From the WSJ on Wednesday afternoon, provisional details of Illinois’ delayed $3.7bn pension bond sale:
Initial indications on the deal Tuesday showed $6.1 billion in orders, with around a fifth of those coming from international investors, such as sovereign-wealth funds and insurance companies, one market participant said. Read more
Cash-strapped Illinois plans to sell $3.7bn of bonds this week to fund its annual pension bill in a test of broad-based demand for troubled US municipal debt, the FT says. Market participants said the bonds would draw interest in spite of Illinois’ financial problems because the state was likely to offer relatively high interest rates compared with other areas of the bond market, which have rallied significantly. The sale was postponed last week so the state could pay its annual pension contribution.
Moody’s expects defaults and distress in the $3,000bn US municipal bond markets but does not anticipate a broad “crisis of confidence”, says the credit rating agency’s chief executive. “There may be additional defaults in the municipal sector. There certainly is going to be distress in the municipal sector,” said Raymond McDaniel, chairman and chief exec of Moody’s, in an interview with the FT. “But we differentiate that from a broad-based systemic problem.” Meanwhile, Investment News adds that financial advisers are concerned a report last week saying the SEC is investigating how muni bond funds price risk in their portfolios may cause investors to rush for the exits.
Moody’s expects defaults and distress in the $3,000bn US municipal bond markets but does not foresee a broad “crisis of confidence”, according to the credit rating agency’s chief executive, reports the FT. “There may be additional defaults in the municipal sector. There certainly is going to be distress…but we differentiate that from broad-based systemic problem,” Raymond McDaniel, chairman and CEO of Moody’s, told the FT. More scrutiny of the municipal bond markets, in which US states, cities and other public sector borrowers raise money, comes as investors take a broader look at risks in sectors once seen as “safe”. McDaniel said credit problems in bond sectors “traditionally viewed as a safe haven” had potential for confidence problems – with effects on the broader system.
The SEC is investigating whether high-yield muni bond mutual funds are overstating the value of illiquid, high-risk holdings, the WSJ says. Sources said that the Commission was concerned that investors in the fund could have been misled about the real value of the their investments. Mutual funds in the sector have been hit by investor withdrawals as the wider muni market falls, selling off high-yield muni debt to raise cash. Around $24.7bn of net outflows have been recorded since late November. Junk muni bonds are a small part of the overall $3,000bn market, totalling no more than $54bn in value. Nevertheless, the SEC is looking at so-called ‘tobacco’ and ‘dirt’ bonds which can go for years without changing hands, sources said.
Worried about public pensions liabilities? Well, look away now.
In a report out Wednesday, The Center for Retirement Research at Boston College tried to isloate the factors that influence (1) the spreads on municipal bond yields, and (2) Moody’s rating of those bonds. Read more
Here’s a novel idea for municipalities: ignore the prickly muni bond market and accept help from your local Wall St bank.
From the WSJ on Wednesday: Read more
From the Municipal Securities Rulemaking Board on Tuesday, a little bit more light for all those new investors in the metamorphosising municipal bond market:
For new issues of securities beginning February 14, 2011, EMMA will display information about whether the issuer or other obligated person has undertaken to provide continuing disclosures in accordance with Securities and Exchange Commission Rule 15c2-12. EMMA also will display the identity of any obligated persons other than the issuer and the timing by which issuers or obligated persons have agreed to provide annual financial and operating data. This information is available on the continuing disclosure tab for each security. Read more
The $3,000bn municipal bond market has become a “top priority” for the Securities and Exchange Commission amid concerns of mounting risks for investors, said the head of the regulator’s enforcement unit for the area, reports the FT. “It is even more critical than ever that investors are receiving … timely disclosure so that they can make informed investment decisions,” Elaine Greenberg, chief of the SEC enforcement division’s municipal securities unit, said in an interview. However, while the SEC can file charges against municipalities if they are alleged to have committed fraud, but otherwise is limited by law in its oversight to the brokers, advisers and other registered financial actors party to the transaction.
Wednesday’s House hearing into state and municipal debt had a touch of the “Scottish play” about proceedings.
When Meredith Whitney was finally mentioned, Chairman Patrick McHenry quipped that the rules had been broken. Read more
As fears grow over the scale of a crisis some believe could rival the debt problems of the eurozone, hedge funds and other investors are looking at how to trade the market in America’s municipal debt, according to the FT. Political sensitivities to shorting munis has helped drive investors looking to trade muni risk to a wider CDS index backed by 50 credits, rather than swaps for individual states and borrowers. The Wall Street Journal notes that “State and Municipal Debt: The Coming Crisis?” is the provocative topic of a congressional hearing on Wednesday, which among other things will consider whether states should be allowed to file for bankruptcy protection.
As fears grow over the scale of a crisis some believe could rival the debt problems of the eurozone, hedge funds and other investors are looking at how to trade the market in America’s municipal debt, the FT reports. The mounting concern over “munis” has brought with it hedge funds and financial institutions who want to bet on the bonds’ creditworthiness, or make money on the back of volatile “spreads” – the premiums at which munis trade relative to benchmark debt.
Wall Street is seeking to expand the market for derivatives that allow banks and investors to profit from – or hedge against – bond defaults by struggling US states and local governments, the FT reports. With hedge funds and other investors wanting to speculate on the health of US state and municipal governments – and banks wanting to hedge their exposures amid concerns over rising risks – efforts are being made to boost the CDS market.
Seems everyone is interested in munis these days.
From Friday’s FT: Read more
The Securities and Exchange Commission has opened an investigation into Rhode Island’s bond offerings, as the regulator steps up scrutiny of the $3,000bn market where states and municipalities raise money, the FT reports. A source said that the SEC was investigating state disclosure of liabilities and underfunded pension obligations to investors. Rhode Island’s general treasurer said that the SEC had provided no further details on the investigation for her state and that no requests for information had been received. The treasurer is already reviewing the state’s bond disclosures.
Bloomberg has tracked down Meredith Whitney, bought her scrambled eggs, and demanded an explanation.
In an article out on Tuesday, Whitney is asked about her prediction that “You could see 50 sizable defaults, 50 to 100 sizable defaults” amounting to “hundreds of billions of dollars’ worth of defaults” in the municipal bond market: Read more
The Securities and Exchange Commission is studying whether Harrisburg, the capital of Pennsylvania, has provided the bond markets with enough information about its troubled finances, the FT reports. A spokesman for Harrisburg’s mayor confirmed that a request for documents was received two months ago. Harrisburg has been unable to pay guarantees it made on $300m of debt issued to finance a local incinerator project, veering close to default and becoming a symbol of the municipal debt market’s problems. A a slew of lawsuits have also been launched over the incinerator bonds and the local authority that owns the incinerator has hired accountants for a forensic audit on the bond deals.
Another day, another report of municipal bond outflows from mutual funds. From Reuters on Wednesday:
The mass exodus of cash from municipal bonds accelerated to a record outflow of an estimated $5.7 billion in the week ended Jan. 19, data from the Investment Company Institute showed on Wednesday. The redemptions are the most in any week since the ICI, a U.S. mutual fund industry trade group, started tracking weekly investment flows at the start of 2007. Read more
Moody’s is now ranking US states’ liabilities according to both debt and unfunded pension liabilities, the FT reports. In a bid to give a broader picture of state finances, Moody’s combined their net tax supported debt and unfunded pension liabilities to assess how leveraged states are. Even then however, Moody’s has used data from 2009 which put all unfunded liabilities at $500bn, some way below other estimates. The move by the ratings agency has nevertheless ruffled feathers, the NYT says, because states do not show any of their pension obligations on audited financial statements.
The Illinois state governor’s office has confirmed that the Securities and Exchange Commission is investigating official disclosures over the state’s pension liabilities, the WSJ reports. A Moody’s analyst added that Illinois officials had told him the inquiry was focused on whether the state should have treated future savings on the costs of the pension fund as reductions in current costs, for the purposes of selling municipal debt. Illinois’ system is one of the worst among US states for underfunded liabilities and missed contributions. FT Alphaville has a backgrounder on fixing US state public pensions, including accounting for future savings and assumed returns on investment.
Mad, bad, and dangerous to know — the response from states to the idea of Congress pre-emptively legislating for their bankruptcy.
In Monday’s Wall Street Journal, EJ McMahon of the Manhattan Institute adds to the criticism, arguing that it could distract states from the essential task of pension reform. Read more
Recent action in the municipal bond market … from The Bond Buyer:
Is this how it starts?
The New York Times has splashed on whispers of backroom (mainly Republican) Congressional musings on ways for states to declare bankruptcy — an option not currently open to states under federal law. Read more
Those who believe municipal or state bankruptcy is a clean and simple option may want to take a peek at the city of Vallejo’s proposal to exit court control of its finances. Details from Bloomberg on Wednesday:
The city would pay general unsecured creditors about 5 percent to 20 percent of their claims, according to court papers filed in U.S. Bankruptcy Court in Sacramento, California’s capital. The creditors, who include retirees and former employees, will be paid $6 million over two years, according to the filing. Read more
What’s good enough for GM is apparently good enough for California and Illinois.
That’s the argument made by University of Pennsylvania law professor David Skeel in an op-ed in Tuesday’s WSJ: Read more
Vanguard Group, among the largest managers of US retail savings, has delayed plans for three funds specialising in municipal bonds as yields in the market jump to the highest level in two years, the FT reports. FT Alphaville says this is a safe decision, and one that reveals a little bit about the oft-misunderstood muni-bond market. As a post by Bond Buyer’s Dan Seymour explains, muni ETFs have recently been trading below the indexes they were built to track.
Sign-of-the-times news from the municipal bond world on Thursday (report from Reuters):
Vanguard Group canceled plans to open a line of tax-exempt bond exchange-traded funds as municipal bond prices tumbled and index tracking concerns hit competitors’ ETFs. Read more
To tell the story of China’s biggest bank account it helps, perhaps, to start with a story about certain, smaller, Chinese bank deposits. So. Meet Zhang Meifang.
Ms Zhang is, or rather was, an official at the Jiangsu Province Finance Bureau. Read more
The $3,000bn US municipal bond market could be on the verge of a crisis to rival that in the eurozone, as cash-strapped states and cities facing big budget and pension deficits struggle to pay their debts, the FT notes, citing the thoughts of prominent market names like Warren Buffett, Jim Chanos and Meredith Whitney. Bloomberg reports that JPMorgan CEO Jamie Dimon also warned on Tuesday that more US municipalities may file for bankruptcy. Meanwhile, FT Alphaville looks at the implications of California’s plans to limit its general obligation bond sales.