How will Public Finance be hit by COVID19?
I am a sophomore at a semi-target school for IB. I am interested in Public Finance. I feel like the Public Fin sector will be hit big by COVID-19 because the state/fed government can't spend money on building infrastructures because they have other things to worry about right now, at least for few years due to COVID19. Airport and some non-profit sectors are not generating enough revenue either and will probably be hit by it. I have very limited knowledge about this topic as you can see by my reasoning. What are your thoughts? Will the deal flow in this sector slow down?
Hey publicfin, I think you deserve a response...heck, everyone does. We're listening, sorry about the delay ...my best guess at places on WSO that could help:
Fingers crossed that one of those helps you.
Airports won't be impacted too bad as we have seen their resilience during 9/11. It will definitely be a setback, but only temporarily. From what I'm reading, senior living seems to be one of the areas that faces risk as prospective residents may delay their move as they are more susceptible to covid. Muni market overall has been extremely volatile
Got it. Thanks for your insight. I thought muni market were less volatile because many are backed up by something or they are issued by fed/state/local government, which have lower risk of default.
It’s true the market has been volatile. However the federal reserve has taken significant action to stabilize the market and muni yields measured by MMD have fallen back to almost where they were at the beginning of March. I think new issuance—the metric we as public finance underwriters are most concerned with—will probably be initially slow over the next couple of weeks. However, as issuers gain more confidence in markets, issuance will increase rapidly to account for the lag experienced due to the dip in March. Things will probably be back to normal after a few months, and the currently low rate environment is quite favorable for issuance. However the bigger concern would be the credit quality of issuers. It’s pretty easy to imagine that some issuers such as airports may be harmed significantly over the next 6 months, as well as smaller governmental issuers. I imagine hospitals and universities will be fine too, as well as energy and water utilities.
Got it. Thank you for your analysis!
This.
pus, that credit card quality impacts the spread issuers face when that come to market. So, while the low rate environment may be enticing, the blow-out in rates creates a wash and causes issuers to pause on showing up in the market.
Remember, munis are a credit product. The goal amongst bankers at the moment is cover clients the best you can, maintain relationships, hope your trading/UW desks didn't take a massive hit on the budget, and surface on the other side of this thing with a strong balance sheet and new opportunities to lend.
Often times markets can get comfortable with high volume, tight spreads, and low rates. What fun is that? Banks were already pinched on terrible take down numbers. Assuming you survive, don't get laid off, and can handle a reduced bonus for a year, the other side presents real opportunities (yeah, yeah glass half full sue me). If you are entering the pub fin workforce in 2 years, you will be entering at time where every single state and local gov. will no longer have access to fed support packages from this thing, tax revenues should finally be stabilizing and commence issuers issuing stupid amounts of debt to make up for budget shortfalls, pension obligations, improvement projects etc.
For your interest, do some reading on a credit such as the MTA. Due to its highly visible nature and association to NYC it is easy enough to read an article or two and spin your wheels for a second. Is the MTA and NYC going to exist when this thing is over? Yes. How will they turn the engine back on? Debt.
The muni market traditionally sees less volatility during" normal" times as it functions as a "boring" safe haven (similar to treasuries) with the added lure of tax breaks for high net worth (investing legal definition) individuals. The problem is, this investor base is extremely concentrated and "only" one type of investor: high net worth individuals. Hence the extreme volatility and associated fluctuation in rates/price during the market flight to cash. Muni bond funds saw the first outflows (last 2 weeks) of cash for the first time in over 60 consecutive weeks.
Thanks @ChuckieSullivan! Your analysis is really helpful.
I read that MTA is asking fed for $1 billion. If fed does give them then the impact might not be that bad. MTA's credit rating is in A's I believe, so they might issue more bonds due to this huge decline in revenue/increase in budget deficit, if they don't receive any aid from fed.
Thanks again!
I don’t know if I agree that municipal issuers will issue more bonds if there’s a gap in federal funding. Municipal bonds issued by transportation agencies are generally revenue bonds issued for a specific construction project, not to fill in budget holes—in contrast to the federal government, which issues treasuries to fund deficits. If an a transportation issuer was issuing debt to fill in funding gaps, I would wonder how much investor interest there might be for said new money and I would also wonder what the yields/rating on those bonds would be.
Definitely a fair take. I would say transportation is a bit of an anomaly here. Especially since muni transpo often falls under the P3 bucket and has a non-muni layer to it. Lots of deals are TE-AMT / Taxable and even issued with corporate CUSIPs. This occurs because of various security/exposure/public purpose provided by for-profit airlines, developers etc. Hard to use that grouping to speak of munis as a whole ("general obligation"). Most of those deals steal a muni tag because they provide some "public benefit" or the underlying land is leased by the county etc. With that said, it will be interesting to see how the money from phase 4 impacts infrastructure with Pelosi & Trump touting the focus on infrastructure spending.
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