Bond Issuance, Interest Rates to Rise, Experts Predict

FORT LAUDERDALE, Fla. – Bankers at the National Municipal Bond Summit said they believe new bond issuance will increase, especially in the high-yield senior living and charter school sectors.

While there is uncertainty about when interest rates will go up, some experts believe that the Federal Reserve could begin tightening in the third quarter of 2015, Assured Guaranty Municipal managing director John Hallacy said in a panel discussion on the state of the market.

“We believe the opportunity funds are here to stay regardless of the rise in the interest rate environment,” said Yaffa Rattner, managing director at Piper Jaffrey, while addressing hedge funds and their partnership with mutual funds. “We believe more supply is coming.”

With as many as 10,000 baby boomers reaching retirement age daily, according to the Census Bureau, and an increase in dementia, the demographic trends support the need for about a 50% increase in the number of senior living units, she said.

Rattner also expects new issuance in the charter school sector, where demand exceeds capacity, she said. Currently, about 2.9 million students attend charter schools, which are publicly funded.

Such schools have seen year-over-year growth of 14%, with more than a million students on waiting lists.

“Where there is opportunity, there’s also risk,” Rattner said, noting that it is critical for investors to select schools that are academically and financially strong, and that offer strong covenants. “At the end of the day, this is no different from any other high-yield sector.”

While bond issuance was down in 2014 with many municipalities continuing to implement fiscal austerity measures, the Securities Industry and Financial Markets Association expects long-term issuance to rise this year, said Eric Isban, a vice president in the public infrastructure group at Sumitomo Mitsui Banking Corp.

“I think that issuers will have to address pending infrastructure needs,” he said.

Banks are also becoming more comfortable viewing credits and quality, and are now extending liquidity facilities to an average of about eight years. About $96 billion of credit enhancements, such as letters of credit, will come due in 2015-2016.

The banking sector has seen little contraction in those offering liquidity facilities, with a total of 162 institutions from a high of 169.

“We’ve seen notable growth in Asian banks followed by Canadian players and some smaller U.S. regional banks,” said Isban.

He also warned banks to put personnel on notice that there was an attempt to fraudulently draw on an LOC in recent weeks.

Someone posing as a trustee acquired an LOC draw certificate and attempted to withdraw funds through wiring instructions on behalf of a client, Isban said.

“There was no draw,” he said. “Clearly, the bank had the proper controls in place.

“What’s interesting to me is that in what a lot consider the sleepy space of municipal LOCs that we see this kind of activity,” he said. Isban said he had never seen an incident like this in the 15 years he has worked in the industry.

While an investigation is ongoing into the case, the incident is worrisome and may not be isolated, Isban said, adding that banks should be diligent about protecting information.

New variable-rate demand obligation issuance is expected be about $9 billion this year, compared to $6.6 billion last year, Isban said after the panel discussion.

“The short end of the curve is attractive,” particularly for sophisticated issuers, he said.

Last week, short term variable rates were as low as 2 basis points. Fees for LOCs have also declined, offering issuers better value for longer duration.

Shelly Sigo is the Southeast Bureau Chief at The Bond Buyer.

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