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Keep the Torch of Tax-Exempt Finance Shining Bright

Congratulations to Smith's 2017 All-Star Analysts Team. The recognition for a job well done is richly deserved.

Smith's Research & Gradings celebrated 25 years of serving the municipal bond market during 2017.  Over the decades, Smith's All-Star Analysts Program has provided unprecedented transparency into the role of analysis in the investment process.

Never in the history of Smith's All-Star Analysts Program, has the need for high quality research been greater.  America's States and Local governments face unprecedented challenges, ranging from unfunded pensions and fragile infrastructure to tax reform. So too, municipal bond investors face challenges from episodic disclosure and weak bond covenants.

  Smith's All-Star Analysts Program provides recognition for municipal bond analysis wherever it is conducted, be it on Wall Street, the Rating Agencies, Bond Insurance Companies, Commercial banks, Insurance Companies, Institutional Investors, or Hedge Funds.

 

Attack on Municipal Finance

The attack on municipal finance by the U.S. House of Representatives eliminates advance refundings, deductions for State and Local Taxes, as well as the tax-exemption for "Private Activity Bonds" (PABs).  On the U.S. Representative's chopping block were affordable housing mortgage revenue bonds, community-based health care hospital bonds, airport revenue bonds, life care community bonds, and, of course, stadium bonds.

An attack on one municipal bond must be understood as attack on all municipal bonds.

 

BlackRock No. 1 Team

BlackRock earned Smith's No.1 All-Star Analysts Team in 2017.  Jim Schwartz was elected the best Director of Research on the buyside.  Equally as important, he manages a group of First Team All-Star Analysts: Joe Pangallozzi, State and Local GO Bonds; Timothy Milway, Housing Bonds; Chris Fornal, Transportation (Airports); Sean Carney, Municipal Strategist, and Jack Erbeck, COPs, Lease-Backed, Appropriation Risk Securities.

Also contributing to the team total was Karen Hogan, who won Second Team honors in the Hospital (Stand-Alone) category, and Brian Pyhel, who won Second-Team honors in the Power Utility Bond category. Tim Milway, in addition to his First Team ranking in Housing, received a Second Team award in the Special Revenue Bond category.

 

Deal of the Year:

Hudson Yards Infrastructure Corp:  Second Indenture Revenue Bonds

In voting conducted by institutional investors, The 2017 All-Star Deal of the Year was awarded to the Hudson Yards Infrastructure Corporation for its 2nd Indenture Revenue Bond offering.

Goldman Sachs & Co. was lead manager on the deal which featured $2.1 billion in tax-exempt bonds and $33.3 million in taxable bonds. The Series 2017 Bonds are rated Aa3 by Moody's, A+ by S&P and A+ by Fitch. Proceeds from the bonds are being used to refund all outstanding 2007 First Indenture Revenue Bonds and advance refund a portion of the Series 2012 First Indenture Revenue Bonds. With a dearth of new issuance in the market and demand for yield among investors, the May 2017 offering was 4.5x oversubscribed.

 

 

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George Friedlander and his team at Citi reported on the demand for muncipals by commerical banks. Mr. Friedlander noted the solid, but "not overly large" new issue calendar. Mr. Friedlander prefaced, "One factor that is important to consider — but often difficult to track — is the very substantial demand coming from a handful of commercial banks. A key factor in this strong demand is the minute cost of funds for these specific banks resulting from having large retail banking systems."

He said, "We continue to talk to investors who are surprised by the capacity of the muni market to hold in as well as they have relative to Treasuries as Treasury yields have declined sharply. Historically, during downward moves in Treasury yields of this magnitude, munis have trailed fairly far behind."

Citi believes a key reason for the impressive relative and absolute strength of the muni market has been the extremely strong buying of munis by a relative handful of major banks.

 

 

 

Connecticut's attorney general Richard Blumenthal announced that he has sub­poenaed the nation's three largest debt-rating agencies as part of an investigation into possible anticompetitive practices.

AG Blumenthal said that his office issued sub­poenas Oct. 10 to Standard & Poor's, Moody's Investor Services and Fitch Ratings Service.  The investigation focuses on whether the credit-rating agencies are using their dominant position to unfairly raise prices or exclude competitors in violation of Connecticut's antitrust laws.

"Assuring debt ratings are honest and untainted is vital to investors, companies and government," AG Blumenthal said.

McGraw-Hill disclosed the subpoena in its third-quar­ter report filed with the Securities and Exchange Commission. S&P received the subpoena on Oct. 16, 2007. AG Blumenthal is investigating whether some compa­nies rated an issuer's debt against its wishes, then ordered the issuer to pay for the service or face a possible poor rating.

 

 

 

 

 

 

William Sims, president of the firm founded by his father, Herbert J. Sims & Company, said, "I'm a senior living finance specialist; I'm not a municipal bond man."

He meant it in the best sort of way. With a bit of pride, he laid claim to being the No.1 senior living finance specialist in the nation. "I know B.C. Ziegler & Co. would argue with me. But, I think they would agree that, together, we are No. 1 and    No. 2."

Regulars in the municipal bond market may not realize H.J. Sims & Co. employs 80 people at its headquarters in Westport, Connecticut, as well as branch offices in Orlando, Florida, and Long Beach, California. Sims Mortgage Funding is located in Pearl River, New York. Mr. Sims joined the firm in 1973. Prior to joining Herbert J. Sims & Co., Inc., Mr. Sims worked in the bond department of Merrill Lynch where he served as a liaison between the branch offices nationwide and the underwriting and trading departments in New York City.

 

 

 

 

Moody's Investors Service Inc. published a timely and thought-provoking review of the largest city-owned electric utilities.

Overall, the potential creation by Congress of a drop-dead date for the implementation of a retail choice is the single most important credit factor in the entire electric utility sector.

"In the final analysis, one major determinant of pressures related to the degree of competition and the severity of downward ratings is when and how retail choice will be implemented," Moody's said. "To date, most state legislation that has been approved or is being considered has provided either an opt-out or phase-in provision for retail choice for municipal electric utilities.

Moody's noted California allows municipal utilities to phase-in retail choice between the years 2000 and 2010. However, Moody's added it expects market forces (including marketing programs by investor-owned utilities) will pressure city-owned utilities to offer some retail choice sooner.

 

November 20, 2017, Vol. XXV, Issue 19-20  Municipal Edition

 

The Global Economic Doctor

November 13, 2017, Vol. 2, Issue 19

 

 

The Return of Mr. Volatility?

 

"Victory belongs to the most persevering."

   — Napoleon Bonaparte

 

Summary: The long running bull market appears to be sputtering. Signals from the high-yield bond market indicates a growing sense of nervousness as spreads widened last week. Although equity markets may have more room to run if a credible tax reform bill passes, we believe that future gains are going to be more difficult to sustain. To be certain 2017 turned out to be better than expected — global growth strengthened (including in the U.S.) and markets performed accordingly. Perhaps everything will again fall into place to make 2018 another great year based on the following:

  • The U.S. economy continues to expand, helped along by tax reform, gradual Federal Reserve hikes and strong corporate earnings;
  • The EU overcomes nationalist and proto-nationalist problems, economic growth strengthens and the European Central Bank shifts to a plan for gradual and clear rate hikes;
  • A Brexit deal is done with minimal disruption;
  • Abenomics usher in a period of moderate economic expansion and mild inflation in Japan;
  • A deal is struck to reduce tensions with North Korea;
  • China continues to restructure its economy and maintains economic growth in excess of 6.0%;
  • And Equity markets continue their march upwards amid low volatility, while bond markets remain relatively strong, supported by healthy new supply.

Sorry, but we don't see that happening. 2018 is likely to be more challenging from both economic and market standpoints. There is a risk that in 2018 we could see geopolitical risk shift from background noise to event risk in both advanced and emerging economies. Most events should not derail global economic growth, but they are likely to inject greater volatility into markets — something we have not seen for a while.  The problem is that many of the geopolitical risks that threatened in 2017 have not gone away. Some are set to become more problematic. The Vix has floated around 10 since September. Look for that to change in early 2018 as the politics threaten to trump economic trends. This does not mean a market crash, but it indicates that the investment landscape is going to be more treacherous for the unwary.

We expect soon to hear that Mr. Volatility is back in the building along with Elvis

 

 

 

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Smith's Research & Gradings,  has become a bellwether research company, often predicting significant trends and spotlighting controversial subjects sometimes months before they come to light elsewhere. Smith’s provides independent research and third-party analysis for institutional investors. Smith's analysis is an indispensable part of Wall Street and the world's capital markets.

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