1 / 19

A Brave New World: Changing Dynamics of the Municipal Market

Explore the evolving landscape of municipal finance, with discussions on investors, issuers, credit enhancement, the short-term market, and ratings. Gain insights from industry experts at the NFMA National Conference.

jvillasenor
Télécharger la présentation

A Brave New World: Changing Dynamics of the Municipal Market

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. A Brave New World: Changing Dynamics of the Municipal Market Speakers: Matt Fabian, Municipal Market Advisors Bob Muller, J.P. Morgan Jim Murphy, T. Rowe Price Moderator: Naomi Richman, Moody’s NFMA National Conference May 7, 2008

  2. Discussion Topics and Leaders • Investors - Murphy • Issuers - Muller • Credit Enhancement - Fabian • Short-Term Market - Muller • Ratings - Fabian

  3. Topic #1: InvestorsWho is Today’s Marginal Investor?

  4. Estimated Growth of the TOB Market Growth of the TOB Market ($million liabilities outstanding) Source: JP Morgan Estimate

  5. Long term and Short Term Supply Trends Source: Federal Reserve, The Bond Buyer

  6. Basis Breakdown Hurts “the Trade” Source: Citigroup

  7. Short Term Market: Increasing Demand, Less Supply Source: The Bond Buyer

  8. Topic #2: IssuersHow are Issuers Responding to Current Market Conditions?

  9. In 2007, muni issuers sold $102 billion in short-term paper and have averaged short-term sales of $96 billion since 2003 • Despite the headlines, issuers are unlikely to want to move to a 100% fixed rate market • But, can they still sell short-term debt in size? • Without the ARS market, how much bank capacity is available? Municipal Issuance Since 2003 ($ Thousands) ISSUERS Source: Bond Buyer 7

  10. Topic #3: Credit EnhancementWhat’s the value of credit enhancement?

  11. MMA: Leading Market Change Value of Credit Enhancement • Sharp downgrades of some financial guaranty ratings have devalued all financial guaranty ratings; there is no easy recovery • Value of bond insurance is now insurer by insurer, investor by investor—what do YOU believe? • MMA expects the insurers will need to keep raising money into 2009 as the crisis widens and rating models are adjusted • Optimism for the affected companies is not yet reasonable Connect with Municipal Market Advisors> www.mma-research.com > 978.287.0014

  12. Topic #4: Short-Term MarketWhat is the future of the short-term market?

  13. Auction rates are still at expensive levels… Spot SIFMA/1 Month LIBOR vs. 1 Month LIBOR SIFMA 7-Day Auction Rate Index Spread over SIFMA • (BPS) • 1M LIBOR • SIFMA / 1M LIBOR THESHORT-TERMMARKET Source: JPMorgan Source: JPMorgan and SIFMA 2

  14. …Although the immediate issuer cost savings incentive to fixing-out to long-term rates has declined • Cross-over buyers and retail investors looking to pick up yield have drove ARS rates down from the absurdly high numbers witnessed in January through March • After conversion costs, issuers may find that the current market is in equilibrium with long-term rates • Nevertheless, the ARS market is vulnerable to further exogenous shocks, such as additional insurer downgrades Thirty-Year BMA Compared to Median ARS Yields THESHORT-TERMMARKET Source: JPMorgan, US Fixed Income Markets Weekly, April 4 2008 3

  15. Upheaval in the TOB market and the potential for changes in 2(a)7 eligibility will be the next hurdles for the short-term market • JPMorgan estimates that the TOB market shrunk by 22% in 1Q08 • TOB drivers face margin calls due to a underperformance in the AAA curve relative to LIBOR • Increased credit scrutiny from money market funds • Decreased liquidity from banks • Multiple forces are converging on the 2(a)7 market that may make for big changes • Market will be shaped by MSRB, SEC, global ratings and bank capacity Growth of the TOB Market ($ Million Liabilities Outstanding) 20 Yr AAA / 20 YR LIBOR Ratio -22% THESHORT-TERMMARKET Source: JPMorgan estimates. Data as of April 2008. 4

  16. Tax-exempt money funds and bank deposits will likely see large inflows as taxable money funds lose attractive assets to invest in • The regulated and non-regulated banking system is heavily reliant “maturity transformation” • Two basic forms of maturity transformation in the non-regulated system are commercial paper issued by SIVs/conduits and repos from hedge funds • In addition to that are the maturity transformations done via the auction rate market, TOBs, VRDBs and broker-dealer issued securities Skeleton Balance Sheets and the Securitization Process THESHORT-TERMMARKET Source: JPMorgan, “How will the crisis change markets?”, April 14 2008 5

  17. Topic #5: RatingsHow can investors sort out the evolving meaning of bond ratings?

  18. MMA: Leading Market Change Corporate Equivalent Ratings for Munis (1 OF 2) • At this point, change is inevitable • Participants should be studying implications not alternatives • Trading “through” GSRs may not be feasible if TOBs re-emerge to suck out yield again • Creates a serious challenge for the bond insurers; Radian and Assured Guaranty perhaps best positioned • S&P’s position creates risk to the market that we will only have two new issue rating agencies going forward Connect with Municipal Market Advisors> www.mma-research.com > 978.287.0014

  19. MMA: Leading Market Change Corporate Equivalent Ratings for Munis (2 OF 2) Connect with Municipal Market Advisors> www.mma-research.com > 978.287.0014

More Related