Municipal bond prices held up surprisingly well during
the month, despite an increased supply of new municipal
bond issues following months of low issuance.
Municipal yield spread against Treasuries widest
in two years
The 10 year, “A” rated MMD Index bonds yielded
3.21% on November 30th versus the 2.07% taxable yield
offered on the 10 year U.S. Treasury bond.
Although nominal bond yields are low across most bond
sectors, on a relative basis, non-taxable municipal
bond yields exceed long-term Treasury bond yields by
the widest margin in more than two years. Supply will
remain elevated over the first couple of weeks of December
and we expect the significant sums of available cash
will easily absorb it.
“Something is rotten in the state of Denmark”
Today, Marcellus' commentary to Horatio could be amended
slightly to call out Jefferson County, Alabama and Harrisburg,
Pennsylvania given their recent Chapter 9 municipal
bankruptcy filings. The immediate impact of these
filings on the national bond market was minimal, although
the filings will raise the financing costs for other,
well-run issuers located in these states absent any
state intervention.
The State of Pennsylvania has acted swiftly and responsibly
by immediately challenging the Harrisburg filing. As
of this writing, a Pennsylvania court has dismissed
the Harrisburg filing, agreeing with the state’s
position that Harrisburg lacks the legal authority to
file for bankruptcy. We hope this court decision stands
for the sake of every well-run, local government unit
in Pennsylvania and its residents.
Jefferson County, Alabama is a different story to this
point. We have long expected Jefferson County to file
for bankruptcy for several reasons:
For years, Jefferson County, Alabama
has been a poster child for municipal corruption and fiscal
mismanagement. Recently, it exacerbated its plight by
attempting to take control of system assets away from
the trustee and receiver. In effect, Jefferson County
is asking the court to deny sewer bondholders preferential
treatment to system net revenues, a security lien that
is clearly stated in bond documents.
The county is making several claims contradicting widely
held, longtime views among investors and bond counsel
regarding the security of bonded debt and issuer obligations
to its investors. This includes the County’s claim
that bondholders lost the right to be paid before others
once the county filed for bankruptcy – forcing them
to wait for payment, like all other creditors, until the
case is resolved.
Although our
portfolio-managed
clients have not had any exposure to Jefferson County,
Alabama debt for many years, we are watching the proceedings
very closely. It is critically important that the court
honors the treatment of special revenues, even in bankruptcy.
The financial interests of senior creditors such as bondholders
cannot be pushed aside for misguided parochial interests.
We assume the chances of this occurring are low, but we
are disappointed local and state officials allowed the
issue to devolve to this point. We remain very wary of
Alabama debt until the court resolves several issues revolving
around Jefferson County.
Our suggestion for now – avoid any Alabama debt
until the bankruptcy judge clarifies this issue.
Gang of Twelve: No decision good for municipals
(for now)
The continuing political stalemate in Washington has benefited
the municipal market, albeit temporarily. The various
Presidential and Congressional threats to tax exemption
have fallen to the wayside for now and most likely will
remain on the backburner until after the 2012 elections.
This is a short-term
municipal
credit positive development for state and local governments.
State and local governments currently have plenty of challenges
already without having to deal with the issues of higher
borrowing costs and diminished local control over infrastructure
projects – two situations that will occur if the
federal government enacts legislation eliminating or severely
restructuring today’s well-developed, broad-based
municipal bond market.
We will have more to say on this topic in the coming weeks.
Ronald P. Bernardi
President and CEO
Bernardi Securities, Inc.
December 3, 2011
