June 29 (Bloomberg) -- States and municipalities are likely to sell more bonds this year than ever before.
That's right, welcome to another annual record, just two years after the market topped the $400 billion mark. In 2005, municipal bond issuers sold $408 billion in bonds, according to the Bond Buyer newspaper.
Issuers have sold more than $200 billion in bonds so far this year, and we're only at the halfway point. Keep in mind that the $200 billion mark was only broached in 1985, when tax reform sparked a rush to market, and that $200 billion used to be seen as a pretty good year.
Even allowing for a sluggish July and August, and that hasn't been a given in this market for years, don't be surprised if yearly volume tops $425 billion.
The reasons are many. Issuers are coming to realize that 4.60 percent, which is about what top-rated municipalities are paying to borrow money for 20 years, is still pretty cheap. That's well above the recent record low of 4.03 percent posted by the Bond Buyer 20-General Obligation Bond Index last December.
It's axiomatic in the market that higher interest rates choke off refinancing. And yet, in 1997, most issuers were paying interest rates that were higher still -- 5.50 percent plus to borrow money. Most municipal bonds are callable 10 years after they are sold.
Benefits Bonds
So the municipal market will still see a lot of refinancing. In a big year, this typically accounts for anywhere from a quarter to a third of bond issuance. In 1993, for example, refinancing comprised 51 percent of total sales.
Municipalities are also going to keep borrowing to pay for infrastructure construction and maintenance, the usual roads, bridges, sewers and airports.
And of course there's so-called other post-employment benefits, the term attached to the health-care coverage promised to public-sector retirees by states and municipalities, and just now being tallied up by those entities.
The total bill there has been estimated at anywhere between $1 trillion and $2 trillion. States and localities are unlikely to sell bonds to pay for the whole thing, because figuring OPEB liability, like pension costs, is an imprecise art. But they will sell bonds for a portion of it.
That may or may not be a good idea -- I'd prefer them to make their regular pension and benefit contributions -- but it will happen.
Question of Demand
There's going to be refinancing, and new-money bond sales to pay for the nation's fabric, and bond sales to shore up pensions and other liabilities. The big question is whether there is going to be continued demand for municipal bonds.
There hasn't been mention of a glut of municipal bonds in years. If anything, you almost have to wonder if supply will keep up with demand.
The other week I wrote about Branson, Missouri -- yes, the place the uncharitable would call the home of has-been music theater -- selling bonds to build an airport, basically on spec. Top yields on the bonds due in 2037 and subject to the alternative minimum tax was 6.20 percent.
That's not a lot of yield in exchange for a lot of risk. Then I saw the Chicago O'Hare International Airport's $108 million special-facility revenue bond sold to refinance a 1994 issue used to build some facilities for American Airlines.
The bonds, which are secured by the airline, are rated Caa1 by Moody's Investors Service, actual, bona fide, junk. The 43- page official statement contains nine pages of risk factors, mentioning the fierce competition in the industry, the price of fuel, reduced pricing power, labor costs that are higher than the competition, and bankruptcy. You get the point. The 5.50 percent bonds due in 2030 were priced to yield 5.64 percent.
Bundles of Bonds
Then there was this interesting little Bloomberg News story: ``More Tax-Exempt CDOs to Follow Merrill, UBS Deals, Moody's Says.'' The story said that bankers are working on at least eight new tax-exempt collateralized debt obligations, transactions which batch together hundreds of millions of dollars in securities and then are cut up and sold in pieces with different yields based on risk. I bet the people who put together things like this love the variety (and relative yield) represented by the American Airlines bonds.
You've heard about CDOs. They're sort of at the heart of the subprime meltdown. But these would be tax-exempt CDOs, built with municipal bonds. So what does that mean? One thing: more demand for municipal bonds, in addition to the mutual funds, and hedge funds, and individual investors who are clamoring for the things.
This is going to be a big, big year in Muniland.
(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)
|
