Muni Bond (and Muni Bond Fund) Discussion

[nelsonowe]

Thanks for the RJ newsletter. I have seen earlier editions of it and do find their sample portfolios modestly interesting, but generally the info is pretty generic.

I have yet to find any reliable, professional discussion/opinion/newsletters on munis. The few people posting here seem to know as much as anybody!

 

[COcheesehead]

I just haven’t found muni bonds as compelling in comparison to other taxable bond options lately.
Muni bonds also have been the only bonds I have had called in the recent past.
With all that said I would not hesitate to add more to my ladder if the right option is available. I love having lots of tax free income and they are pretty safe (taxation based GO) if selected correctly.

 

[jazz4cash]

I have been feeling this way for awhile but just recently came across some decent issues that I would but if I had dome dry powder. Muni rates generally just haven’t risen as much as other FI alternatives. I’ll keep looking and hope to find something when a chunk matures. .

 

[imbatman]

Digging around for some reasonable options after the run-up, and I keep seeing these state HSG bonds that are issued in the last two months at high rates with a premium price. Ex. 60637B5A4 or 34074MW49. I know all HSG will likely be redeemed early due to ER terms, and if not they do have call dates with premium call prices.............but they also seem to have SFP, which seems to just call at 100.00 par and starts much earlier than the call dates (ex. Nov 2024 and Jan 2025, respectively).

Is this normal? Who would buy a bond at a 5-9% premium price with a potential SFP date that is 1-2 years out?

Just wondering if I am missing something.

 

[nelsonowe]

Interesting. For 34074MW49, the stated the yield-to-sink is -5.48%, so it's not like the risk is hidden! I guess buyers are betting the chance they get redeemed early on ALL their position is pretty small, and are willing to risk that in trade for a higher average return overall than is available elsewhere.
Which raises a good question: How are sinking fund redemptions handled - how are the specific bonds chosen? I tried reading the Official Statement and didn't see any clear answer.

 

[imbatman]

Yes, I haven't bought because of that Yield to Sink, but generally as I have looked at more of these, the # of shares redeemed for sink starts very small and incrementally increases.

So yeah, unless I misunderstand the sink redemption applying at $100.00 to premium bonds initially issued at (ex. $106.394 in the case of 34074MW49).....seems it is just a giant gamble that your particular shares won't be unluckily selected. Still seems very "unpremium" to have premium issued shares redeemed at a discount in 12-months on a 30-year note. I don't get it!!

 

[njhowie]

Yield to sink is not something to worry about in general. You should approach it as a statistics problem. First, before doing anything, you know that your ultimate yield to redemption is going to be something between yield to maturity and the minimum of yield to sink/call.

Now, as far as yield to sink, you can look at the sinking schedule and see how much (what percentage of the total) is going to be redeemed in each year. Set it up as a statistics problem and then you can come up with an expected yield to redemption. As nelsonwe noted, each year there is a very small amount being redeemed, with the final 20% in the year of maturity. Between now and 2034, only 10% is being redeemed.

 

[njhowie]

Which raises a good question: How are sinking fund redemptions handled - how are the specific bonds chosen? I tried reading the Official Statement and didn't see any clear answer.

It is random/lottery. I've had portions of my position taken in sinking fund redemptions, sometimes leaving me with less than 5 bonds.

https://www.nabl.org/bond-basics/mandatory-sinking-fund-redemption/

The holders of the Principal amount of a Term Bond to be redeemed on the date of each Mandatory Sinking Fund Redemption are chosen at random, so the bondholders do not know when or whether all or any Principal amount of the Term Bond they hold will be redeemed.

 

[imbatman]

Thanks for all the tips and thoughts. I am not a fan of games of chance in what is otherwise low risk living income.....that plus the fact these are all mostly Housing bonds which have extraordinary redemption terms which are also a more significant game of chance more likely to be impactful.

 

[jazz4cash]

Thanks for all the tips and thoughts. I am not a fan of games of chance in what is otherwise low risk living income.....that plus the fact these are all mostly Housing bonds which have extraordinary redemption terms which are also a more significant game of chance more likely to be impactful.

Could you comment on the extraordinary redemption terms and exactly what you perceive to be the risk? I have a couple of home state housing bonds and I have been averse to adding more as I really prefer GOs at this point to diversify my holdings, but I am seeing some out of state issues that are tempting. I actually drove by one of my home state housing projects and it was a reassuring experience. Can’t do that with out-of-state projects.

 

[imbatman]

I am newish in the last couple of years to holding individual bonds myself so haven't experienced it directly (and do hold numerous state HSG bonds), but I have read from others on this forum, as well as in a few of my prospectuses, verbiage indicating they may call if people repay/ refinance the loans that these bond proceeds are being used for......I have heard some bonds also have terms around significant changes in interest rates, but haven't seen that myself in those I have purchased.

I see a lot of GO bonds that are Rated A2 / A3 but most HSG bonds are rated AAA to AA2.....and I generally defer to "experts" at the credit agencies. I also really like finding insured munis too, have a number of those (it does raise and is reflected in the credit ratings).

 

[jazz4cash]

Ok, I thought you might be referring to what I’ll call early payoff risk. My HSG bonds are more related to affordable housing programs (rent subsidies). I look for ones targeting students, seniors and public service workers.

 

[imbatman]

On Fido secondary Tax Exempt Muni = 74448GAA7 WI Pooled Charter School AA3 5.75% (@ $104.65 yielding 5.15%) 2062 mature with 2034 call..........for those that don't mind LONG dated, this yield has pretty much disappeared in the last month.

 

[njhowie]

On Fido secondary Tax Exempt Muni = 74448GAA7 WI Pooled Charter School AA3 5.75% (@ $104.65 yielding 5.15%) 2062 mature with 2034 call..........for those that don't mind LONG dated, this yield has pretty much disappeared in the last month.

I avoid charter schools like the plague.

I do not like what the official statement says at all:

THE SPONSOR AND ITS AFFILIATES
The Sponsor is a Delaware limited liability company formed to act as the seller of the Portfolio and to sponsor the issuance of the Certificates. The Sponsor is a special purpose vehicle and has no other assets or obligations except to act as Sponsor for this transaction and own the Class B Certificates. Rosemawr Management LLC, an affiliate of the Sponsor, will be the initial Administrator under the Trust Agreement. The Administrator is a leading alternative investment manager formed in 2008 with a focus on investing in the U.S. municipal, not-for-profit and sustainable infrastructure sectors. The Administrator was founded by Greg Shlionsky who was previously a Managing Director and head of municipal derivative and structured product trading at Lehman Brothers. He was joined in 2008 by Julie Morrone and Jamie Lister, each of whom had worked in leadership positions in municipal finance for over 20 years. Mr. Shlionsky, the Administrator’s Portfolio Manager, Ms. Morrone, the Administrator’s Director of Research, and Mr. Lister, the Administrator’s Director of Origination and Investor Relations, continue to serve as the Administrator’s key executives as well as its primary decision-makers.

SOURCES AND USES OF FUNDS
Proceeds of the Certificates will be used to (i) purchase the Bonds from the Sponsor and (ii) pay certain costs of issuance of the Certificates.

THE PORTFOLIO
Purchase of the Bonds
The Issuer will use the proceeds of the Certificates to purchase the Portfolio from the Sponsor. The Portfolio consists of a variety of tax-exempt bonds (the “Bonds”) which were issued for the benefit of various charter schools located throughout the United States. On the Closing Date, the Issuer will purchase the Bonds from the Sponsor at their approximate Fair Market Value pursuant to a Portfolio Purchase Agreement. The Sponsor will cause the Bonds to be delivered directly to the Trustee to be held as part of the Trust Estate for the benefit of the Holders. During the period of the offering, in addition to this Official Statement and a roadshow, the Underwriter will make a data room housed on Intralinks available to prospective investors. The Data Room includes a compilation of certain information regarding the Portfolio including, among other things, a data tape, various publicly available disclosures related to the Bonds, the charter contract for each Borrower, cash flows for the Bonds and the Certificates, and certain appraisals. To access the Data Room, prospective investors must request access from the Underwriter by contacting Kate Jovanoska at kjovanoska@jefferies.com or by phone at 212.284.2044.

Prospective purchasers of the Certificates seeking to understand the credit and risks of the Bonds should review EMMA filings made with respect to each Bond on the EMMA website at emma.msrb.org.

So, funds from these bonds are used to purchase charter school bonds through this middleman who is a former Lehman employee who is skimming fees for this "service". And what are the ratings of the charter school bonds which the funds from these bonds are being used to purchase? "Oh, the portfolio is of the highest quality bonds, of course".

Charter schools are a hot button in many municipalities. I've seen numerous which are rated BBB- and lower - because the finances stink.

If you are interested in charter school bonds, go buy them individually. This portfolio has major red flags.

Read the section on RISKS RELATED TO CHARTER SCHOOLS.

Concentration Risk. 32.9% of the Par Amount of the Bonds relates to Borrowers who are located in the state of North Carolina. As discussed above, the Borrowers are reliant on state and local payments and changes to those payment obligations could materially impact the Borrowers’ ability to make the payments on the Bonds. As a result, any change in state statutes or appropriation failures in North Carolina could have a disproportionate impact on Bond Payments, and by extension, the Certificates.

Bottom line, no way I would buy these.

Do not go chasing yield. Read the 198 page official statement first. Then, if you are still sold, go ahead and purchase.

 

[Mr._Graybeard]

The Wisconsin Finance Authority is an odd duck. The name makes it sound like it's part of Wisconsin state government, but it's not. Instead, it's the creation of four Wisconsin counties and the city of Lancaster, Wis. Other players include the Wisconsin Counties Association and the League of Wisconsin Municipalities, among others.

As this bond suggests, the authority writes a lot of bonds for borrowers outside the state. In fact, if it were to write a bond for a Wisconsin borrower, local government bodies such as the county where the borrower is located would have to give its approval. It has no such requirement for out-of-state bonds.

And that's kind of the point. If, say, a financially strapped school district wanted to issue bonds on its own, its financial condition could make the issue a difficult sell. But a conduit like the Finance Authority offers a fig leaf so the issuer can get the debt into the market.

I would assume any bonds issued by the finance authority to be junk until I could determine otherwise. The State of Wisconsin's Legislative Reference Bureau issued a report on the finance authority that eliminates any confusion and notes that many of its debtors are in dire shape. Here's a quote from the report:

On October 1, 2019, the Wall Street Journal reported1 that the Public Finance Authority’s (PFA) bonds had the most reports of impairment (indicating bad or risky debts) of any lender in the municipal bond market.

I look at the WFA like one of those shady mortgages brokers who were writing "no-no" mortgages before the market collapsed. Approach their issues with caution.

 

[imbatman]

Wow you guys read through this quicker than me! Thanks! Yeah I have never purchased charter schools either, and I appreciate all the red flags you guys saw, but I also don't get the fundamental disconnect of how this can hold a pool of baax funds and have no authority other than those assets.....and end up with an AA3 rating. I finally found Moody's report from last week and still not sure how this adds up.

https://www.moodys.com/research/Moo...-one-class-of-Pooled-Rating-Action--PR_483705

 

[njhowie]

Wow you guys read through this quicker than me! Thanks! Yeah I have never purchased charter schools either, and I appreciate all the red flags you guys saw, but I also don't get the fundamental disconnect of how this can hold a pool of baax funds and have no authority other than those assets.....and end up with an AA3 rating. I finally found Moody's report from last week and still not sure how this adds up.

https://www.moodys.com/research/Moo...-one-class-of-Pooled-Rating-Action--PR_483705

1. That ratings note is a bunch of word salad.

2. Do you get the warm fuzzy's when they tell you their ratings are based on some CDO methodology, discuss recovery rates on potential defaulted bonds, and the like?

3. I've sent email to the contact mentioned in my prior post from the official statement to get access to the online data room mentioned to check out what the portfolio is comprised of. I'll report back if I hear anything.

 

[njhowie]

Click through on Moody's and read about this methodology...
https://ratings.moodys.com/rmc-documents/405919

This is what they use to evaluate junk. The rating is the result of playing with numbers, nothing more. Tweak the numbers, get a better rating.

 

[njhowie]

I've quickly gone through the bonds identified in Appendix A of the official statement and none of them are rated by any agency according to EMMA.

And this is why Moody's applies their CDO methodology. Garbage in, garbage out.

 

[imbatman]

Yeah it is stuff like this where I start wondering if I can't rely on the rating agencies, not sure what I am doing here at all......and maybe my >0.50 expense ratio MF is a better use now that rates are in a better place.

I did start considering yesterday how much my accumulated $0.10 per (at buy AND sell) secondary bond Fido markup "expense" over the course of a year would compare to a year of MF management with low expense ratio (especially if they are getting better face value initial offerings than we get). A calculation for spare time perhaps.

Anyhow, it was a good learning exercise thanks folks.

 

[jazz4cash]

The Wisconsin Finance Authority is an odd duck. The name makes it sound like it's part of Wisconsin state government, but it's not. Instead, it's the creation of four Wisconsin counties and the city of Lancaster, Wis. Other players include the Wisconsin Counties Association and the League of Wisconsin Municipalities, among others.

As this bond suggests, the authority writes a lot of bonds for borrowers outside the state. In fact, if it were to write a bond for a Wisconsin borrower, local government bodies such as the county where the borrower is located would have to give its approval. It has no such requirement for out-of-state bonds.

And that's kind of the point. If, say, a financially strapped school district wanted to issue bonds on its own, its financial condition could make the issue a difficult sell. But a conduit like the Finance Authority offers a fig leaf so the issuer can get the debt into the market.

I would assume any bonds issued by the finance authority to be junk until I could determine otherwise. The State of Wisconsin's Legislative Reference Bureau issued a report on the finance authority that eliminates any confusion and notes that many of its debtors are in dire shape. Here's a quote from the report:



I look at the WFA like one of those shady mortgages brokers who were writing "no-no" mortgages before the market collapsed. Approach their issues with caution.

Thanks, again Graybeard. I now recall you explained this to us awhile back when I was first learning about munis. I had found a (MO?) student housing bond being issued by this WI entity. I see many issues labeled ‘Fin Auth’ or similar cryptic description for private and quasi public educational facilities. The fig leaf comment is something that occurred to me. I could consider a tiny purchase but most likely I pass.

 

[Mr._Graybeard]

I should mention that a lot of state finance authorities are not like Wisconsin's (I would venture to say most aren't, but I haven't done the research to back that up). The authorities in Illinois and Indiana are state-run; their mission is to provide a financing source for nonprofits and/or some government bodies in their home states. I have bonds for large hospital groups that were issued through financing authorities. In each case I investigated the groups taking on the debt, and they looked sound.

 

[imbatman]

@COcheesehead got me revisiting CEFs as I haven't looked at them in awhile. Today I started dabbling a little in NVG (Nuveen AMT-Free Municipal)

• Market Yield 5.05%
• Currently trading at 13% discount to NAV (3-yr AVG is 6.6%)
• 2.5B mkt cap w/ 800K avg daily trading volume
• 40% leverage
• 3% expense ratio
• 79% earnings coverage / -$0.0085 UNII per share (currently distributing more than taking in)

https://www.nuveen.com/en-us/closed-end-funds/nvg-nuveen-amt-free-municipal-credit-income-fund
https://cefdata.com/funds/nvg/
https://www.cefconnect.com/fund/NVG

 

[jazz4cash]

I should mention that a lot of state finance authorities are not like Wisconsin's (I would venture to say most aren't, but I haven't done the research to back that up). The authorities in Illinois and Indiana are state-run; their mission is to provide a financing source for nonprofits and/or some government bodies in their home states. I have bonds for large hospital groups that were issued through financing authorities. In each case I investigated the groups taking on the debt, and they looked sound.

I wish to be more knowledgeable about evaluating these issues. In my state we have a few financing authorities/agencies that I believe are state run. They issue bonds for non profits including elite private secondary schools and adjacent state university medical facilities that serve regions of my state. They are generally highly rated. Tough to find bargains and even tougher because of my limited evaluation skills. I am thinking of a scheme to use Roth funds to buy highly discounted low coupon munis.

 

[njhowie]

I am thinking of a scheme to use Roth funds to buy highly discounted low coupon munis.

The time has really passed for the best yields - I think we all know that. At this point, I don't think you're really going to find any bargains relative to where the market is. If you do find a "bargain", it's likely because it is lower quality or has something in the official statement/terms as to why it is highly discounted. Maybe some will pop up, but unless you're actively watching, I think the chances are slim that you'll find any gems.

Lastly, if you do focus on this approach, most of your returns will come from the increase in value over time rather than interest income. That means you are sacrificing cash flow and really need to hold to maturity or sell to realize the YTM. Personally, I don't care how my YTM is arrived at, I'll hold no problem. However, some folks are going to want the higher income along the way for one reason or another.