by Gayl Mileszko
Albert Martin Gitchell was a 28-year-old self-employed butcher living in Ree Heights, South Dakota who was drafted into the U.S. Army as a cook and stationed at Camp Funston, a military reservation of 54,000 troops in Fort Riley, Kansas during World War I. On March 11, 1918, he woke up complaining of a bad cold with a sore throat, headache and muscular pains. He was hospitalized with a 104 degree fever and became the first documented case of the Spanish Flu in the U.S. By noon that day, 107 of Private Gitchell’s fellow soldiers were also admitted for treatment. Within three weeks, more than 1,100 were sick enough to require hospitalization and thousands more were sick in barricades.
By April of 1920, more soldiers had died from the 1918 flu than were killed in battle during the war. Conditions including global troop movements, overcrowding, and poor hygiene helped to spread the flu in waves as it mutated. By the time the pandemic ended in 1921, there were 500 million cases and 50 million deaths worldwide with an extraordinarily high mortality in healthy people in the 20- to 40-year age group. The average life expectancy in America plummeted by a dozen years as there was no vaccine to protect against influenza infection and no antibiotics to treat secondary bacterial infections. Microscopes were unable to see something as incredibly small as a virus until the 1930s. The first licensed flu vaccine and mechanical ventilator did not appear in America until the 1940s. Over the course of the deadly 1918 pandemic, 675,000 Americans perished. The 1918 virus in fact remained the seasonal flu strain until 1958 and it was not until 90 years later, in 2008, that researchers announced what made it so deadly: a group of three genes enabled the virus to weaken a victim’s bronchial tubes and lungs and clear the way for bacterial pneumonia.
One Hundred Years Later, Another Deadly Pandemic
One hundred years after the Fort Riley admission, an unnamed 35-year old man entered an urgent care clinic in Snohomish County, Washington with a four-day history of cough and fever after his return from a family visit to Wuhan, China. He was the first confirmed U.S. case of the novel coronavirus. Hospitalized with viral pneumonia, he was placed in an isolation pod, treated with supplemental oxygen, and put on Remdesivir. Like Private Gitchell a century before, he was lucky and survived. Five days after the experimental treatment, he was discharged. But within two weeks, the first COVID fatality occurred in Santa Clara, California. Twelve months later, more than 28.8 million U.S. cases have been confirmed and more than 523,000 have died. Americans have lost one year of average life expectancy as a result of this virus that has reached around the globe faster than any pandemic in history. And despite all the advances in intensive care, antiviral drugs, and global surveillance over time, the most effective measures have remained the same as in 1918: social isolation, masks, sanitation, quarantines and good nursing care.
Unprecedented Speed of Vaccine Development
Vaccine development is a long, complex process that often takes ten to twelve years of public and private investment and is characterized by a failure rate as high as 93%. The mumps vaccine held the previous record at four short years. But, after 30 years and untold billions of spending, there is still not an AIDS vaccine effective enough to be licensed. So, the speed with which researchers and pharmaceutical companies have responded to the 2019 Pandemic is unprecedented and nothing short of miraculous. As of this writing, 92.1 million vaccines have already been administered. Daily hospitalizations have declined by 74% from the high on January 5. Daily deaths have declined 87% from the high on April 15 and 84% from the most recent peak on February 12.
Lifting Restrictions One Long Year Later
The Centers for Disease Control announced this week that people who were fully vaccinated two weeks ago can now meet safely indoors in small groups without masks. They can dine indoors, hug unvaccinated grandchildren and visit with others who have no pre-existing conditions. Officials still recommend against large events and travel. They still advise wearing masks and social distancing in public spaces, but some states such as Texas, Wyoming and Mississippi, and some companies like Albertsons’s have removed the mask mandate. The White House now says that all American adults will be able to get a vaccination by the end of May and 69% of the public intends to get a vaccine – or already has.
Long-Term Care Facilities
Most attention is, of course, still focused on COVID’s impact on long term care facilities. These include some 28,900 assisted living communities and 15,600 nursing homes with a combined 2.7 million licensed beds, 5 million residents and 1.5 million workers. The COVID Tracking Project reports 1.3 million cases and 174,474 deaths have been reported in 33,639 of these locations as of March 4, 2021. COVID has had an estimated $15 billion impact on senior living communities but this is a needs-based industry and the increasing needs of our aging population will continue to drive its recovery and growth. A recent survey of prospective residents and their adult children by ASHA found that the appeal of senior living communities has actually increased. Since vaccinations began in December, the great news is that there has been a 90% drop in COVID cases in these facilities from 30,000 per week to 3,000, according to the American Health Care Association (AHCA). 80% to 90% of long-term care residents have taken the vaccine in the past three months and many providers are now reporting zero cases. The concern is with staff acceptance, which is still averaging only about 40%. But AHCA and LeadingAge have set a target of June 30 for having 75% of care-providing staff vaccinated.
In 2019, the World Health Organization named vaccine hesitancy – a reluctance or refusal to vaccinate – as one of the ten biggest health threats facing the world. Although the vast majority of Americans (81% according to a recent Pew Research Survey) continue to view the coronavirus outbreak as a major threat to the economy, the Census Bureau reports that 23% will either probably or definitely not get vaccinated. Several of the factors involved include complacency, inconvenience, fear, and lack of confidence. Some believe that natural immunity is more effective than a vaccine, others are worried about safety given the limited amount of research conducted, particularly on pregnant women and women of childbearing years. The U.S. Conference of Catholic Bishops questions one vaccine’s moral permissibility, saying it was developed, tested and produced using abortion-derived cell lines. Quite a few among those we know worry about side effects, tolerability, and long-term effects on immune systems. There are millions who do not get vaccines in general, do not think they need it, are afraid that personal information collected will be used for immigration-related purposes, or have been alarmed by past mistakes in the medical care system. Researchers point out that human evolution has hard-wired us for laziness, so some of us simply don’t want to look into the science, navigate confusing websites, or wait in line.
Issues with Vaccine Mandates
In order to provide safe conditions for customers, safe working environments, reduce illness and hospitalization-related workforce shortages, and return to normal operating practices, employers are reviewing rulings and guidance from the Occupational Safety and Health Administration and the Equal Employment Opportunity Commission. While awaiting availability as well as more data from the FDA and CDC on the efficacy and duration of immunity for the three vaccines currently available, most companies are encouraging but not mandating vaccinations or proof of vaccination as a condition of employment. There is a legal question as to whether an employer can mandate a vaccination that only has the FDA’s emergency use authorization. But to incentivize individuals and groups to take the vaccine, some companies are requiring an educational session to inform decision-making, offering cash bonuses, holding raffles or giveaways. McDonald’s is providing four hours of paid time and Trader Joe’s is giving two hours’ worth of pay. Target offers $15 each way for staff who use Lyft to get to their appointments. Other employers are lessening PPE requirements or eliminating daily temperature checks for those receiving full doses.
Some companies like Atria Senior Living decided to make vaccinations a mandatory condition of employment for its 11,000 workers. Quite a few other enterprises see a competitive advantage in being able to claim that all employees have been vaccinated and may try to adopt a compulsory inoculation requirement. But collective bargaining agreements may mean negotiations with unions are necessary. And under the Americans with Disabilities Act, workers who do not want to be vaccinated for medical reasons can request an exemption; employers would have to provide reasonable accommodation, such as allowing the employee to work remotely. In addition, if taking the vaccine is a violation of a “sincerely held” religious belief, these workers would also potentially be able to opt out Under Title VII of the Civil Rights Act of 1964.
If an employer does choose to mandate the COVID vaccine, experts say that a company is not generally liable should an employee develop side effects from a vaccine; any claims would likely be routed through worker’s compensation programs and treated as an on-the-job injury. Immunity laws and orders offering certain protection from lawsuits arising from the pandemic vary widely by state. Provisions may apply to injuries, deaths, care decisions, and/or property damage, may apply only during the declared emergency, and generally make exceptions for gross negligence and willful misconduct.
Impact on the Municipal Bond Market
A recent study by the Federal Reserve Bank of St. Lois found that the COVID-19 pandemic has affected the U.S. municipal bond market on several different fronts. Demand for municipal bonds had been steady and strong for years as investors sought to meet safety, income and after-tax return goals but perceived risk spiked and a wave of selling began once the pandemic was declared. Bids were disconnected from the fundamental value of many bonds. Prices suffered their biggest weekly decline in 33 years. Yields increased sharply in March of 2020 until the Fed announced that it would accept bonds as collateral for certain loans and established a Municipal Liquidity Facility. Increased expenditures including unemployment aid and health services, along with a decrease in revenue associated with the extension of tax filing deadlines, had an immediate impact on states but most had built up large reserves as a result of ten years of economic growth.
After a period of considerable stress across all sectors in the primary and secondary markets, investors came to realize the essentiality of services such as water, power, and sewer, the value of stable revenue streams, and the difference between full faith and credit pledges versus unsecured corporate bond pledges as bankruptcies began to mount. But high-risk issuers including health care facilities, senior living facilities, sports and entertainment complexes, public transit, and college dormitories were hard hit as were communities reliant upon tourism. Federal relief packages and talk of more aid helped to buoy the market. Debt sales began increasing again in June 2020 as concerns over credit fundamentals eased and the liquidity crisis resulting from huge outflows from mutual and exchange-traded funds ended. Revenue disruptions persist in certain sectors including airports, toll roads and senior care facilities but these are expected to be temporary.
The Muni Market Today
Demand continues to outpace tax-exempt supply, fundamentals remain generally strong, and more federal stimulus is on the way to bolster state, city, airport, school, college and public transit finances. But the size of the latest proposed aid package, along with strong economic data, have raised concerns for inflation, which in turn has produced fresh volatility in stock and bond markets. Many of the sectors experiencing the greatest stress one year ago, including life care and student housing, are still struggling. Bloomberg Intelligence reports that nine credits with par value of $595 million have become distressed so far this year versus four at this time last year with par value of $171 million. Twelve bonds with par value of $842 million have defaulted in 2021 while the first two months of 2020 saw only $73 million of defaults. Nevertheless, the vast majority of bonds in the $3.9 trillion muni market are paying on time and in full. Rates are still near historic lows, so borrowers continue to enter the market with new money and refunding issues. Investors have added $24.1 billion to municipal bond mutual funds and ETFs bringing asset totals to $956 billion. The new Administration and Democratic House and Senate bring the potential for tax policy changes; the mere talk of hikes increases the value of tax-exempt securities.
The 2-year AAA municipal general obligation bond yield at 0.13% is 6 basis points lower than where it began the month of March, 1 basis point below where it started the year, and 50 basis points below where it stood one year ago. The 10-year benchmark yield at 1.11% is 3 basis points lower in March, 30 basis points higher than where it stood at the new year, and 15 basis points above the yield on March 5, 2020. The 30-year yield at 1.76% has fallen 4 basis points this month but is 37 basis points higher on the year and 20 basis points higher than where it stood last year at this time. Municipals have outperformed Treasury counterparts so far in March, year-to-date and over the past year. High yield municipals are returning 1.69% so far this year, leading all fixed income performance with the exception of convertible bonds.
Last week, HJ Sims brought a $102.1 million non-rated deal for Fountaingate Gardens to construct 129 independent living entrance fee units adjacent to the campus of Gurwin Healthcare System on Long Island. Bonds were issued through the Town of Huntington Development Corporation in New York and structured with three term maturities with a maximum yield of 5.375% in 2056. We believe that this is only the second new senior living construction project to come to market since December of 2019 and the strong market reception reflected investor support for this essential service sector. Among other high yield transactions, the Indiana Finance Authority sold $88.8 million of Caa2/B- rated bonds due in 2026 for United States Steel priced at par to yield 4.125%. The South Carolina Jobs-Economic Development Authority issued $17.1 million of non-rated bonds for Horse Creek Academy in Aiken that featured 2055 term bonds priced at par to yield 5.00%. The Public Finance Authority sold $13.6 million of non-rated bonds due in 2051 for Discovery Charter School in Bahama, North Carolina that priced at par to yield 5.50%.
We at HJ Sims understand that this virus is going to be with us for a very long time, even after the pandemic phase passes, and that the life we knew in 2019 will not return in the same form. But today we are heartened by the pace of vaccinations, the dramatic drops in case counts, hospitalizations and deaths, the positive economic trends, the daily announcements of school, restaurant, life care community and stadium re-openings, the recognition of the need for critical infrastructure improvements, the introduction of fantastic new technologies to make our lives safer, the number of non-profits and for-profits reaching out for advice on refinancings for savings and new projects in line with long-term plans that address coming demographic changes. We encourage all readers to take the time to become better informed on the available vaccines and treatments, on how to help build a collective defense against the virus, and on how to encourage family, friends, colleagues and staff to do the same. We thank all the unsung heroes among our readership and, as always, invite information exchanges with our HJ Sims representatives.