a separate VDOT program. Federal funds are also being sought, according to VDOT. At a time when there has been gridlock in Congress and the White House over additional federal stimulus funding and passing an infrastructure bill, municipal bond analyst Joseph Krist said Virginia's mega transportation project shows "the kind of thinking that should characterize government. "Doing this project in the midst of the pandemic will reflect the kinds of investments and job generators that projects like this could be," Krist told The Bond Buyer. "During times of diminished economic conditions, the project is of the sort that is tailor made to produce at least a local stimulus. "That's a good example of the many positive impacts public capital investment can produce," he added. Krist also said Virginia's project benefits from being planned and funded in a pre-pandemic universe. Alison Black, senior vice president and chief economist for the American Road & Transportation Builders Association, said in LinkedIn blog postaher LinkedIin blog post Oct. 2 that state and local government transportation contracting is slowing down due to the pandemic's impact on state and local finances. "The value of contract awards, a leading indicator of future market activity, was strong up to the July 1 start of the fiscal year in 46 states," Black wrote. "Award values dropped to $13.3 billion in July and August from $19.2 billion in 2019. Black said a slowdown was expected given declining user fees and other transportation-related revenues. By Oct. 1, she said, at least 18 states and 25 local governments or transportation authorities announced more than $10.9 billion in project delays or cancellations due to budget shortfalls. As the country emerges from the pandemic-induced recession, U.S. state infrastructure spending is likely to be disrupted further, S&P said in a comment Oct. 29. “One consequence of continuing travel restrictions instituted to control the spread of the virus is that billions of dollars in transportation-related revenues, which typically fund long-term capital plans, are at risk of falling short of pre-pandemic levels, possibly for several years,” said S&P analyst Timothy W. Little. As the country begins to recover from the recession, which Little said was even more severe than the Great Recession, S&P said it sees a growing risk that there will be continued underinvestment in infrastructure. Despite the economic downturn, Virginia officials say congestion remains high on the Hampton Roads Bridge-Tunnel, supporting the need to move forward with the expansion project. "The fact that a lot of the funding is based on dedicated revenues and not on legislative appropriations is very encouraging for any investor," said William Glasgall. The original westbound Hampton Roads Bridge-Tunnel opened Nov. 1, 1957. It is a 3.5-mile bridge and two, 2-lane immersed tube tunnels connecting artificial islands with trestle bridges to shore. The eastbound tunnel opened in November 1976. The Hampton Roads Transportation Accountability Commission was created as a political subdivision of the state in 2014 to manage the Hampton Roads Transportation Fund for the region. HRTAC replaced the Hampton Roads Transportation Planning Organization. The commission's voting members represent 10 cities and four counties in the Hampton Roads region of southeastern Virginia, as well as five members of the state General Assembly. Ex-officio members represent VDOT, the Commonwealth Transportation Board, the Virginia Department of Rail and Public Transportation and the Virginia Port Authority. As one of its first acts, the HRTAC included a Hampton Roads crossing study in its list of priority projects, leading to the development of a supplemental environmental impact statement to evaluate options for the bridge-tunnel expansion. In December 2016, the Commonwealth Transportation Board approved the preferred route and completed environmental studies. The Federal Highway Administration issued a record of decision approving the project in June 2017. The state initially planned to use a public-private partnership, but later determined that a design-build model was more suitable using local, state and federal public funding. VDOT issued a request for qualifications from firms interested in building the project in December 2017. In February 2019, VDOT selected Hampton Roads Connector Partners as the best value proposer, a Dragados USA-led design-build team that includes lead contractor HDR, lead designer Mott MacDonald, Flatiron Constructors, Vinci Construction, and the French construction company Dodin Campenon Bernard. The state of Virginia signed financing and comprehensive agreements with the HRTAC in April 2019 formally establishing the funding plan, although the commission began financially supporting the expansion project with $500 million of revenue bonds issued in February 2018. The commission also issued $414.3 million of bond anticipation notes in December 2019. The BANs mature July 1, 2022, and will be taken out with a loan under the federal Transportation Infrastructure Finance and Innovation Act. HRTAC Executive Director Kevin Page couldn't immediately be reached for comment about the need to move ahead with the expansion. Page told the publication Transport Topics on Monday that despite complications arising from the COVID-19 pandemic and downturn, congestion remains a problem. “Like any other major metropolitan region with high population centers, we do suffer from the commonplace backup and congestion,” Page told Transport Topics. “One thing that COVID has done for us is proven that the congestion at the Hampton Roads Bridge-Tunnel has sustained even through COVID. [It] further emphasizes the need to do this project."
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A confluence of upcoming events kept municipal bond buyers on the sidelines Monday as an uncertain and cautious tone was felt throughout the market. Investors are waiting for the results of Tuesday’s U.S. national elections as the Federal Reserve gets ready to hold its monetary policy meeting on Wednesday and Thursday and the Labor Department prepared to release the October employment report on Friday. On Monday, munis finished steady to weaker across the curve, with yields higher on the shorter end of the AAA scales while remaining steady father out the curve. Muni supply is estimated at only $759.6 million in a calendar composed of $529.1 million of negotiated deals and $230.5 million of competitive sales. According to Kim Olsan, senior vice president at FHN Financial, this week is beginning to look a lot like Christmas, with only ultra-light volume expected. “Based on so much supply being pre-issued ahead of the election, forward estimates have dropped 75% to just $5 billion,” she said. October saw the second highest muni volume week in history with $65 billion of bonds being priced as issuers raced to get deals done ahead of the election. Only the $69.83 billion that came in December of 2017 before tax law changes went into effect was a bigger month. Election eve in the municipal market displayed the usual quiet behaviors of a typical Monday, minus all the deal prep and investment strategies as the tax-exempt universe is taking a pause, glued to tomorrow’s much-anticipated presidential race and its impact on the municipal market. “The new-issue market has come to a virtual stop sign with a sudden reversal of the past two months, where supply had accelerated to all-time highs,” Jim Colby, portfolio manager and strategist at Van Eck said Monday. The market seems poised to accept the outlook scenarios of the election as still supportive for municipals, he said, pointing to a potentially stronger conviction for Joe Biden and his plan for higher taxes, which will benefit tax -exemption. On the buy side, he said it appears demand generated from calls and coupons and maturities will dictate price in the coming two months, or until the results of the election become clear. “Given the appearance of the forward calendar, this could be as quiet a finale to 2020 — juxtaposed to the frenetic activity of the past several weeks,” Colby said. Meanwhile, Jeffrey Lipton, managing director and head of municipal credit and market strategy at Oppenheimer Inc., agreed the market has adapted a tell-tale tone prior to the election. “Closing out today's session, we can characterize market activity as extremely quiet as the ‘big day’ is now upon us,” Lipton said Monday. “As November gets underway, we can note a dramatically different primary supply picture as the calendar shows under $1 billion in sales for this week,” he added. Throughout much of October, municipals traded within a tight range even as the new-issue calendar brought a record monthly issuance last month, he said. “Issuers lined up en masse to take advantage of historically low interest rates ahead of one of the most contentious presidential elections in recent memory and the market, with a largely institutional investment bias, stood ready with a hearty appetite,” he said. This occurred as many issuers are struggling to address outsized budget gaps brought on by the pandemic-induced recession and are considering creative and unconventional remedies, he added. “For most of October, demand continued unabated, and we expect this support to endure throughout the balance of the year,” Lipton said Monday. Given Oppenheimer’s views of ample demand and abating new-issuance through the remainder of the year, compelling market technicals can be expected to keep municipal bond fund flows positive and to cast an overall bullish tone for the asset class, according to Lipton. Against that backdrop, the market can expect to see municipals breaking free of their current trading range with the search for lower yields a likely outcome and strong positioning heading into 2021, Lipton said. “Market sentiment can also be lifted by expectations of higher individual and corporate tax rates under a Biden presidency,” Lipton said. “While the retail impact on demand may be somewhat limited, higher corporate taxes may very well incentivize certain institutional buyers that have otherwise shown more muted interest in the tax-exemption.” Municipal market participants are also poised for a broader infrastructure initiative under a Biden win that may lead to more issuance activity at some point next year, Lipton noted. But, he continued, the Democratic agenda has a better shot of coming to fruition should a blue sweep take hold. “In our view, however, the top agenda item for either a Trump or Biden presidency that will likely dominate the political landscape will have to be a direct and measured response to what appears to be a resurgence of confirmed COVID-19 cases in most states, with the coming winter months expected to give rise to elevated hospitalizations and deaths,” Lipton said. Olsan noted that November issuance will be jammed into a few weeks, since the upcoming Veteran Day and Thanksgiving holidays, leave only four full weeks in 2020 in which to process supply. “Net implied demand between bonds rolling off from calls and maturities (estimated at $45 billion through December) and projected supply could exceed $20 billion into year end,” she said. “The variable is what amount of volume can realistically be readied for pricing in a narrow window, but indications lean more constructively for issuers.” In its weekly report, FHN said a surge in taxable muni volume created some unique buying conditions compared to the corporate equivalents. “A pricing of $299 million A2/A South Carolina Public Service bonds drew a 10-year yield of +171/ UST as contrasted with A3/NR $500 million Berkshire Hathaway Energy bonds spread +90/UST,” FHN said. “Smaller issues of higher-rated taxable munis also offer attractive spreads to new-issue corporates. King County WA (Aaa/AAA) sold $73 million GOs at auction with the 2030s pricing +82/UST, while Aa3/AA- Proctor and Gamble priced its new 10-year +47/UST.” As long as refunding needs remain high and taxable bonds are a viable conduit, opportunities should be buyer-favorable, FHN said. Presidential campaign signs compete for voters' attention in Pittsburg, Pa., on Sunday. Bloomberg News Last Friday was just a typical end-of-the-week session, with no tricks or treats for municipal investors as the market remained quiet ahead of the election, said John Mousseau, president of Cumberland Advisors. “It was a good time to buy issues in the past few weeks because we know issuers were coming to market to beat the election.” He said this was especially true due to “memories of volatility and the sell-off from four years ago.” Mousseau noted there were good buying opportunities in recent weeks, however, visible supply has noticeable decreased to $5 billion from $20 billion. “We will see some reversion to the mean, of course, but this should revert to a sellers market,” he said. Analysts expect the Federal Open Market Committee to keep rates unchanged this week, but will keep an eye out for what Fed Chair Jeome Powell says at the press conference after the meeting. “Regardless of who wins the presidency, we expect another sizable fiscal stimulus bill to pass soon after the election,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. "Both monetary and fiscal policy should remain accommodative." Economists surveyed by IFR Markets expect non-farm payrolls to have risen by 600,000 in October with the unemploiyment rate falling to 7.6% from 7.9% in September Primary market“Though there are no holidays this week, the new-issue calendar certainly looks like a holiday week,” said Peter Franks, Refinitiv MMD senior market analyst. “The week's issuance is below $1 billion and the only major sales will be (Aa3/AA-) $130 million Maine Turnpike tomorrow in the negotiated market and $93 million Charleston County, S.C., Ed selling Thursday in the competitive market. Time will tell if Florida ROW taxable and tax-exempts come off the day-to-day calendar.” Bofa Securities is expected to price the Maine Turnpike Authority’s (Aa3/AA-/AA-/) $130 million of Series 2020 turnpike revenue bonds on Tuesday. There are currently three competitive sales from Florida on the day-to-day calendar. The Florida Department of Transportation has $179.17 million of Series 2020A tax-exempt and $189 million of Series 2020B taxable right-of-way acquisition and bridge construction bonds awaiting sale. The Florida Board of Governors has a $71.8 million sale of Series 2020 tax-exempt dormitory revenue bonds for the Florida International University on the daily slate. Secondary marketSome notable trades on Monday: Northeastern Texas ISD 5s of 2023 traded at 0.35%-0.34%. Maryland GOs, 5s of 2024, at 0.31%. New York EFC subs, 5s of 2025, at 0.37%-0.36%. Chesapeake Virgina 5s of 2028 traded at 0.69%-0.68%. Clark County Washington Evergreen SD #114, 4s. of 2033 traded at 1.51%-1.50% after originally pricing at 1.54%. NYC TFA subs 5s of 2033 at 1.69%-1.68%. NYC TFA subs, 5s of 2034 at 1.77%-1.76% after originally pricing at 1.79%. Arlington Texas ISD 4s of 2045 at 2.05%-1.94%. Last week, the most traded muni sector was industrial development followed by education and utilities, according to IHS Markit. On Monday, high-grade municipals were mixed, according to final readings on Refinitiv MMD’s AAA benchmark scale. Short yields in 2021 and 2022 rose one basis point to 0.21% and 0.22%, respectively. The yield on the 10-year muni was up one basis point to 0.94% while the yield on the 30-year was flat at 1.71% The 10-year muni-to-Treasury ratio was calculated at 110.7% while the 30-year muni-to-Treasury ratio stood at 105.3%, according to MMD The ICE AAA municipal yield curve showed short maturities were steady in 2021 and 2022 at 0.21% and 0.23%, respectively. The 10-year maturity rose one basis point to 0.93% and the 30-year was unchanged at 1.73%. The 10-year muni-to-Treasury ratio was calculated at 110% while the 30-year muni-to-Treasury ratio stood at 106%, according to ICE. The IHS Markit municipal analytics AAA curve showed short yields flat at 0.17% and 0.18% in 2021 and 2022, respectively, with the 10-year unchanged to yield 0.95% and the 30-year steady at 1.72%. The BVAL AAA curve showed the yield on the 2021 and 2022 maturities unchanged at 0.16% and 0.18%, repectively, while the 10-year was steady at 0.92% and the 30-year flat at 1.73%. Treasuries were stronger as stock prices traded higher. The three-month Treasury note was yielding 0.09%, the 10-year Treasury was yielding 0.84% and the 30-year Treasury was yielding 1.62%. The Dow rose 1.45%, the S&P 500 increased 0.90% and the Nasdaq gained 0.18%.
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Chicago’s COVID-19 fiscal wounds spurred Moody’s Investors Service to move its outlook to negative on the city’s already-junk general obligation rating. While shifting the outlook to negative from stable, Moody’s affirmed the Ba1 rating it assigns to $3.7 billion of GOs. It cut the city to speculative grade in 2015. The city has not asked Moody’s to rate any new GO or revenue deals in recent years. A Chicago Department of Public Health sign offers advice for residents amid the coronavirus pandemic. Budget stress stemming from COVID-19 brought another negative outlook to the city's bond ratings. Bloomberg News The rating agency's negative outlook also applies to the Ba1 rating it assigns to the $245 million of motor fuel tax bonds it rates, the Baa2 rating on senior lien water and senior lien sewer bonds and the Baa3 rating on junior lien sewer bonds. Moody’s rates about $2.3 billion of outstanding water and sewer bonds. The rating on all the credits was affirmed. Moody’s said it took the action with the “expectation that the sudden and substantial decline in certain economically sensitive revenue will intensify the city's challenge to reduce the persistent structural gap between revenue and expenses. “Any negative variances arising from the uncertain operating environment could intensify andprolong the challenge. The city's high and growing leverage from debt and pensions will also continue to weigh on its credit profile,” Moody’s wrote. The negative outlooks on the revenue credits are due to their linkage to the GO rating. Moody’s action comes one week after Mayor Lori Lightfoot laid out her proposed 2021 budget plan that relies on a mix of structural and one-time fixes to fully close the current $800 million gap and a $1.2 billion hole in 2021. The plan relies on pushing off $950 million of debt repayment over two years, some tax hikes, job cuts, and a modest $30 million draw on $900 million of reserves. The revision also comes one day after Fitch affirmed the city’s BBB-minus rating but also shifted its outlook to negative. S&P Global Ratings moved its outlook on the BBB-plus rated GO rating to negative in April. Kroll Bond Rating Agency rates the city A with a stable outlook. The Lightfoot administration, which has received push back from aldermen who would rather use reserves than cut spending or raise taxes, believes the affirmations are a good sign that the city’s ratings will weather the pandemic storm and it’s an argument they are likely to take to council members seeking to use reserves. “The city's 2021 budget strikes the right balance in addressing the significant financial challenges created by COVID. Their affirmation of the rating indicates that the credit worthiness of the city has been maintained in the budget proposal,” finance department spokeswoman Kristen Cabanban said in an email after the Moody’s action. Moody’s report makes clear that the city isn’t out of the woods as the pandemic’s course could further erode the balance sheet. Moody’s warned that a widening of the structural gap that increases the likelihood that reserves will decline or debt will increase and heightened risk of pension systems transitioning to pay-as-you-go funding structures or material growth in unfunded pension burdens could drive a GO downgrade. “Chicago’s situation is unique because the city’s extremely high fixed costs constrict its flexibility. The city's growing leverage from debt and very high unfunded pension liabilities will continue weighing on its credit profile,” Moody’s said, adding that the GO rating “balances the city's still healthy liquidity with an expectation that rising fixed costs, largely stemming from the need to address underfunded pensions, will present persistent budgetary challenges for years to come.”
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Municipal bonds held their ground Thursday as the last of the week's large new issues priced while weaker Treasuries and political and COVID jitters were hanging over the markets. Bond buyers digested a variety of deals coming from Los Angles, New York, North Carolina and Georgia issuers. Trading did show some high-grade names firmer in the belly of the curve, but yields mostly held steady. New Jersey said on EMMA it tentatively plans to issue up to $4.5 billion of tax-exempt and taxable bonds the week of Nov. 19under the COVID-19 Emergency Bond Act. Municipals traded little changed on the day, with yields steady to slightly stronger along the AAA scales. Investors continued to put cash back into tax-exempt mutual funds, with Refinitiv Lipper reporting muni bond funds saw about $582 million of inflows in the latest reporting week. The day wrapped up with some general weakness as the yield on the 10-year Treasury reached its highest levels since June as the second of two heavy supply weeks neared its close, according to a California manager. “The big increase in new issuance in recent weeks is starting to show in a little bit of indigestion with measures of secondary market supply elevated,” said Anthony Valeri, executive vice president and director of investment management at Zions Wealth Management. The dollar amount of bid-wanteds is over $1 billion for the first time since April and although dealer balance sheets also appear heavy, they are well below March levels, according to Valeri. “Dealers are cautious, prices soft, and valuations relative to Treasuries have weakened this week,” he said. Tax-exempt yields in five-years and shorter rose slightly on Thursday as buyers continued to balk at low absolute yields, while activity longer in the curve remained mixed and volatile — albeit mostly sideways ahead of next week's pivotal election, according to analysts from Refinitiv/Municipal Market Data. On the political front, Valeri of Zions said some of the early election indicators could impact investor decisions going forward. “Biden’s lead remains substantial, but has narrowed in recent days and control of the Senate is close to becoming a toss-up,” Valeri said. “Investors may be questioning the magnitude of post-election stimulus and tax implications,” he said, noting a potential tailwind from higher tax rates has yet to benefit municipal bonds. Overall, on a longer-term basis, municipal bond valuations are attractive with average triple-A yields notably above Treasuries, Valeri said. “However, the ongoing supply overhang, uncertainty around stimulus and potential tax implications, and taxable bond market weakness are all leading to a soft market for now,” he said. Primary marketBofA Securities priced the Los Angeles Community College District’s (Aaa/AA+/NR/NR) $1.79 billion of taxable general obligation refunding bonds. The bonds were priced at par to yield from 0.276% in 2021 (12.5 basis points above the comparable U.S. Treasury security) to 1.174% in 2026 (+57 basis points above Treasuries), 1.606% in 2028 (+77 basis points above Treasuries), 1.806% in 2030 (+97 basis points above Treasuries), 2.106% in 2032 (+127 basis points above Treasuries), and from 2.336% in 2033 (+150 basis points above Treasuries) to 2.486% in 2035 (+165 basis points above Treasuries) and 2.825% in 2039 (+120 basis points above Treasuries). JPMorgan Securities priced and repriced the New York Metropolitan Transportation Authority’s (A3/BBB+/A-/AA) $426.285 million of Series 2020E Climate Bond Certified transportation revenue refunding bonds to lower yields by as much as 10-15 basis points, just as the authority announced it would tap the Fed's Municipal Liquidity Facility before year-end to the maximum borrowing amount of nearly $3 billion. The Thursday deal had bonds reprice to yield from 3.59% with a 4% coupon in 2026 to 3.89% with a 5% coupon in 2033; a 2045 maturity with an average life of 24.452 years was priced as 4s to yield 4.02%. The bonds had been tentatively priced to yield from 3.69% with a 4% coupon in 2026 to 4.04% with a 5% coupon in 2033; a 2045 maturity was priced as 4s to yield 4.16%. “More than four months following the phased reopening of non-essential businesses, transit ridership remains far below pre-pandemic levels,” the Comptroller’s Office said. “Ridership was 70% below 2019 levels on the subway and 57% below on MTA buses as of Wednesday Oct. 21.” BofA Securities priced North Carolina’s (Aa1/AA+/AA+/NR) $700 million of Series 2020B limited obligation Build NC bonds. The deal was priced to yield from 0.22% with a 5% coupon in 2021 to 2.06% with a 2% coupon and 1.67% with a 4% coupon in a split n2035 maturity. BofA priced the Municipal Electric Authority of Georgia’s (A2/A-/BBB+/NR) $253.49 million of Series 2020A bonds. The $194.89 million of Project One subordinated bonds were priced to yield from 0.47% with a 5% coupon in 2022 to 2.50% with a 4% coupon in 2040. A 2045 maturity was priced as 5s to yield 2.43% and a 2050 maturity was priced as 5s to yield 2.51%. The $58.6 million of general resolution projects subordinated bonds were priced to yield from 0.47% with a 5% coupon in 2022 to 2.79% with a 3% coupon in 2040; a 2045 maturity was priced as 4s to yield 2.71%. Milwaukee, Wis. (NR/A/AA-/NR) competitively sold $120 million of Series 2020R9 general obligation refunding promissory notes. Wells Fargo Securities won the deal with a true interest cost of 1.63%. The notes were priced as 1.75s to yield 1.60 in 2030. N.J. plans $4.5B COVID-19 bond saleThe state of New Jersey said it expects to issue up to $4.5 billion of tax-exempt and taxable municipal bonds later in November. The bonds were authorized under the state’s COVID-19 Emergency Bond Act and are direct general obligations of the state, backed by its full faith and credit. Proceeds will be used to address the state’s financial problems caused by the coronavirus pandemic and fix a revenue shortfall in fiscal 2021 BofA Securities has been named as book-running senior manager for the deal. The size, timing and structure of the potential transaction are subject to market conditions, the state said. Informa: Money market muni funds fell $544MTax-exempt municipal money market fund assets fell $554.4 million, bringing total net assets to $111.74 billion in the week ended Oct. 26, according to the Money Fund Report, a publication of Informa Financial Intelligence. The average seven-day simple yield for the 186 tax-free and municipal money-market funds remained at 0.02% from the previous week. Taxable money-fund assets dropped $7.5 billion in the week ended Oct. 27, bringing total net assets to $4.18 trillion. The average, seven-day simple yield for the 779 taxable reporting funds remained at 0.01% from the prior week. Overall, the combined total net assets of the 965 reporting money funds fell $8.06 billion in the week ended Oct. 27. Refinitiv Lipper reports $582M inflowIn the week ended Oct. 28, weekly reporting tax-exempt mutual funds saw $582.366 million of inflows. It followed a gain of $607.029 million in the previous week. Exchange-traded muni funds reported inflows of $40.771 million, after outflows of $116.503 million in the previous week. Ex-ETFs, muni funds saw inflows of $541.595 million after inflows of $723.532 million in the prior week. The four-week moving average remained positive at $883.120 million, after being in the green at $543.841 billion in the previous week. Long-term muni bond funds had outflows of $205.727 million in the latest week after outflows of $97.084 million in the previous week. Intermediate-term funds had inflows of $87.597 million after inflows of $61.102 million in the prior week. National funds had inflows of $593.114 million after inflows of $584.010 million while high-yield muni funds reported inflows of $100.092 million in the latest week, after inflows of $21.399 million the previous week. Secondary marketSome notable trades on Thursday: North Carolina GO 5s of 2022 traded at 0.23% while 5s of 2023 traded at 0.24%-0.23%. Tennessee GOs, 5s of 2026 at 0.49%. Delaware GOs 5s of 2027 at 0.53% while Friday at 0.55%. Texas waters, 5s of 2029, traded at 0.96%-0.95%. Wednesday at 1.02%-1.01%. Fairfax Virginia GO 5s of 2029 at 0.84%-0.83% and Wednesday at 0.91%-0.92%. NYC TFA subs 5s of 2029 traded at 1.20% same as Wednesday. Baltimore County, Maryland 5s of 2030 traded at 0.94%. Wednesday 0.98%. North Carolina 5s of 2030 at 0.89%-0.88% and 0.92%-0.91% Tuesday. Loudon County, Virginia 5s of 2030 at 0.95%-0.94%. Washington GOs, 5s of 2033 at 1.37%-1.33%. Dallas waters 5s of 2045 traded at 1.78%. Leander Texas ISD 4s of 2045 traded at 1.79%-1.73%. NYC TFA subs 4s of 2046 at 2.52%-2.54%. NYC TFA subs 4s of 2047 at 2.55%-2.54%. High-grade municipals were mixed, according to final readings on Refinitiv MMD’s AAA benchmark scale. Short yields in 2021 and 2022 rose one basis point to 0.20% and 0.21%, respectively. The yield on the 10-year muni was steady at 0.93% while the yield on the 30-year was flat at 1.71`%. The 10-year muni-to-Treasury ratio was calculated at 111.2% while the 30-year muni-to-Treasury ratio stood at 105.1%, according to MMD The ICE AAA municipal yield curve showed short maturities rising one basis point in 2021 and 2022 to 0.21% and 0.23%, respectively. The 10-year maturity was unchanged at 0.92% and the 30-year was unchanged at 1.73%. The 10-year muni-to-Treasury ratio was calculated at 110% while the 30-year muni-to-Treasury ratio stood at 106%, according to ICE. The IHS Markit municipal analytics AAA curve showed short yields flat at 0.16% and 0.17% in 2021 and 2022, respectively, with the 10-year yielding 0.95% and the 30-year at 1.71%. The BVAL AAA curve showed the yield on the 2021 maturity unchanged at 0.15% and the 2022 maturity flat at 0.16% while the 10-year was steady at 0.92% and the 30-year unchanged at 1.72%. Treasuries were weaker as stock prices traded higher. The three-month Treasury note was yielding 0.09%, the 10-year Treasury was yielding 0.84% and the 30-year Treasury was yielding 1.63%. The Dow rose 1.12%, the S&P 500 increased 1.88% and the Nasdaq gained 2.34%.
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New York City should develop a detailed financial plan and look at other options before turning to long-term borrowing to fund its operations, according to a report released Thursday by New York State Comptroller Thomas DiNapoli. Mayor Bill de Blasio has been asking the state for permission for up to $5 billion of bond sales to cover an estimated $9 billion budget gap caused by the pandemic. So far, Gov. Andrew Cuomo and the state legislature have resisted the idea of approving bond sales to fill the gap caused by plunging tax revenue and virus-related cost increases. “The scope and devastation of the COVID-19 pandemic has created a significant revenue loss for the city while driving up costs to deal with its effects,” DiNapoli said. “The challenges are certainly daunting, but are mitigated by reserves the city built up before the current recession.” According to the Citizens Budget Committee, the city has used $4 billion of its reserve funds and the Retiree Health Benefits Trust Fund to close gaps in fiscal 2020 and 2021. From the General and Capital Stabilization Reserves $280 million was used in fiscal 2020 and $1.15 billion in fiscal 2021, which left $100 million in the fiscal 2021 general reserve, the minimum required by the City Charter and Financial Emergency Act. The General Reserve and Capital Stabilization Reserve remain at $1.25 billion annually in fiscal years 2022 through 2024.The remaining $2.6 billion came from a drawdown of the RHBT, which reduced the RHBT balance from $4.7 billion to $2.1 billion in fiscal 2021. The report noted the city’s current projected budget gaps remain lower than the prior two recessions and officials anticipate a rebound in both growth and revenues in fiscal years 2022 and 2023. As of Oct. 21, preliminary data for the close of fiscal 2020 shows the city has accrued $2.62 billion in COVID related expenditures, according to New York City Comptroller Scott Stringer's Office. In total, the city has committed to $4.76 billion in COVID related spending in siscal 2020 and 2021. The report found the city’s reserve and surplus levels going into the pandemic were among the highest on record, as a result of record economic and revenue growth and actions taken by the de Blasio administration and the City Council to boost reserve levels. The report also said the city’s budget gaps before the pandemic were much smaller than those before the Great Recession or the 9/11 terrorist attacks. On average, the pre-pandemic gaps were under 5%, compared to 10% in the previous two recessions. As a result of this expected return to normal economic activity, DiNapoli projects the gaps to average 12% through fiscal year 2023 before any actions are taken by the city to address the shortfalls. “An updated projection of the economic recovery, with a conservative approach to managing the uncertain outlook, is needed to understand the magnitude and duration of potential revenue shortfalls and should be a prerequisite for considering deficit financing as a revenue source,” the report said. In ordinary times, deficit financing would be treated as a last resort, but the report said that during these extraordinary times the city’s economic competitiveness could be at stake. New York State Comptroller Thomas DiNapoli. “Past experience indicates the city would be well-served by developing and considering all options, in order to identify if and when deficit financing is truly needed,” DiNapoli said. In looking at new revenues and cost savings, the report said the city must not disturb its economic recovery or allow residents’ quality of life to deteriorate. DiNapoli urged the federal government to provide help, saying that past recessions highlighted the role of federal assistance. The level of federal support for the state would add to what would be available to the city. “Washington, for its part, can, and must, help the city weather this colossal economic storm,” he said. New York City is one of the largest issuers of municipal debt in the United States. As of the end of the second quarter of fiscal 2020, the city had about $38 billion of general obligation debt outstanding. That's not counting the city's various authorities, such as the Transitional Finance Authority, which has $39 billion of debt outstanding, and the Municipal Water Finance Authority, which has $31 billion outstanding. Moody’s Investors Service rates the city's GOs Aa2 and S&P Global Ratings and Fitch Ratings rate it AA.
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Tourism-dependent Florida continues taking a hit in year-over-year state revenue comparisons, which were down 6.8% in September All revenues supporting the state budget came in $230.2 million above the recently revised forecast, according to the September report by the Legislature’s Office of Economic and Demographic Research. In August, collections posted a gain of $177.3 million over the revised forecast. Outgoing Senate President Bill Galvano, at the podium, said others have regained confidence in our economy Bloomberg News Although the report said collections were above the recently revised estimates for a second month in a row, it also said all revenue sources are down 3.6% compared to 2019. "Even with this favorable outcome, the September results continue to reflect the significant economic loss wrought by the pandemic," the report said, noting that had the pre-pandemic forecast remained in effect it would have shown a $145.8 million loss. "The most significant over-the-year loss is attributed to declines in the tourism and hospitality-related industries, dropping receipts 28.2% below collections for the tourism category in September 2019," the report said. While the tourism category consists of state sales tax collections, the report said five other sales tax categories, including sales taxes paid by residents, came in above the new estimates, with three posting gains over September 2019. Sales tax collections account for 79% of total revenues supporting the state budget. Florida relies heavily on its 6% sales tax because a state income tax is constitutionally prohibited. The revenue estimating conference met Aug. 14 and revised the amount of anticipated income supporting the state budget downward by $3.4 billion in the current fiscal year; down $2 billion in fiscal 2022; and $1 billion less in 2023, compared with what was expected before the coronavirus pandemic. In his last revenue report to state lawmakers, outgoing Senate President Bill Galvano, R-Bradenton, said many Florida families are still struggling with pandemic-related unemployment or underemployment due to closures or reduced services. "These numbers indicate that in recent weeks others have regained confidence in our economy and are beginning to resume more normal spending habits, easing off what had been an atypically high savings rate when larger portions of the economy were closed or restricted," said Galvano, couldn't run for re-election this year due to term-limits. In the September report, forecasters said the state's economy and revenues benefited from the release of pent-up demand because of some consumers’ ability to draw down atypically large savings that built up during the pandemic. Personal savings had increased to a rate of 33.6% in April, up from 7.9% for all of fiscal 2019. The savings rate dropped to 14.1% in the September report. Galvano said some people will remain "understandably skeptical" about the state's future due to the health, social, and economic impacts of the coronavirus that causes COVID-19. "As I close what will be my last update on fiscal matters during my term as Senate president, I am optimistic because of the positive news in this report," he concluded. Like many states, Florida's positivity rate of coronavirus cases is increasing. On Thursday, the third consecutive day positive COVID-19 cases increased by 4,000 or more, the state health department reported 4,198 new cases and 77 deaths. Florida now has 794,624 total positive cases and 16,854 deaths, the fourth-highest fatality rate in the country, according to the Johns Hopkins University COVID-19 tracking project.
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Priya Misra, managing director and global head of rates strategy at TD Securities, said the immediate issue for the municipal bond market is dealing with its legacy book of derivatives and its legacy book of cash bonds. Bloomberg News The Internal Revenue Service will not treat certain fallback language as a material change to a contract referencing Libor or other interbank offered rates. The IRS made that official in Revenue Procedure 2020-44 earlier this month, announcing that fallback language released by the International Swaps and Derivatives Association as well as the Alternative Reference Rates Committee can be used. The Revenue Procedure applies to contracts entered on or after Oct. 9 through Dec. 31, 2022, and is also retroactive for modifications to contracts entered into prior to October 9. The need to incorporate this fallback language was highlighted earlier this week at the Bond Buyer California Public Finance Conference by Priya Misra, managing director and global head of rates strategy at TD Securities, who said the immediate issue for the municipal bond market is dealing with its legacy book. “There are muni bonds and a lot of Libor linked muni bonds that exist beyond the end of ‘21,” Misra said Monday. “In fact, most floating-rate muni bonds extend beyond ‘21 which means you have to look at your fallback now.” Misra warned that the next milestone in the shift to the Secured Overnight Financing Rate is expected to be the announcement from the U.K.’s Financial Conduct Authority before the end of this year on the exact endpoint of its reference rate by declaring Libor as nonrepresentative. That event will serve as the “death notice” for Libor to anyone who has been in denial about the expected phaseout at the end of 2021, she said. “If that happens, I think it absolutely has an impact on the derivatives market, as well as the cash market,” Misra said. “Anybody with reliable exposure, that SEC announcement will mean something, maybe your hedge will be ineffective, maybe your bond or your swap will immediately move to SOFR. So it all depends on your fallback.” Activity in interest-rate swaps linked to the SOFR surged this month to $84 billion as of Oct. 21, which is nearly triple the amount for the entire month of September, according to an analysis of CME Group figures by TD Securities. Over the summer New York Federal Reserve President John Williams announced in a joint presentation with Bank of England Governor Andrew Bailey that the deadline for the phase-out of Libor at the end of 2021 will not be delayed despite the COVID-19 pandemic. Johanna Som de Cerff, acting chief of Branch 5, IRS Office of Chief Counsel Financial Institutions, and Products Division, told an audience recently that the new IRS revenue procedure should “give comfort” to issuers worried about the tax consequences of “modifying your debt contracts, your swap, and other derivative contracts.” Som de Cerff spoke during a webcast by the Government Finance Officers Association that was billed as a mini muni conference. “What this guidance says is that, if you take that model language, and you put it in your contract, and it lists the kinds of contracts you can do this for, then it's not really an event for tax purposes,” she said. The new language in the swap or bond issuance also will have to include an equivalent interest rate. If that’s done, Som de Cerff said, “You don't have to worry that the IRS is going to treat that as a termination event or an exchange event or that somehow your swap can't be integrated. It's basically 'a nothing,' if you follow the narrow guidelines that are written into this revenueprocedure.” The IRS also wants issuers and bond attorneys to submit comments prior to the end of 2021 about how the revenue procedure is working. “You can inform the IRS as to what other things need to be addressed,” said Som de Cerff. “What are you going to need? What are you seeing? What problems are there?” The comments will be used by the IRS the same way it uses comments on proposed regulations. Jessica Giroux, director of governmental affairs for the National Association of Bond Lawyers, who moderated the panel discussion Som de Cerff spoke at, said the IRS decision to accept comments is “great.” “Sometimes things don't go as smoothly as you want them to,” Giroux said. “And so this little allows some flexibility over at the IRS.” The ISDA fallback language was announced Oct. 23 as the IBOR Fallbacks Supplement and IBOR Fallbacks Protocol. ISDA said the supplement amends its standard definitions for interest rate derivatives to incorporate robust fallbacks for derivatives linked to certain IBORs, with the changes coming into effect on January 25, 2021. From that date, all new cleared and non-cleared derivatives that reference the definitions will include the fallbacks. Additionally, ISDA said the protocol will enable market participants to incorporate the revisions into their legacy non-cleared derivatives trades with other counterparties that choose to adhere to the protocol. The protocol has been open for adherence since the Oct. 23 date of the announcement and also becomes effective on Jan. 25 almond with the supplement. “With the fallbacks in place, derivatives market participants will be able to get on with transitioning their IBOR exposures with confidence that there is a robust back-up in case of need,” said ISDA Chief Executive Scott O’Malia.
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P-to-P payments article 2 Min Read October 28, 2020 12:01 AM 5h ago BofA sees Zelle P2P cash gifts rise during COVID-19 Bank of America has seen a 33% increase in cash gifts flowing through the Zelle P2P app since the start of the pandemic, with total gifting volume reaching $1 billion. Kate Fitzgerald Tweet LinkedIn Email Print
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Tuesday's economic data again suggested strength in some areas and weakness in others, as a read of consumer confidence slipped, while durable goods orders gained more than expected, manufacturing rose, the services sector also improved, and home prices climbed. The consumer confidence index dipped in October to 100.9 from 101.3 in September, ending a two-month streak of declines, The Conference Board reported Tuesday. The present situation climbed to 104.6 from 98.9, while the expectations index dropped to 98.4 from 102.9. Economists polled by IFR Markets expected the confidence index to rise to 102.5. The index, which is down 28.2 points from its pre-pandemic average, “has failed to sustain gains in this recovery because of the early summer and fall spikes in COVID-19 cases, which is having a disproportionately negative impact on services consumption,” according to Roiana Reid, U.S. economist at Berenberg Capital Markets. The rise in the present situation index combined with the drop in the expectations index, suggests consumer are more unsure about the future, given the rise in COVID-19 cases. “Consumers grew more optimistic about current labor market conditions, but their assessment of current business conditions remained very depressed,” Reid said. “They increased their future employment and income expectations, but downgraded expectations for future stock market performance.” Consumers are reacting to the spike in virus cases and high unemployment, said Scott Anderson, chief economist at Bank of the West. “Buying plans were mostly lower, suggesting consumers do not anticipate the economy gaining much momentum in the fourth quarter,” he said. Scott Anderson, chief economist at Bank of the West Durable goodsDurable goods orders rose 1.9% in September, after a downwardly revised 0.4% increase, originally reported as 0.5%, the Commerce Department said Tuesday. Transportation equipment orders, which grew 4.1%, were a major factor in the rise in overall orders. Excluding transportation, orders grew 0.8% in the month. Economists estimated orders would be up 0.5% and 0.4% excluding transportation orders. Core capital goods, a harbinger of business investment plans, gained 1.0% in the month after a 2.1% climb the month before, and are at a six-year high, Reid said. “Durable goods showed a strong increase in orders, led by the volatile aircraft and motor vehicles and parts sectors,” she added. "Still, core orders increased solidly, reflecting continued strong demand for manufactured goods, consistent with the optimism in regional and national manufacturing sentiment surveys. Durable goods shipments increased modestly, having already staged a V-shaped recovery.” Case-Shiller home prices indicesHome prices spiked 5.7% year-over-year in August, after climbing at a 4.8% annual pace a month earlier, according to S&P CoreLogic Case-Shiller. Economists estimated prices would gain 4.2% year-over-year. Year-over-year, the 10-city composite gained 4.7%, up from 3.5% a month earlier, while the 20-city composite rose 5.2%, after a 4.1% increase a month earlier. Month-over-month, the national index, not seasonally adjusted, gained 1.1% in August, as did the10-city composite and the 20-city composite. Economists predicted a 0.5% rise month-over-month. “Non-seasonally adjusted home prices are up 5.18% from a year ago based on this index — the largest advance in two years — as the residential housing market continues to be a bright spot in the economic recovery,” Anderson said. Richmond Fed surveysService sector activity showed “signs of improvement” in October, according to the Federal Reserve Bank of Richmond service sector survey, released Tuesday. The current revenues index increased to 19 from 6 and the demand index dropped to 8 from 11. The local business conditions index also climbed, to 12 from 7, the services expenditures index narrowed to negative 2 from negative 7, capital expenditures rose to 4 from 1, while the number of employees index rebounded to positive 9 from negative 3. Looking six months ahead, the expected service sector revenues index decreased to 19 from 21, services expenditures reversed to negative 4 from positive 9, capital expenditures climbed to 15 from 11, while the number of employees index doubled to 18 from 9, the wages index rose to 35 from 24, and the demand index fell to 12 from 21. The current prices paid trends index fell to 4.82 from 5.50, while the prices received index sank to 1.91 from 3.55. The expected price paid trends index decreased to 3.55 from 3.98, while the expected prices received index declined to 1.68 from 2.50. Manufacturing activity in the district “strengthened” in the month, the Richmond Fed said, as the manufacturing index gained to 29 from 21 last month. Shipments swelled to 30 from 13, volume of new orders rose to 32 from 27, local business conditions gained to 30 from 24 and capital expenditures dropped to 13 from 20. Looking six months ahead, the future shipments index fell to 34 from 51, volume of new orders decreased to 24 from 45, local business slipped to 37 from 52 and capital expenditures index declined to 22 from 35. Dallas Fed services surveyOctober Texas service sector activity “grew at a reduced pace,” according to the Federal Reserve Bank of Dallas on Tuesday. The current general business activity index rose to 13.2 in October from 11.5 in September, while at the company level, the index fell to 7.8 from 9.7. The outlook uncertainty index gained to 5.8 from zero the month before. The revenue index slipped to 7.1 from 14.0, the employment index dropped to 0.6 from 2.7, and the part-time employment index fell to negative 1.6 from 3.7. Looking six months ahead, the general business activity outlook index gained to 20.1 from 18.9, while the company outlook dropped to 17.6 from 20.8.
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New York City offered its Transitional Finance Authority bonds to retail investors for a second day as new supply loaded with some big Texas and South Carolina issues headed into the marketplace. In secondary trading, municipals were mostly stronger Tuesday, with yields on the AAA scales dropping by as much as two basis points on longer-dated maturities while rising on the short end of the curve. The municipal market was flat to slightly better in 30-years by a basis point or two, a New York underwriter said Tuesday. “Bid lists are a little greater, but the market is performing well — despite the large calendar,” he said, noting that the deals from the Central Texas Regional Mobility Authority and the South Carolina Public Service Authority were well-received amid the overall firmness. “Assuming that nothing dramatic happens in the next four days, the broad market will end down about 40 basis points for the month, but would hold onto a near-3% gain for the year,” according to Kim Olsan, senior vice president at FHN Financial. “High-yield is up a nominal amount this month and just above positive year-to-date.” Taxables, while exploding in terms of total volume as a percentage of new issuance, took a hit this month, she said. “The big story has been in taxable munis, down more than 1% in October on volume that could exceed $25 billion for the month (there was $43 billion through the first 10 months last year),” Olsan said. “The sector is still up more than 7% in 2020, but will need a large reversal into year-end to surpass the 11% gain in 2019.” Peter Block, managing director of credit strategy at Ramirez & Co., said this week’s calendar is another “blockbuster” led by some sizable deals such as the upcoming offerings from the Los Angeles Community College District and the $1.1 billion Los Angeles Unified School District. Beyond this week, Block said the 30-day visible supply is estimated at negative $4.1 billion — consisting of $24.5 billion of maturities and calls, and $20.4 billion of announced supply. “The secondary remains well bid as bid-wanted and trading throughout remains at average levels,” Block wrote in a weekly municipal commentary. “Dealer inventory remains light ahead of the election. Tax-exempts remain fairly valued on a ratio and spread basis, while taxables remain cheap versus comparable taxable corporates,” he continued. Primary marketRamirez & Co. held a second day of retail orders on the New York City Transitional Finance Authority’s (Aa1/AAA/AAA/NAF) $700 million of tax-exempt future tax-secured subordinate fixed-rate Fiscal 2021 Series D Subseries D-1 bonds. Yields remained unchanged from Monday's levels. The bonds were priced for retail to yield from 0.30% with a 5% coupon (+12 basis points) in 2022 to 0.79% with a 5% coupon (+35 basis points) in 2026 and to yield from 1.82% with a 5% coupon (+56 basis points) in 2034 to 2.80% with a 2.75% coupon (+106 basis points) and 2.78% with a 3% coupon (+104 basis points) in a split 2050 maturity. The bonds will be priced for institutions on Wednesday; the TFA also plans to competitively sell about $200 million of taxable fixed-rate bonds on Wednesday. And the TFA will be reoffering $218.215 million of Fiscal 2001 Series C bonds, Fiscal 2010 Subseries G-5 bonds and Fiscal 2013 Subseries S-6 bonds. “Depending on one’s estimate for New York City credits to recover from this year’s widening, a commitment in the new issue Transitional Finance Authority bonds could look attractive,” FHN’s Olsan said. “Intermediate maturities were offered for retail orders at spreads above +50/AAA and with absolute yields exceeding 2% in long, sub-5% coupons.” She said other sectors were seeing rewards too. “Likewise, certain pockets in secondary business show similar advantages. Bid lists are still biased toward short-maturity and short-call structures — which appears to be both a seller- and buyer-friendly approach in short calls with almost no new issue up against those formats,” Olsan said. “A seller of 20-year state GOs with a five-year call was paid through 1% on a bid list, nearly 50 basis points lower than the implied 20-year AAA spot, but with ample concession to a 2025 call date.” Since 2020, the NYC TFA has sold about $57 billion of debt, with the most issuance occurring in 2018 when it offered $7.76 billion of debt. The South Carolina Public Service Authority (A2/A/A-/NR came to market with $638.33 million of bonds for Santee Cooper in two issues. Barclays Capital priced the South Carolina Public Service Authority’s $338.49 million of Series 2020A tax-exempt refunding and improvement revenue obligations. The bonds were priced to yield from 0.37% with a 5% coupon in 2021 to 2.38% with a 5% coupon in 2043. BofA Securities priced the PSA’s $299.84 million of Series 2020B taxable refunding revenue obligations. The bonds were priced at par to yield from 1.485% in 2025 to 2.659% in 2032. BofA priced the Central Texas Regional Mobility Authority’s $340.91 million of Series 2020E (Baa1/A-/NR/NR) senior lien revenue bonds, Series 2020F (Baa2/BBB+/NR/NR) subordinate lien revenue bond anticipation notes and Series 2020G (Baa2/BBB+/NR/NR) subordinate lien revenue refunding bonds. The Series 2020E bonds were priced to yield from 1.48% with a 5% coupon in 2029 to 2.42% with a 4% coupon in 2040; a 2045 maturity was priced as 5s to yield 2.43% and a 2050 maturity was priced as 4s to yield 2.71%. The Series 2020F bonds were priced as 5s to yield 0.93% in a 2025 bullet maturity. The Series 2020G bonds were priced to yield from 1.47% with a 5% coupon in 2028 to 2.62% with a 4% coupon in 2040; a 2045 maturity was priced as 4s to yield 2.79% and a 2050 maturity was priced as 4s to yield 2.86%. RBC Capital Markets priced Austin, Texas’ (Aa3/AA/AA/NR) $227.795 million of Series 2020A electric utility system revenue refunding and improvement bonds. The bonds were priced as 5s to yield from 0.28% in 2023 to 1.77% in 2040, 1.94% in 2045 and 2.02% in 2050. Siebert Williams Shank priced the Cypress-Fairbanks Independent School District, Harris County, Texas’ (Aaa/AAA/NR/NR) $388.23 million of Series 2020A unlimited tax school building and refunding bonds. The deal is backed by the Permanent School Fund guarantee program. The bonds were priced to yield from 0.21% with a 4% coupon in 2022 to 2.46% with a 2.25% coupon in 2045. Jersey City, the largest city in Hudson County, sits across the river from Manhattan. Bloomberg News In the competitive arena, Hudson County, N.J., (NR/AA/NR/NR) sold $223.086 million of unlimited tax general improvement bonds. JPMorgan Securities won the bonds with a true interest cost of 2.1661%. The bonds were priced to yield from 0.25% with a 2% coupon in 2021 to 2.20% with a 3% coupon in 2041. NW Financial Group is the financial advisor; Wilentz Goldman is the bond counsel. The Evergreen School District No. 114, Wash., (Aaa/NR/NR/NR) sold $223.845 million of unlimited tax GOS backed by the Washington State School District Credit Enhancement Program. BofA won the bonds with a TIC of 2.2394%. The bonds were priced to yield from 0.20% with a 5% coupon in 2021 to 1.84% with a 4% coupon in 2039.The financial advisor is the Educational Services District 112 of Vancouver, Wash. Pacifica Law Group is the bond counsel. On Wednesday, Goldman Sachs is set to price the Los Angeles Unified School District’s (Aa3//AA+/AAA) $1.1 billion of Measure Q Series 2020C dedicated unlimited ad valorem property tax bonds. On Thursday, BofA is expected to price the Los Angeles Community College District’s (Aaa/AA+//) $1.8 billion of taxable general obligation refunding bonds. Secondary marketSome notable trade on Tuesday: Delaware GOs, 5s of 2022, traded at 0.19%. Friday, they traded at 0.20%. Texas waters, 5s of 2023, traded at 0.23%-0.22%. Maryland GOs, 5s of 2028, traded at 0.73%. Baltimore County, Maryland GOs, 5s of 2030, traded at 0.98%. When they priced in late February, they came at 1.01%, which points to how far high-grades have come through the pandemic. Katy Texas ISD 4s of 2039 traded at 1.62%-1.55%. Washington GOs, 5s of 2040, traded at 1.61%-1.52%. Leander Texas ISD 4s fo 2041 traded at 1.71%. On Tuesday, high-grade municipals were mixed, according to final readings on Refinitiv MMD’s AAA benchmark scale. Short yields in 2021 and 2022 rose two basis points to 0.19% and 0.20%, respectively. The yield on the 10-year muni fell two basis points to 0.94% while the yield on the 30-year dropped tow basis points to 1.72%. The 10-year muni-to-Treasury ratio was calculated at 120.8% while the 30-year muni-to-Treasury ratio stood at 109.6%, according to MMD The ICE AAA municipal yield curve showed short maturities up one basis point with the 2021 maturity at 0.20% and the 2022 at 0.21%. The 10-year maturity dipped one basis point to 0.93% and the 30-year fell two basis points to 1.73%. The 10-year muni-to-Treasury ratio was calculated at 120% while the 30-year muni-to-Treasury ratio stood at 110%, according to ICE. The IHS Markit municipal analytics AAA curve showed short yields up to 0.16% and 0.17% in 2021 and 2022, respectively, with the 10-year yielding 0.97% and the 30-year at 1.73%. The BVAL AAA curve showed the yield on the 2021 maturity up one basis point to 0.15%, the 2022 maturity up one basis point to 0.16% while the 10-year fell one basis point to 0.93% and the 30-year dropped one basis point to 1.73%. Treasuries were stronger as stock prices traded mixed. The three-month Treasury note was yielding 0.10%, the 10-year Treasury was yielding 0.78% and the 30-year Treasury was yielding 1.56%. The Dow fell 0.70%, the S&P 500 decreased 0.25% and the Nasdaq gained 0.45%.
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The financial and legal obstacles besetting a long-planned Maryland light rail system could hinder other large-scale transportation public-private partnership projects, analysts said. The Maryland Department of Transportation assumed many contracts from Purple Line Transit Partners this month after the private partner shut down construction of the 16-mile, 21-station light rail line. PLTP is involved in an ongoing legal dispute regarding the termination of a concession agreement, which has put the project an estimated two and a half years behind schedule from its original 2022 expected completion date. Construction in May at the College Park, Maryland, Purple Line Metro Station. Maryland Department of Transportation “This could diminish P3s in the public sector and certainly paint them in a negative light,” said Fitch Ratings analyst Scott Zuchorski. “It could cause [the public sector] to think more carefully about pursuing them.” The Purple Line project has been plagued by $800 million in cost overruns, delays and lawsuits since the Maryland DOT signed a 36-year concession agreement in April 2016 with PLTP to build and operate the rail system. PLTP issued $323 million of private activity bonds through the Maryland Economic Development Corp. in 2016 and received an $875 million low-interest Transportation Infrastructure Finance and Innovation Act loan. It has unsuccessfully negotiated with MDOT since June 2017 to resolve disputes over construction delays. Paul Lewis, vice president of policy and finance at the Eno Center for Transportation, said he expects near-term challenges completing major P3s due to the Purple’s Line’s stresses, since there is such a small sample size of similar projects. The Purple Line’s pitfalls, he added, come on the heels of similar disruptions last year to a $770 million redevelopment of Denver International Airport’s Jeppesen Terminal, which featured a rail line, following the collapse of the project’s partnership with GDH. “If I were an investor and I were looking at the two transit P3s with financing components, I’m not seeing a great track record,” Lewis said. “There aren’t many examples of this.” Zuchorski said the legal cloud hovering over a high-profile project like Purple Line will also make investors more leery to embrace future transportation P3s. Purple Line bondholders may only receive 80 cents a dollar if courts ultimately determine that MDOT is not required to release a termination payment covering full payment of outstanding debt, he said. “Who is ultimately at fault for the termination will have an impact on how this plays out for bondholders,” Zuchorski said. “The state of Maryland may ultimately get the project done, but that doesn’t necessarily mean the bondholders are protected.” G. Scott Rafshoon, a partner at Squire Patton Boggs’ P3 practice, said the Purple Line stumbles would likely make states and developers reluctant to pursue complex projects that involve a large number of contracts. Many successful P3s for less risky transportation projects, such as highway improvements, have been completed, and he said he hopes governments will still consider utilizing the private sector for infrastructure projects. “I’d like to think the days of one project going south killing all other chances for P3s are behind us,” Rafshoon said. "There might be some slowing down on some projects and in particular ones that are as ambitious as the Purple Line, but most of them aren’t that big.” Previously, transportation P3s faced concerns after the state of Georgia nixed contracts for a $1 billion high-occupancy toll lane project in 2011, he said. While the cancellation slowed P3s in Georgia, nearly a decade later private operators have advanced other smaller transportation projects throughout Georgia. The MDOT press office did not respond to requests for comment on the status of Purple Line or legal battle with PLTP. The MDOT has said bonds could be issued by the agency or another developer to help finance the project's completion.. PLTP could not immediately be reached for comment.
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The San Francisco Public Utilities Commission is the first municipal issuer to list on a foreign exchange as it attempts to reach new investors in Europe and beyond. The SFPUC listed its recent taxable green bond deal on the London Stock Exchange on Thursday after it sold more than $600 million of taxable green bonds in early October. Two tranches totaling $341 million of Series E taxable Climate Bonds Initiative-certified green bonds — $300 million maturing in 2041 with a 2.825% coupon priced at par and $41 million maturing in 2047 with a 2.945% coupon priced at par — are now listed on the LSE. Of the Series E deal, about 36% of the investors were impact investors, the issuer said. The Hetch Hetchy Reservoir provides drinking water to San Francisco. The listing in this case is more like a registration, a “check the box” requirement for some investors, and not for actual transactions. Buying and selling will still exist in the secondary municipal market. But by listing on the LSE, SFPUC satisfies a regulatory requirement in Europe that the bonds be listed on an exchange. Both tranches traded up in the secondary after the deal priced, with the 2041s trading at 2.77%-2.80% on the day it was listed, though it is unclear who the buyers and sellers were. The issuer said its view on listing its taxable green bonds in Europe is part of a long-term plan to build relationships with new, international investors and officials view increasing the investor base for U.S. muni green bonds as an important way to grow its footprint around the globe. "There’s a larger market for green bonds in Europe but many European green bond investors are limited to buying bonds listed on a European exchange,” said Eric Sandler, SFPUC chief financial officer and assistant general manager, business services. “We view listing as an element of a broader strategy for accessing this larger investor market and driving down the cost of capital.” SFPUC is also evaluating conducting non-deal-related road shows to highlight its work in ESG and green space, which is especially practical now that they can be done virtually, officials said. “We’re hopeful that as we refine our approach we’ll be able to attract European buyers,” Mike Brown, the commission's environmental finance manager, said. Sandler noted earlier this month the SFPUC is committed to building low-carbon, socially inclusive infrastructure and hopes to be an example for other U.S. municipal ESG investors. “Building off of our work last year to align project impacts with the UN sustainable development goals, we see listing in Europe as another way to reach new investors and participate in the global green bond market,” he said. Don't miss The Bond Buyer's California Public Finance Conference panel on 'What Should Investors Expect on ESG?' at 2:45 p.m. ET Wednesday. The London Stock Exchange also welcomed the issuer. “This landmark transaction is the first green bond from a U.S. municipal issuer to be listed on London Stock Exchange, with use of proceeds being deployed to fund environmentally beneficial projects,” Denzil Jenkins, interim CEO of London Stock Exchange Plc said. Jenkins noted there are currently more than 240 bonds on the exchange’s Sustainable Bond Market, raising over $80 billion from 68 issuers. SFPUC has been issuing green bonds for more than five years and when it sold its first green bond deal in 2015, it self-certified. The October deal was CBI verified. It followed a December 2019 $657 million transaction, one-third of which went to impact investors. SFPUC also is part of NASDAQ’s Sustainable Bond Network, a global online platform designed to improve transparency in the market for green, social and sustainability bonds, which also debuted in December of 2019. Others in the municipal industry are making their footprint in ESG and social visible. Market participants including rating agencies are focusing on ESG, climate change and green bonds, from the largest asset managers to third-party verifiers to issuers themselves. COVID-19 has put a cloud over much of 2020, but investors and issuers say that it potentially makes ESG and climate change even more important going forward.
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Dallas Area Rapid Transit will pursue savings through an $870.6 million taxable refunding as it continues expanding its extensive rail and bus system. The deal is scheduled to price Thursday through negotiation with senior manager Loop Capital Markets, led by managing director Tilghman Naylor. Proceeds from the Series 2020D bonds will be used to refund outstanding 2014A, 2014B and 2016A bonds for expected net present value savings. "Our objective for the Series 2020D refunding is purely for savings," DART Treasurer Dwight Burns said. "We have no need for cash-flow relief or restructuring. "The markets are favorable," he added. "However, we’re being flexible about choosing refunding candidates. As we approach our pricing, we’ll be patient and flexible about the candidates we choose for refinancing." At its Oct. 20 meeting where the Series D bonds were approved, the DART board also authorized $908 million of Series E bonds to refund a 2018 Rehabilitation Improvement Financing loan from the federal government. "We are negotiating a rate reduction on the existing loan with the USDOT’s Build America Bureau," Burns said. "We plan to finalize it around calendar year-end. The updated loan will be reset at the current 30-year Treasury rate, plus 1 basis point. The original loan was set at 2.98%, so compared to current rate trends, we should realize substantial debt service savings." The Series D bonds, maturing through 2049, are rated Aa2 by Moody’s Investors Service and AAA by Kroll Bond Ratings Agency. The bonds are backed by a 1% sales and use tax collected in DART's 13 member municipalities, approved by voters in 2000, along with some farebox revenues. Despite the pandemic that has reduced ridership and slowed the previously booming regional economy, rating analysts maintain a stable outlook for the transit agency that covers a 700 square-mile service area. “Ridership is slowly rebounding from the trough in the spring, but sales tax recovery is more uneven,” Moody’s analyst Genevieve Nolan wrote in an Oct. 14 report. “Favorably creditors retain strong protections against DART's operations and possible financial stress, most notably collections of pledged revenues by the state, which are intercepted by the trustee before the remainder flows to the authority.” DART received $229.6 million from the Coronavirus Aid Relief and Economic Security (CARES) act by Sept. 30, according to the agency. The American Public Transportation Association is calling for a second round of relief, saying that six in 10 public transit systems will need to reduce service and furlough employees in the coming months without an additional $32 billion in emergency federal funding from Congress. “Our request for $32 billion is necessary to avoid catastrophic decisions that will only hurt our riders, our communities, and the nation” said APTA President and CEO Paul P. Skoutelas. “The industry continues to serve essential employees every day, but without additional emergency funding, many transit agencies will soon need to cut transit services and routes and furlough transit workers, leaving our communities without service and jobs when they need them most.” DART was created by voter referendum in 1983 and is governed by a 15-member board appointed by the cities through a population-based formula. No city is able to appoint more than 65% of the board. The agency’s 2021 fiscal year began Oct. 1. “Despite sharp monthly sales tax revenue declines at the outset of the COVID-19 pandemic, improvement is reflected in recent data,” KBRA analyst Harvey Zachem wrote in his Oct. 20 rating report. “Projected FY 2020 results are expected to show an approximately 1.5% year-over-year decline, which is favorable compared to most other regions in the nation. The resilient performance stems from a deep and diverse economy and restrictions that were not extremely onerous.” On Sept. 17, DART announced that it was restoring 90% of pre-pandemic service levels beginning Oct. 19. The board action came after DART limited bus and light rail service on April 6 due to the pandemic. Track is delivered for the Silver Line commuter rail in Plano, Texas. DART DART is continuing to build its 26-mile Silver Line commuter rail system that will connect Dallas’ northern suburbs with Dallas-Fort Worth International Airport and intersect with DART and Denton County Transportation Authority light rail lines. The 2018 federal loan financed the project along the former Cotton Belt freight route. The Silver Line will ultimately link with Fort Worth’s commuter rail line known as “The T” at DFW Airport. DART also runs a light rail line to the airport from downtown Dallas. When completed in early 2023, the $1.2 billion Silver Line will connect with the Trinity Metro TEXRail commuter rail line at DFW North station providing access to Downtown Fort Worth, Grapevine, and various other Tarrant County areas. DART is also working on a downtown Dallas underground system known as D2. DART launched a study in 2007 to identify the second phase of major transit improvements in downtown Dallas. The goal was to improve mobility and circulation to, through and within downtown. As of Sept. 30, DART had $3.1 billion of debt outstanding, including the federal loan, per KBRA. “While an additional $2.9 billion in new long-term debt is anticipated through FY 2040, annual debt service coverage from sales tax revenues alone is forecast to remain above 2.51x based on DART’s 20-year Financial Plan assumption of a 4.5% sales tax combined annual growth rate,” Zachem said. “FY 2019 pledged sales tax revenues provide coverage of 2.63x estimated MADS (FY 2041) following issuance of the currently offered bonds, without credit to federal interest rate subsidies for outstanding Build America Bonds.” DART's 93-mile light rail system, with 64 stations, is the longest light rail system in North America and was built at a cost of $5.5 billion. In July, a study of construction near DART light rail stations described the economic impact of development along the routes. Researchers from the Economics Research Group at the University of North Texas reviewed 81 development projects completed within a quarter mile of DART stations with a total property value of $5.138 billion between 2016 and 2018. "The projects themselves added billions in economic activity for the DFW economy," said Michael Carroll, who led the research team. "Further, these projects will serve as a catalyst for future economic growth. As the economic landscape fills in around the initial projects, we will see growth in a wide variety of sectors." Financial advisors on the deal are David Gordon, senior managing director of Estrada Hinojosa & Co., and Jill Jaworski, managing director of PFM Financial Advisors.
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