March 2018 BI MUNIS State of the Market 2017 Recap 2018 Status Tax Reform Implications Infrastructure Current Opportunities Sector Outlooks Agenda Dashboard contains Themed publications ID: 798154
Download The PPT/PDF document "Bloomberg Intelligence Credit" is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.
Slide1
Bloomberg Intelligence Credit
March 2018
Slide2BI MUNIS
State of the Market
2017 Recap2018 StatusTax Reform ImplicationsInfrastructureCurrent OpportunitiesSector Outlooks
Agenda
Slide3Dashboard contains: -Themed publications
-Weekly
Monitor publicationsDashboard functions from BI Industry groups -Too much municipal data, -fragmented information Focus on topical issues for publication: -Rates -Flows -New Issuance -Secondary Market -Relative ValueIterative process – always encouraging client feedback/requestsBloomberg Intelligence {BI MUNIS <GO>}
Slide4Data Features: -Large underlying data subsets are based off of the underlying issuers Financial Analysis (FA) data sets
-Relative comparison tabs allow quick views on peer groups
-Indicators tab features:AAAMuni/Treasury RatiosEconomic IndicatorsYTD Issuance Tab has breakout of market segments and largest statesETF Fund flows offers more granularity than ETF <GO>Bloomberg Intelligence {BI MUNIS <GO>}
Slide5We left 2017 on a high noteReturns for munis positive across sectors 2017Very strong December
Leaders included
Long DurationLower CreditLocal GOsRevenue BondsHigh YieldBBB debt outperformed AAA by 430bps in 2017State of the Muni Market
Slide62018 has disappointed so far…Returns for munis negative across sectors 2018Pre-re bonds segment net positive YTD at 0.06%
Puerto Rico and USVI also up for the year
Hardest hit this yearLong DurationAAA more so than BaaLocal GOsRevenue BondsHigh YieldState of the Muni Market
Slide7Supply/Demand Driving Force in MarketSupply has been decliningNegative net supply of -$9.5 billion as of 2/27
Despite year end surge, muni issuance ended 2017 down 4.2% vs 2016
Municipal issuance is down 33% YoYCurrent Muni Market
Slide8Supportive TechnicalsDemand still appears to be robust with net ICI muni flows hovering around $9 billion YTD
Flow patterns behaving in opposite manner as we would expect given performance
Some slight reversion to past behavior
Slide9Higher Rates a combination of inflation expectations, global rate movements and Fed expectationsMunis along for the UST rate ride – up ~50bps in 10 YearsLots of year-end 2017 buyers upside down on purchases
Demand in the 2YR has punished short end ratios
All about Rates
Slide10RatiosMuni/Treasury Ratios under pressure throughout 2017, saw Q4 ReliefRatios in 2YR, 5YR, 10YR and 30YR peaked at end of Nov, all below averages now
2YR portion of the curve has performed the worst in 2018 as buyers crowd short end of curve
Further UST sell-off post Powell testimony will provide further pressure
Slide11Lower for Longer(ish)2s10s Muni curve slope is 92.6bps, 5YR
ave
of 158bpsDespite recent steepening, historically flat curve provides little true incentive to extend too far end of curve10/30 YR Rate Ratio is 80.4%15/30 YR Rate Ratio is 91.4%20/30 YR Rate Ratio is 96.1%All ratios up YoY
Slide12Tax Reform ImpactsLoss of Advanced Refundings
Rush to market in
2017Solely Advanced Refunding Bonds made up 15% of total muni issuance in 2017Smaller muni supply in 2018Favorable Technical set up for munis with supply dearthLoss of Tax Credit BondsReduction of Corporate tax RateHolding almost 29% of the market, insurance companies and banks are substantial muni investors and demand could soften
Slide13Infrastructure….Infrastructure Plan on the Horizon?Current Funding gap approaching $5 trillion through 2040
Raising Fed gas tax as part of solution to fund Highway Trust Fund
Pivot toward a combination of a P3 model and pushing spending to local levelCould ease limitations on tolling for interstate highwaysPABs could come back under fire with re-introduced legislation from Rep. Brady
Slide14Market OUtlookMunis hamstrung by secondary oversupply and lack of true price discovery via new issue
Total dealer positions elevated at $21.2 billion
Impact bleeding into primary with unsold balances and wider offer levelsRecent Rate Increase Not the Worst Situation to Put Cash to workMunis still attractive on a TEY basis, assuming both a top rate of 37% and a lower rate of 32% As the curve flattens, look for entry points in the long end to appear
Slide15Market Outlook Cont…Appears as if the shift toward shorter call structures is meeting some resistance
2018 YTD issuance shows us that of the 63% of bonds that had a call feature
Large majority were in the 9/10 year bucketBonds with 5 year calls and shorter are less than 4% of the market
Slide16Market Outlook Cont…While traditional Muni/UST ratios are uninspiring…
Ratios comparing AA
and A rated municipals to AA and A corporate bonds appear more interestingwith the largest growth in ratios noted for 10-year AA revenue bonds/corporates30YR ratios haven't been as positive as their shorter-tenor alternatives, with three out of the four categories posting ratios just slightly above 52-week averages
Slide17Market Outlook Cont…Tax time could provide some ultra short rate opportunity…
As bondholders seek to raise cash for upcoming tax bills, not only could municipal fund flows soften a bit, but rates for municipal variable rate demand bonds could rise, following previous years' patterns of tax time
increasesAt 1.09%, the latest rate reset for the SIFMA Municipal Swap index (MUNIPSA) marks the second consecutive increase for the index following a steady decline to begin the year
Slide18Muni Sector outlooksEssential Service and Transportation with most favorable outlooksHealthcare improved but federal challenges still linger
State credit hampered by slower revenue collections, rough budget season
Local credits have challenges from SALT capsPensions a large issue for state and local govt
Slide19TransportationAirportsDriven by low fuel costs
competitive pricing, airport
segment is in for stable year.U.S. domestic airline travel is set to expand 2.4% a year, for a total of 65% by 2037International capacity airports showing most growthToll RoadsUS vehicle miles travelled increased 1.3% YoYlargest gains were in Pennsylvania, at 3.5%, and Michigan, at 4.6%“A” 30YR Toll Road Spreads up 23% YTD
Slide20State CreditSlowing revenues and rising fixed costs, led by pensions and OPEBs, combined to fuel structural imbalances
Average
pension-plan funding across the U.S. declined by 4%, from 2015 to 2016For the second-straight year, New Jersey, Kentucky, Illinois and Connecticut have claimed the top four spots for the lowest state-pension funding ratiosLimiting SALT deduction both a State and Local issue
Slide21Colorado Pension FocusBested only by Minnesota, Colorado pension funding declined by 14.4% YoY, in the last available fiscal year disclosure was available for
Unfunded liability for PERA (
Public Employees’ Retirement Association) has hit a record high of -$32 billionRamifications on the local level for borrowing costsAnother prolonged economic downturn or market sell-off could push the plan close to insolvency as happened in 2010Retirees are living longer and drawing benefits longer than actuaries expectedSimilar story in other states….plans close to fully funded in 2000….boosted benefits…than POOF!
Slide22Local CreditThose areas with already high fixed-cost ratios could feel further pain with inability to refinance debt outside of 90-day windows
Other
options for municipalities to restructure debt, either via taxable bonds, bank loans, current refundings or use of derivativesLocal municipalities, though well supported in their endeavors to pass bond measures this past November, could feel some pushback if the effects of tax reform hit local wallets.
Slide23Higher EducationFundingSince 2008, only four states have increased per-pupil spending on higher education, leaving the vast majority below prerecession levels
To combat
funding cuts, tuition levels have increased broadly SpreadsSpreads are rich to averages in both A and AA Higher EdHowever, since June of 2017, spreads for AA Higher Ed have widened by 14%, while A spreads have tightened by a 21%
Slide24HealthcareRisksHealth care faces threat from the
dismantling of the Affordable Care Act's (ACA) individual mandate, via the removal of fines for failure to obtain
insurancefewer patients who are more highly reimbursed, along with increases in bad debt and thinner marginsreductions in the Medicaid Disproportionate Share Hospital (DSH) allotments to impact Safety Net Hospitals
Slide25Water, Sewer, Public PowerThe water and sewer sector makes up just one constituent of the universe for infrastructure spending
Water
and sewer portion of munis i known for being essential to communities, as well as for its ability to set rates, which can translate into more predictability in terms of debt-service coverage ratiosEntities in this Public Power will be supported by continued low natural gas rates and the unshackling of environmental regulationsAA Pub power spreads cheap to averages in 5,10 Years
Slide26Supply – Largest IssuersTop Colorado Underwriters
Highest Yielding Deal of the Year
Best Performing Bond of the YearWorst Performing Bond of the YearCredit Improvement Story of the YearMost Unusual Bond DealMost Active Banker based on SupplyBest Colorado Bond Priced in WisconsinMost Experienced Colorado BrokerColorado 2017 top 10
Slide27The data included in these materials are for illustrative purposes only. The BLOOMBERG TERMINAL and Bloomberg data products (the “Services”) are owned and distributed by Bloomberg Finance L.P. (“BFLP”) except that Bloomberg L.P. and its subsidiaries (“BLP”) distribute these products in Argentina, Bermuda, China, India, Japan and Korea. BLP provides BFLP with global marketing and operational support. Certain features, functions, products and services are available only to sophisticated investors and only where permitted. BFLP, BLP and their affiliates do not guarantee the accuracy of prices or other information in the Services. Nothing in the Services shall constitute or be construed as an offering of financial instruments by BFLP, BLP or their affiliates, or as investment advice or recommendations by BFLP, BLP or their affiliates of an investment strategy or whether or not to “buy”, “sell” or “hold” an investment. Information available via the Services should not be considered as information sufficient upon which to base an investment decision. BLOOMBERG, BLOOMBERG TERMINAL, BLOOMBERG PROFESSIONAL, BLOOMBERG MARKETS, BLOOMBERG NEWS, BLOOMBERG ANYWHERE, BLOOMBERG TRADEBOOK, BLOOMBERG TELEVISION, BLOOMBERG RADIO and BLOOMBERG.COM are trademarks and service marks of BFLP, a Delaware limited partnership, or its subsidiaries. © 2017 Bloomberg. All rights reserved. This document and its contents may not be forwarded or redistributed without the prior consent of Bloomberg.
Bloomberg Intelligence is a service provided by Bloomberg Finance L.P. and its affiliates. Bloomberg Intelligence shall not constitute, nor be construed as, investment advice or investment recommendations (i.e., recommendations as to whether or not to “buy”, “sell”, “hold”, or to enter or not to enter into any other transaction involving any specific interest) or a recommendation as to an investment or other strategy. No aspect of the Bloomberg Intelligence function is based on the consideration of a customer's individual circumstances. Bloomberg Intelligence should not be considered as information sufficient upon which to base an investment decision. You should determine on your own whether you agree with Bloomberg Intelligence
. Bloomberg Intelligence is offered where the necessary legal clearances have been obtained. Bloomberg Intelligence should not be construed as tax or accounting advice or as a service designed to facilitate any Bloomberg Intelligence subscriber's compliance with its tax, accounting, or other legal obligations. Employees involved in Bloomberg Intelligence may hold positions in the securities analyzed or discussed on Bloomberg Intelligence.
Bloomberg Intelligence is a service provided by Bloomberg Finance L.P. and its affiliates. Bloomberg Intelligence shall not constitute, nor be construed as, investment advice or investment recommendations (i.e., recommendations as to whether or not to “buy”, “sell”, “hold”, or to enter or not to enter into any other transaction involving any specific interest) or a recommendation as to an investment or other strategy. No aspect of the Bloomberg Intelligence function is based on the consideration of a customer's individual circumstances. Bloomberg Intelligence should not be considered as information sufficient upon which to base an investment decision. You should determine on your own whether you agree with Bloomberg Intelligence.
Bloomberg Intelligence is offered where the necessary legal clearances have been obtained. Bloomberg Intelligence should not be construed as tax or accounting advice or as a service designed to facilitate any Bloomberg Intelligence subscriber's compliance with its tax, accounting, or other legal obligations. Employees involved in Bloomberg Intelligence may hold positions in the securities analyzed or discussed on Bloomberg Intelligence.
DISCLAIMER