Market Commentary: Feathers Flying

by Gayl Mileszko

“Hope”, wrote the poet Emily Dickinson, “is the thing with feathers that perches in the soul and sings the tunes without the words.” Along with love and faith, hope has been one of the mainstays for millions upon millions of us throughout the 425 days and counting of this Pandemic, often resting in the form of doctors and nurses, paramedics, caretakers, scientists, manufacturers, deliverymen, employers or employees. Hope — with its superhuman strength — still prevails for most of us amid all the new questions surrounding the origin of the coronavirus, the effectiveness and durability of the vaccines and treatments, and the emergence of variants. Just this past week, new hopes have arrived to hover over deadly clashes in Jerusalem and Gaza, the DarkSide pipeline cyberattack, rising food and gas prices, shortages of staffing and supplies, those in search of affordable housing, honest work, and in-classroom learning. Today, this year, as always, there is no shortage of need for hope.

On Wall Street, the hope for more than 12 years has been that nothing changes, that the stock, bond, and commodity rallies go on ad infinitum. With their unprecedented interventions, the Federal Reserve and other central banks have eliminated most every semblance of a free market, virtually guaranteeing price appreciation, access to cash that is nearly free, and excessive risk-taking. In the U.S., the Fed has been buying more than $120 billion worth of bonds each month since last June and the assets on its balance sheet now exceed $7.8 trillion, a sum that represents over 34% of our gross domestic product. Included in the total is $2.18 trillion of mortgage-backed securities at a time when the housing market is setting new records for prices, competition and speed of sales. The substantial increase in housing and other prices we are experiencing is seen by many as a precursor to more widespread and escalating inflation, a plight that no poet extols.

Investors are typically spooked by the mere talk of inflation. Now, home buyers, gas pumpers, food shoppers, and car renters, among others, know that it is omnipresent, the question being how accurately it is being measured and whether its rise is transitory or non-transitory. At this writing, higher prices along with shortages in everything from microchips to rubber, chicken and diapers, lumber and gasoline have caused both stock and bond markets to sell off ahead of producer and consumer price index data releases on Wednesday. Short and intermediate U.S. Treasury yields are flat on the month at 0.15% for the 2-year and 1.60% for the 10-year. Long 30-year yields are 5 basis points higher at 2.32%, pressured somewhat by the unusually heavy auction schedule. Corporate bond yields, as measured by the 10-year Baa benchmark are up 5 basis points to 3.37%. Municipal bonds have generally strengthened so far in May with the 2-year AAA general obligation bond yield at 0.11%, the 10-year at 0.97% and the 30-year at 1.55%. On the equity side, the VIX Fear Index has risen 18% this month to 22.02 but the Dow is up 418 points to 34,293 and the S&P 500 has dipped 1% to 4,144. The Nasdaq is down 4% to 13,420. And the Russell 200 is down 2.6% to 2,206. Oil prices are up 2.6% this month to $65.21. As is typical when markets sense inflation, gold prices have risen by nearly 4% to $1,834 and silver prices are up 6% to $27.55. Bitcoin, which has again experienced sessions of extreme volatility in May, is basically flat on the month at $56,694.

In the municipal market, the widespread hope is for more tax-exempt supply. The volume coming in the primary market is light, as are dealer inventories. Buys significantly outnumber sells in the secondary market, and institutions dominate daily trading. Investors bracing for higher taxes have poured $43.1 billion into municipal bond mutual funds and exchange traded funds this year. On top of all this, a surge of bond redemptions begins in June and lasts all summer: principal from maturing and called bonds plus interest will amount to $158 billion, and issuance may not even cover half the amount required for reinvestment. Bond buyers, traders, bankers and advisers along with state and local officials, industry associations, and non-profit organizations have all come together in support of congressional action to restore the tax-exempt status of advance refundings as one solution.

The ability of state and local borrowers to refinance many bonds on a tax-exempt basis was eliminated with the 2017 Tax Cuts and Jobs Act. The Joint Committee on Taxation estimated that this would save the federal government $16.8 billion over ten years. But it does not appear that legislators considered all of the ramifications of this major change affecting their state and local counterparts and joint constituents: the inability of cash-starved cities and nonprofits to achieve debt service savings or finance other critical public works projects in an historically low rate environment, the higher interest costs that would have to be paid by state and local taxpayers, the dramatic drop in tax-exempt supply available to meet investor demand, a demand that increased in response to Act’s state and local tax deduction limits. Advance refundings were said to represent 27% of the municipal market in 2016. In 2018, investment bankers had to respond to borrower refinancing needs with structures including shorter call features, corporate bonds, federally taxable municipal bonds and “Cinderella” bonds issued as taxable but transformed into tax-exempt securities at the redemption date. On last week’s primary calendar, 42% of the par amount was issued as refunding bonds.

There have been bipartisan efforts to restore tax-exempt advance refundings since 2018. Most recently, a provision was included in the infrastructure bill that passed the House on July 1, 2020. Several measures are pending now in the 117th Congress. These include H.R. 2288 and S. 479. Both require action by the House Ways and Means Committee, chaired by Richard Neal (D-MA) who supports the effort to restore tax-exempt advance refundings, and the Senate Finance Committee, chaired by Ron Wyden (D-OR), who has in the past advocated for tax credit bonds in lieu of tax-exempts. To guide the process, all await the Biden Administration’s full 2022 proposed budget with its Treasury Department Green Book detailing the tax proposals.

We at HJ Sims continue to encourage our clients and colleagues to contact their Members of Congress to urge support for this important effort. While it is unlikely that either of the pending bills will pass on a standalone basis, we see a good possibility that authorizing language could be included in an infrastructure bill, separate tax reform measure, debt limit extension, or omnibus spending bill, with or without a sunset provision. We are following developments closely and will keep readers informed.

While still too low to meet demand, so far this year, the municipal issuance level is perched 17% higher than 2020. In large part this is due to the significant drop in market entry during the turmoil ensuing after the pandemic declaration. Tax-exempt issuance in 2021 as of last Friday totals $108 billion vs $93 billion in 2020. Taxable issuance at $47 billion is nearly $6 billion or 13% higher. Among the smattering of high yield offerings last week, Lincoln County, South Dakota sold $82.4 million of BBB-minus rated revenue bonds for Augustana University in Sioux Falls structured with 40-year term bonds priced at 4.00% to yield 3.29%. The Arlington Higher Education Finance Corporation issued $28.2 million of BB rated bonds for Wayside Schools in Austin that featured 2046 term bonds priced with a 4% coupon to yield 3.31%. This week’s calendar will likely come in under $7 billion and includes an $89 million non-rated refunding for Glenridge on Palmer Ranch in Sarasota, and financings for two Minnesota charter schools: $30 million for non-rated North Lakes Academy in Forest Lake and a $22 million for BB-minus rated Woodbury Leadership Academy.

Feathers were flying in the wake of Friday’s surprisingly low jobs report. Only 266,000 jobs were added in April, well below the estimates for 1 million. Some view the numbers as an anomaly, perhaps to be revised upward in the next release. Otherwise the economic tune is an upbeat one. First quarter GDP increased at a 6.4% rate. Job openings have just risen to a record high 8.12 million, and the number of vacancies exceeds hires by more than 2 million, the largest gap on record, in part due to COVID-19 fears, child care responsibilities, and what some consider to be overly generous unemployment benefits that may continue through September.

There has never been times like these, but there are always investment needs and goals. HJ Sims representatives welcome your contact to discuss your borrowing and investing plans. We invite you to share your portfolios, strategies, fears, doubts and hopes. Right now, the major credit reporting agencies have upwardly revised their outlooks for most sectors. Business travel is picking up, new clothes are being fitted as major firms begin bringing employees back to work in corporate offices, airlines are all filling their middle seats. Conventions, expos and state fairs are finally all going live in the coming months, and live bands singing our favorite tunes are on tour. America is on the mend and hope abounds as feathers fly.

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How to Do It… Borrow in a Pandemic

Owner-operators will soon be confronting thorny financial questions as they emerge from the fog of the pandemic. How should skilled facilities prioritize spending? As one banker observed, the capital markets for skilled nursing may not have returned to where they were before COVID-19, but both debt and equity are available for operators who can prove their clinical expertise.

Read more in this McKnight’s article featuring insight from HJ Sims’ Curtis King.

Market Commentary: Pay It Forward

by Gayl Mileszko

In Raleigh, North Carolina, there is a special place on Hargett Street that opened six years ago in a building that once housed a bank and a funeral home. Building renovations took several years and, during this time, the insightful James Beard Award-winning chef/owner had plenty of time to consider what she would name the new restaurant that would occupy the space. It was, of course, inspired by Benjamin Franklin and called it Death & Taxes. But after several acclaimed seasons, this small business along with almost every restaurant in the country was forced to close temporarily due to the pandemic. Hers managed to survive while dozens and dozens of others beloved by the Triangle community closed permanently. Death & Taxes re-opened for takeout in February and now has a dining room with reduced capacity that is open four nights a week. The menu still features the “Tax Free”, a fine rye whiskey cocktail with smoked cherries and bitters, and “The Catacomb”, an unusual mix of gin, vodka, red vermouth, and cappelletti pasta.

The famous quote “In this world, nothing is certain except death and taxes” was attributed to Franklin in 1789. Since the pandemic was declared, we in the U.S. have suffered 577,845 reported COVID-19 related deaths. The world has lost 3,217,512 of its citizens at the last count of the John Hopkins Coronavirus Resource Center, which has been our first, most steady, and apolitical tracker. With respect to taxes, the latest tax filing deadline looms ten days from now. Higher brackets may be in store for next year under the Biden Administration’s proposals. We await specific details. But for now it appears that the new estate tax, a new higher capital gains rate, and the repeal of step-up in basis could bring total effective marginal rates to 61% for some, the highest level in nearly a century according to an analysis from the Tax Foundation.

On the federal level, it is unclear whether any or all of the White House proposals can pass Congress. We outlined some of the hurdles last week. But several states have already enacted hikes for the 2022 fiscal year. So accountants and financial planners are advising families to consider the impacts of various higher rates and the possible advantages of making gifts and realizing capital gains at this time. We encourage you to begin conversations with your HJ Sims financial professional. We are working hard to guide our clients through these uncertain times with a host of resources.

For most investors looking forward, there is no doom and gloom associated with stock, bond or commodity market outlooks. Equity market rallies have certainly been unprecedented since the September 2008 and March 2020 crises. The vast majority of analysts see them extending as long as the Fed continues its massive bond-buying and rate-compressing policies. But stock buyers cannot always rely upon dividends and appreciation to meet all of their investment and income needs. Bonds have represented a significant and critical percentage of family as well as institutional portfolios since at least the 17th century when England first issued debt to finance a war against France. Yes, yields have been on a long, continuous decline for more than 40 years since the 10-year Treasury peaked at 15.84% in September of 1981, forcing even many of the most conservative investors into far riskier assets while providing fantastically low rates for  non-profit and for-profit borrowers.

Since we are still at the very low end of historic yields, many–if not most–analysts see them continuing to rise alongside inflation throughout the near future. Several prominent market participants see bonds as a poor investment choice right now.  Berkshire Hathaway’s Warren Buffett recently said that fixed income investors face a bleak future. JP Morgan Chase’s Jamie Dimon recently quipped that he wouldn’t touch Treasuries with a 10-foot pole. Ray Dalio, founder of Bridgewater Associates, is quoted as saying that investing in bonds has “become stupid”. We disagree with these generalizations. We have bought, structured, and underwritten bonds throughout the course of our 86-year history and remain huge proponents of tax-exempt and taxable bonds as critical components of long-term investment portfolios. Our banking, trading, underwriting, analytic and sales teams specialize in products including Cinderella, capital appreciation, refunding, taxable, and corporate bonds. We are among the few broker dealers with expertise in non-rated and below investment grade securities, aiding many borrowers with smaller, start-up, and novel projects in securing financing and identifying suitable higher yielding opportunities for our investing clients. As you, our readers, think about your own holdings, your capital and income needs going forward, we again encourage you to contact your HJ Sims representative to discuss how bonds may work for you.

U.S. bonds should never be dismissed, particularly in a world replete with negative yielding sovereign debt. At this writing, the 5-year bonds of Japan yield negative 0.105%, Spain’s yield negative 0.245%, and those of France yield negative 0.54%. The 10-year bonds of Germany yield negative 0.24% and those of Switzerland yield negative 0.26%.  The U.S. Treasury 5-year currently yields 0.81%, the 10- year 1.58% and the 30-year 2.25%. Our 10-year A rated corporate bonds yield 2.74% and comparable 30-year bonds yield 3.51%.  Our 10-year AAA municipal general obligation bonds yield 0.99% and the 30-year yields 1.57%.  Last week, non-rated student housing bonds at Lynn University in Boca Raton were sold in the primary market with 5.00% coupons, priced at par. John Knox Village in Lee’s Summit, Missouri came to market with non-rated bonds due in 2056 priced with a coupon of 5.00% to yield 4.35%. Central Wyoming College offered non-rated bonds due in five years at 4.125%. In the secondary municipal market, Cherokee Charter Academy in Gaffney, South Carolina had bonds with a 7% coupon due in 2050 trade at $102 to yield 6.69%. Virgin Islands Water and Power Authority bonds with a 5% coupon due in 10 years traded at $90.50 to yield 6.228%.

So far this year, both individual and institutional investors have benefitted from an influx of cash via federal aid, bonds maturing, coupons and dividends paid, tenders and calls. Corporate bond buyers have had a field day with record amounts and wide arrays of investment grade and below investment grade rated issues. Municipal bond buyers have seen much less supply, as some borrowers have elected to postpone deals, refinance on a taxable basis, issue corporate bonds to take advantage of broader investor bases, or privately place debt with banks. We note a growing trend for forward delivery bonds, with sales taking place in favorable market conditions for settlement four, six, or even twelve months ahead when bonds are eligible for redemption. Current refundings on a tax-exempt basis are permitted within 90 days of the date of the refinancing. Buyers looking to lock in current rates or plan for reinvestments with cash expected from future redemptions or interest income are making commitments to buy these forwards. Borrowers are not having to pay up very much for this flexibility.

Last week, the BBB/BBB+ New Jersey Transportation Trust Fund Authority came to market with $1.58 billion of bonds in four parts. More than $893 million were for forward delivery on April 27, 2022. The 2036 maturity in the forward bonds priced with a coupon of 5.00% to yield 2.53% while the 2036 bonds settling this week yielded 2.00%. The state paid only 53 basis points more for the one year forward delivery piece, and it outperformed the market by Friday. Also last week, the city and county of San Francisco brought $178.1 million of general obligation refunding bonds in two parts; $86.9 million was issued for forward delivery in four months. The 2028 maturity in the forward deal priced with a 5.00% coupon to yield 0.80%, 19 basis points higher than the same bond maturity yielding 0.61% that settles on Friday.

Buyer willingness to wait up to a year for the delivery of their bonds is one of the many things that has changed in the past year. We are noting some positive trends in hotels, rental cars, domestic air travel, life plan communities and charter schools, all of which were hit hard last year. For investors worried about higher tax rates and looking to sell equities, you may find some good value as well as tax advantage in some of these tax-exempt sectors.

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Market Commentary: Are Tax Hikes Inevitable?

by Gayl Mileszko

All the daily headlines lead us to believe that significant tax hikes are inevitable. There are innumerable fiscal challenges. We have spent $5.3 trillion so far in response to the pandemic-induced recession. There is serious talk of another multi-trillion infrastructure package. The balance sheet of the Federal Reserve has ballooned to $7.7 trillion. Our projected budget deficit — just halfway through the fiscal year — exceeds $1.7 trillion. The national debt now exceeds $28.2 trillion, a figure so large that it has lost meaning for most of us. The President who took office 100 days ago is seen by a good portion of the electorate as having a “mandate” to impose higher taxes on wealthy citizens and big business.

It is easy to understand why tax-exempt municipal bonds are now becoming scarcer and pricier amid all this tax hike chatter. The financial markets seem to sense a growing consensus for action based on media attention to various policymakers with platforms if not jurisdiction. Last year there was a “tax the rich” and “stick it to the corporations” campaign narrative that appeared to generate support for bogeys at around $400,000 in income, $1 million of gifts, and estates over $3.5 million. There are big bulls-eyes on companies seen as benefitting from the 2017 Trump tax cuts. Talk of retroactive applications makes the current grab for tax advantages all the more understandable.

Not a lot of opposition to the talk of tax increases has yet emerged. First of all, the specifics have not been presented, so special interest groups have nothing solid yet to analyze and object to. Some information was expected in the President’s address to the Joint Session of Congress on Wednesday, but the real details are being fleshed out and will take time. U.S. stocks nevertheless took a dive last Thursday on mere reports of plans to almost double the capital gains tax. The Dow dropped more than 320 points. The S&P 50, Nasdaq and Russell 2000 also fell, as did Treasury, corporate and muni yields.

In America, a tax rebellion is always right around the corner. And, given the changes in work and living arrangements brought about by the coronavirus, we are seeing how quickly our fellow citizens in states like New York and New Jersey now vote with their feet when informed that they must pay a higher so-called “fair share”. Companies with operations in multiple nations do not hesitate to move their headquarters, jobs, ingenious products and tax revenue to more friendly host nations. Any efforts to standardize tax laws among 195 different sovereign nations have about a zero chance of success.

We know of no legal prohibition against tax measures that apply retroactively. However, for a variety of reasons, retroactive tax provisions are not common or practical. In Washington, there are strong accounting, financial planning and litigation lobbies. There is also the simple matter of IRS logistics: printing the new forms and instructions affecting virtually every taxpayer and business, publishing the necessary regulations and guidance, educating customer service representatives and enforcement staff, and so on. If you examine past tax legislation, you will note that some provisions have different forward effective dates. Others may be temporary, with sunset dates in order to conform with the requirements of the enabling legislation. There are quite a few provisions in the 2017 Tax Reform bill that expire in 2025 without further action.

As many presidents have learned, tax reform bills are not so easy to get through Congress. They are nearly impossible if rolled out in pieces or phases. There have been at least 21 bills that increased federal tax revenues over at least one fiscal year since 1940 but the only recent major overhauls took place in 1986 and 2017. In order to succeed with cuts — never mind hikes — an administration has to draft very detailed proposals, preferably supplying specific statutory and explanatory language in its annual budget. Given the number of departments, agencies and offices involved, internal consensus is not easily obtained. The Tax Code is so unwieldy there are really no single source experts. In 2020, there were nearly 10 thousand sections. On the legislative side, numerous congressional committees and subcommittees are involved, with testimony, drafting and re-drafting, mark-ups, votes, speeches, and dialogue with constituents. As we saw in 2017, there are leaks, deep intra-party divisions, odd rules and unusual motivations. It is just plain impossible to “fast-track” anything without very heavy and sustained leadership pressure. In the process, hundreds of errors are made and so many unintended effects are revealed that there is typically at least one “technical corrections” bill required within a year or so of passage. That in and of itself can be a magnet for many unrelated and controversial provisions, and difficult to pass.

In the end, so much horse trading for votes is involved that passage of a 500+ page tax bill with an explanatory report of similar size would likely come at the price of all other major administration priorities. This time, it could possibly come at the expense of health care reform, civil rights, climate change, immigration, and infrastructure initiatives. The infrastructure details mean a lot to those of us in the municipal bond markets, most notably tax provisions involving advance refundings. But bear in mind that there are more than 12,000 active, registered lobbyists in DC and almost all of them have at least one special tax provision that they may want included or excluded. The budget committees, Congressional Budget Office, Office of Management and Budget, the Treasury, and the Joint Committee on Taxation are all involved in “scoring” the revenue impact of legislative proposals. These are not simple exercises and they are highly political. If reform is not achieved early in the honeymoon period, sophisticated vote counters and insider knowledge can lead to early pivots by certain classes of taxpayers and international/supranational corporations, significantly altering the projected revenue impacts before debate on the reforms is even over. The 1981 Reagan cuts and 1993 Clinton hikes were enacted by August of the first year in office; the 2001 Bush cuts were agreed to by May.

We will hear more debate on tax policy in Washington in the coming months as plans unfold and we encourage our readers to become involved. There are thin Democrat margins in the House and Senate, and Senate passage would entail a vice presidential tiebreaker and complete loyalty from the caucus. In the current environment, there will have to be close coordination with the Federal Reserve and monetary policy, and with the budget, taxation, and appropriations committees. If reform is enacted this year, mid-term elections may not be seen as a referendum as the full impact will not be felt by all taxpayers until forms are filed in 2023. If a tax reform bill is not signed into law by December, the odds are that tax hikes are unlikely to happen in 2022, an election year. In the meantime, 26 states and the District of Columbia had notable tax changes take effect in January, and more are on tap for new state fiscal years; in New York, the FY22 increases began this month.

In the past week, municipal bonds in high tax states have traded at extraordinarily high prices. Stanford University bonds with a 5% coupon due in 2049 traded this week at $159.792. Hamilton College bonds issued through Oneida County’s Local Development Corporation with a 5% coupon due in 2051 priced at $158.567. New York City Municipal Water Finance Authority bonds and Port Authority of New York and New Jersey bonds with 5% coupons due in 2031 are trading in the $136-$137 range. Long Island Power Authority and Monmouth County Improvement Authority bonds with a 5% coupon due in 10 years offer yields of only between 0.975% and 1.077%. Many individual and institutional investors are holding on to the bonds with federal as well as state tax exemption while looking for more to buy directly or through mutual funds and exchange traded funds. However, new supply is lacking. This week’s calendar, for example, totals only about $5.5 billion, and more than 20% is being issued for refunding purposes in federally taxable structures, and more than 20% is offered with forward settlements. Last week, the most yield we found was in a $10.9 million BB+ rated Michigan Math and Science Academy bond deal that had 2051 term bonds priced with a 4.00% coupon to yield 3.03%

This week, the Federal Open Market Committee met on Tuesday and Wednesday and kept its ultra-loose policy and near zero rates in effect, as expected. Investors are obsessed with guessing how much more economic ground has to be gained before the Fed begins tapering its monthly Treasury and mortgage bond purchases of $120 billion, and official conversations about rate increases begin. To be clear, Fed futures traders expect no changes in rates this year.

Where do you invest? We encourage you to contact your HJ Sims representative. Our banking, trading and sales executives are active in the day-to-day markets. For investors, our credit-driven strategies are designed for the outcome of income.

Is this the right time to borrow? For senior living communities, we point out that we are seeing some of the strongest lending conditions in our 86-year history. Our aim as always is to Partner Right, Structure Right and Execute Right.

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Market Commentary: Blazing Straddles

by Gayl Mileszko

We live in an era when past history is being denounced, flags and monuments buried, and classic old books and movies pulled from the shelves as perceived evidence of systemic racism. One fellow who paid a pretty sum to send his pre-teen daughter to a prominent prep school in New York felt that school leaders were going too far with sudden changes to the school’s curriculum and admissions requirements. He categorized the new policies as mob appeasement and sent a thought-provoking letter expressing his opinion on the woke wars and cancel culture to other parents at the school, entreating them to make their views known to the administration and board. His words soon went viral, stirring emotional responses and revealing how differently we view civic-mindedness.

The Pandemic has certainly magnified some big social, economic and political gulfs in our society that cannot be ignored. But as a republic, as a nation, we will always have certain continental divides. Every generation has stories about the societal changes and challenges we have encountered, fought, adapted to, and overcome. For those of us who grew up in the 1970’s, we had the crises of the Vietnam War, Watergate, double-digit inflation and energy shortages. But this was the decade in which we built the Sears Tower, invented floppy disks, digital wristwatches, portable cassettes, cell phones and voice mail, recorded great music, and passed a gender equality law. We took inspiration from the perfect wins by Mark Spitz, Nadia Comaneci, the Miami Dolphins, Billie Jean King, and Secretariat. We escaped by reading J.R.R. Tolkien fantasies and Agatha Christie mysteries, and by watching movies like the Godfather and Rocky. And we were able to laugh at ourselves and all the stereotypes portrayed in Blazing Saddles, the off-color comedy which has been deemed – at least for now – “culturally, historically, or aesthetically significant” by the Library of Congress and preserved in the National Film Registry.

It will be several decades before historians assess the moment in which we now live and document the social and political highlights and lowlights of this Pandemic era. In retrospect, economic conditions will be the focus for many. Reference will be made to the blazing hot financial markets that categorized the start of the decade, in spite of everything else, stoked by unprecedented central bank interventions and fiscal stimulus. In the depth of a worldwide recession, an endless series of records is being set. Given assurances of more bond-buying and rate controls for the next few years, there may be no stopping the rallies as the recovery takes hold. For new investors unaccustomed to volatility, the day-to-day performance are often jittery with dips and bumps driven by virus case reports, corporate earnings announcements, and weekly government data almost always released with a positive spin. There are also numerous technical factors, policy decisions involving negative interest rates by other central banks, and unexpected events like the situation with Ever Given, that massive container ship that clogged one of the world’s most vital waterways for six days and affected billions of maritime commerce.

Straddles, for those unfamiliar with the official definition, are typically strategies used by traders who anticipate a big move in the price of a stock but want to hedge their bets as to whether it will go up or down. So straddling is a neutral strategy involving the simultaneous buy of a put option and a call option on a stock with the same strike price and expiration date. The straddler profits whenever the stock rises or falls from the strike price by an amount that is more than the cost of the premium. In the current market, we are seeing a different type of straddler – the equity buyer that also likes higher yielding municipal bonds. This is typically a higher income individual residing in a high tax state who likes the dividends and returns of equities but seeks offsetting tax-exempt income and relative safety, mostly from essential public purpose bonds issued with both state and federal tax exemptions paying semi-annual interest and pledging the return of the original principal at maturity. He or she sees the muni market as solid, fairly liquid, and social good-promoting, one that has been rising with — although uncorrelated to — stocks. This investor might straddle other sectors and asset classes as well; CCC-rated corporate bonds, leveraged loans, bitcoin, and even non fungible tokens (NFT), units of data stored on blockchain that commodify and certify digital assets in art, music and sports, for example, as unique.

Municipal bonds have been in particularly great demand, and the clamor for tax-exempt coupons (if not yields) of 5% continues. High-yield municipal bond mutual funds just reported a record $1.28 billion of inflows, breaking a record set in January. In the week ended April 14, muni funds in total took in $2.255 billion. Exchange-traded muni funds reported inflows of $478 million, after having added $350 million in the previous week. Fund assets under management have surpassed $900 billion for the first time and inflows this year have already surpassed the 12-month total for 8 of the last 11 years. In this context, fund portfolio managers, like individual buyers, are understandably having a hard time sourcing product. The supply calendar continues has been light, typically running between $6 billion to $8 billion a week, much lower during holiday-shortened trading sessions. Prices continue to escalate in the primary and secondary markets. The one-year AAA muni yield is at an all-time low of 0.05%.

Some Members of Congress are straddling the fence, but there is non-stop tax talk coming out of Washington. It has many families searching for tax-advantaged investments. The last round of state and local stimulus has bolstered the finances of many frequent borrowers and investors heavy with cash see municipal credit outlooks as improved. Credit spreads continue to compress, so any coupon or call structure that offers additional yield is being bid up. Few muni investors are deterred by the recent gyrations in the Treasury market and auction results. At the close on Tuesday, the 10-year AAA muni general obligation bond yield stood at 0.93% or 60% of the comparable U.S. Treasury yield at 1.56%. The 30-year muni benchmark yield at 1.55% was 69% of the comparable Treasury at 2.25%.

Last week, Florida’s Capital Trust Agency sold $859.6 million of non-rated charter school bonds structured with a 2056 maturity that priced with a coupon of 5.00% to yield 4.00%. The Arizona Industrial Development Agency brought a $33.4 million charter school financing for BB rated Somerset Academy of Las Vegas featuring 2051 term bonds priced at 4.00% to yield 3.22%. The California School Finance Authority had an $11.8 million non-rated charter school social bond issue for iLead Lancaster with a 2061 maturity priced at 5.00% to yield 3.64%. And the Public Finance Authority brought a $9.8 million non-rated transaction for Davidson Charter Academy with a single maturity in 2056 priced with a rare 6.00% coupon and an even rarer discount o yield 6.432%. Among other high yield financings, the Cleveland Cuyahoga County Port Authority came to market with a $250.5 million taxable federal lease revenue bond issue for the Veterans Administration Health Care Center that priced at par to yield 4.425% in 2031. The California Community Housing Agency issued $174.1 million of non-rated essential housing bonds due in 2056 with a 4% coupon yielding 3.05%.

This week, we expect the biggest calendar of the year at $10 billion with a significant percent coming as taxable. So far this year, approximately $41.6 billion of municipal bonds have been issued as taxable or with corporate CUSIPs, up 16% over the amount in 2020. California is issuing general obligation bonds with a 5-month forward delivery date, the largest such forward settlement on record and the latest of $5 billion sold in 2021. The State of Connecticut is also coming with $145 million of special tax obligation transportation infrastructure refunding with a forward settlement in mid-October. Approximately eight financings designated as green, social and sustainable bonds are scheduled for sale. But higher yielding offerings are sparse. Three more charter schools plan sales. At this writing, the Dow is up 2.5% so far in April, the S&P 500 and Nasdaq are up more than 4%. The Russell 2000 has declined by 1.45% while oil is up 5.5%, gold is up 3.8%, and silver is up 6%. Bitcoin is down about 5% but Dogecoin, the meme cryptocurrency created as a joke, is blazing new trails with a market cap of $54 billion, one that exceeds that of Ford Motor and Kraft Heinz.

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Market Commentary: Mint Condition

by Gayl Mileszko

The U.S. Bureau of Engraving and Printing has responsibility for producing all of our paper currency but the U.S. Mint is the sole manufacturer of legal tender coinage. Originally placed with the State Department in 1792 to produce the coins needed for the nation to conduct its trade and commerce, the Mint became an independent agency in 1799 and then a bureau of the U.S. Treasury in 1873. It is now the world’s largest producer of gold and silver bullion coins. In addition to bullion, pennies, nickels, dimes, and quarters, the Mint also produces coin-related products such as Congressional Gold Medals and commemoratives like the silver dollar, silver half-dollar and gold five-dollar coins just issued in January for the National Law Enforcement Memorial and Museum. More than 1,600 employees work at Mint facilities in Washington, Philadelphia, San Francisco, Denver, West Point and Fort Knox. Although its facilities are closed to the public during the pandemic, the Mint has long offered tours of the production sites in Pennsylvania and Colorado where visitors learn about the craftsmanship involved in the design, sculpture and striking processes for U.S coins, each a miniature work of art.

Last year, the U.S. experienced severe coin shortages as consumers moved to digital transactions and so few of us emptied out piggy banks or cleaned under couch cushions and car seats for loose change and cashed in our coins. The urgent needs of merchants and banks prompted the Mint to increase production to the highest levels since 2001 just as spot prices for nickel increased 5.6% over 2019, platinum cost 3.8% more, gold rose 25.8%, copper dropped 3.6%, and zinc fell 15.4%. The Mint shipped 15.5 billion circulating coins to the Federal Reserve Banks and, in response to the soaring demand for gold, more than 24.7 million ounces of bullion. It transferred the seigniorage, the difference between the face value and cost of production which amounted to $40 million, to the Treasury, chump change in the effort to reduce a federal deficit that has now grown to $1.7 trillion in the first six months of Fiscal Year 2021.

The dictionary definition of coin long read: “a small, flat, and usually round piece of metal issued by a government as money.” The key point was that the coins were issued by a government. This week, COIN is the new Nasdaq ticker symbol for Coinbase, the largest U.S. cryptocurrency exchange. The company has only been around since 2012 but Wednesday’s IPO-like entry has been one of the most anticipated market events of 2021 as it appears to reflect acceptance of crypto as a legitimate industry and points to the possibility of widespread adoption of digital currency. The Coinbase platform enables some 7,000 institutions and 56 million retail customers to buy, sell, and store cryptocurrencies such as Bitcoin and Ethereum. The majority of its revenues come from transaction fees of about 0.5% and services such as storage and analytics, while about 10% of the company’s revenues come from sales of its own crypto assets to customers. It also makes money from things like margin fees and a rewards credit card program. In 2020, total revenue amounted to $1.28 billion, up from around $534 million in 2019 as the company’s monthly transacting user base rose from about 1 million to about 2.8 million. Net income was $322 million. In the first quarter of 2021, estimated revenues grew to $1.8 billion on trading volume of $335 billion as the price of Bitcoin almost doubled, causing the number of active monthly traders to more than double to 6.1 million.

COIN is using the less common practice of a direct listing on the Nasdaq. No new shares will be created in the process, and only some of the 130.7 million of Class A shares and 68.5 million of Class B shares outstanding are being sold to the public. No underwriters are involved, and there is said to be no share dilution or lockup period. Nasdaq and Goldman Sachs set a reference price of $250 per share, giving Coinbase a valuation of $66.5 Billion. Demand appears to be overwhelming and valuations extremely high. The overall value of more than 6,600 coins tracked by CoinGecko recently surpassed $2 trillion. Even Dogecoin, with a Shiba Inu dog as its logo and launched as a joke, now has a market cap of $17 billion. But the decentralized and largely unregulated finance business is unquestionably volatile and still highly mysterious and suspicious to many of us. There is a very complex process of mining with staggering energy requirements and environmental costs. There are caps on supply. Anybody with basic programming skills and an understanding of the technical infrastructure can create and market their own private digital currency. Crypto is understood or misunderstood to involve instruments of money laundering. Assets are kept on a shared ledger known as a blockchain, but if you forget your password you can lose access to your entire digital wallet. Some call it hackproof while others know of scams and see plenty of security risks in trading and network storage. Warren Buffett called Bitcoin a “mirage” but strategists at JPMorgan are suggesting cryptocurrency as a way to hedge against significant fluctuations in traditional asset classes and Bank of New York Mellon has announced plans to hold, transfer and issue digital currencies for its clients. Goldman set up a crypto trading desk and plans to begin offering investments in digital assets. A number of companies including Tesla, Burger King, Xbox, PayPal, and Starbucks now accept bitcoin, recognized as the original cryptocurrency founded in 2009, as a form of payment.

Cryptocurrencies are often confused with other digital currencies but both are now a major focus of central banks around the world. Privately issued digital currencies can certainly reduce the ability of the Federal Reserve to control exchange rates and money supply. But with respect to sovereign digital currencies, the Fed Chair said in February that they are looking “very carefully” at a digital dollar. The Treasury Secretary testified that a digital version of the dollar could help address hurdles to financial inclusion in the U.S. among low-income households. Many concerned with privacy, however, are alarmed as digital currencies are trackable, allowing for surveillance and — potentially — supervision over individual transactions as well as the size of accounts. They can also be programmed to have expiration dates. Sovereign digital currencies could be used to work around U.S. sanctions and potentially oust the dollar as the world’s dominant reserve currency. India is considering a new law that bans all tokenized representation of money unless it is electronic cash from its own central bank. The People’s Bank of China just became the first major central bank to launch a virtual currency, e-CNY. Officials there claim that the purpose is to replace banknotes and coins, to reduce the incentive to use cryptocurrencies and to “back up” privately run electronic payments systems. The trial issuance of digital yuan has begun after 7 years of research, and China plans a broader roll-out next February during the Winter Olympics in Beijing. Officials at the U.S. Treasury, State Department, Pentagon and National Security Council are taking a close look at the implications.

The future of our global financial system appears to be changing, perhaps our legal systems as well with the introduction of smart contracts run on cryptographic code. In a low rate environment with high leverage and sensations of inflation and bubbles, plus policies and conditions arising from the pandemic, capital may be re-deploying from stocks and bonds. But for now, the financial markets remain immersed in day-to-day economic news, which indicates modest inflation and record global growth, as well as developments on the Russia-Ukraine border, with China and Taiwan, Iran and Israel, Minneapolis and Portland, Johnson & Johnson’s vaccine, Washington infrastructure talk and first quarter earnings reports. With the Fed playing down inflation and repeating familiar dovish narratives over and over, the Dow and S&P flip to record highs. Some question the numbers, but Bank of America just reported that inflows into global stock funds in the past 5 months ($576 Billion) have exceeded inflows in the prior 12 years ($452 Billion). Since 2008, inflows to stock funds have totaled $1 trillion versus $2.4 trillion for bond funds.

This week, Treasury auctions are expected to total $271 billion and the first one on Monday met with strong demand. The municipal calendar could total $7 billion, dominated by taxable sales. Five green, social and sustainability bond deals are featured and there is a $252 million non-rated deal for Florida charter schools. Municipals, which saw another $1.77 billion of mutual fund inflows last week, and continue to outperform Treasuries. Tax filings have been delayed to May 15 and cash is abundant. New issue pricings continue to be well received with both price bumps and positive secondary follow-through. Last week’s $7.6 billion slate included a $332.5 million non-rated California CSCDA Community Improvement Authority social bond financing for Altana-Glendale that had a 2056 maturity priced at 4.00% to yield 3.58%. The same maturity and coupon in a California Community Housing Agency issue for Mira Vista Hills Apartments priced to yield 3.70%. Among other high yield deals, the New Jersey Educational Facilities Authority had a $5.6 million tax-exempt series with a $38.5 million taxable Baa3-rated transaction for New Jersey City University structured with 2051 term bonds priced at par to yield 4.431%.

Corporate syndicate desks expect $25 billion of investment grade deals this week and $31 billion of high yield sales including the $5.5 billion United Airlines refinancing and a $1.8 billion deal for the Kissner purchase of Morton Salt. At this writing, the 2-year Treasury yield stands at 0.16%, the 10-year at 1.62%, and the 30-year at 2.30%. The 2-year Baa rated corporate bond yield is 1.77%, the 10-year is at 3.31% and the 30-year stands at 4.17%. The 2-year AAA municipal general obligation bond yield is 0.10%, the 10-year is at 1.01% and the 30-year is at 1.62%. The Dow stands at 33,677, the S&P 500 at 4,141, the Nasdaq at 13,996, the Russell 2000 at 2,228. Oil prices have climbed in the past week to $61.22 a barrel. Gold is priced at $1,745 an ounce, silver at $25.40, and platinum at $1,179. Bitcoin is at $64,478 and Ethereum is nearing $2,383.

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Market Commentary: Home is Where the Heart and Wealth Are

by Gayl Mileszko

Our homes have been our anchors, true ports in the storm of this past year, our refuge from all the uncertainty outside. They have evolved as we have, morphing into classrooms and workstations, gyms and bistros, chapels and clinics. It is said that there is no place like home, the place where our stories begin and unfold. Home is the starting place of love, hope and dreams, the place where we can go just as we are, feel safest and always belong. In these and other ways, our homes are priceless. The physical structures themselves, however, have values that can be pinpointed quite precisely and unemotionally. Let us take a look at some of the latest price tags and trends for housing because these structures, our primary residences, in most cases represent the largest percentage of all assets that we hold. 

Despite all that we have been through in this past year, it is astonishing that the U.S. housing market has remained sizzling hot with prices surging at the fastest pace in 15 years. Sales just recently cooled off as new home construction has lagged behind demand and many homeowners have elected to hold onto their houses longer. But buyers in search of better space in which to live, study and work during this pandemic have been in fierce competition for what has become a record-low supply of homes. The residential real estate market has never been tighter. Housing inventory remains at a record low of 1.03 million units, having dropped by 29.5% year-over-year. That amounts to a 1.9-month supply, well below the level said to be needed in a balanced market at six months. Properties are typically selling in 20 days, another record low.  As a result, existing home sales fell 6.6% in February and pending home sales also fell after eight consecutive months of year-over-year gains, according to the National Association of Realtors. Entry-level homes in particular remain in short supply. Median existing home prices, meanwhile, rose to $313,000, 15.8% above the comparable 2020 level, with all regions of America posting double-digit gains. First-time buyers have been responsible for about 31% of sales, and a new Zillow survey finds that these buyers are increasingly comfortable buying online. 

CoreLogic forecasts that home prices will increase by an average of 3.3% by January 2022, with only a few metro areas including Houston, Las Vegas and Miami seeing declines. The Case-Schiller 20-city index shows that Phoenix has had the fastest home-price growth in the country for the 20th straight month, at 15.8%, followed by Seattle at 14.3%. The average commitment rate for a 30-year conventional fixed rate mortgage is about 2.81%, still well below the 2020 average of 3.11%. Rates, which dropped below 3% in July for the first time ever, are expected to remain below 3.5% this year. As they rise along with prices, however, affordability becomes a key and continuing concern for many. As it is, about one in five renters is behind on rent payments and 2.8 million are in mortgage forbearance. But in the four weeks ended March 21, 39% of homes that went under contract sold for more than their list price, up from 23.9% a year earlier according to Redfin Corp. As a result, 76% of nonhomeowners in the U.S. say they have no plans to purchase a home in the next six months due not only to affordability constraints but fear that the market will turn and leave them owing more on their mortgage than their home will be worth. In the fourth quarter, some 410,000 U.S. residential properties with combined mortgage debt of $280.2 billion were underwater. Real estate data firm Black Knight reports that at least one of every 14 residential mortgages in Connecticut was delinquent or in foreclosure.

Homes with a mortgage account for about 62% of all U.S. properties and the home equity for these properties surged to more than $1.5 trillion last year, an increase of 16.2% from a year earlier. Homeowners aged 62 years and older saw their housing wealth grow by a net of 3%, or $234 billion, in the fourth quarter of 2020, according to new data from the National Reverse Mortgage Lenders Association. The increase brings senior housing wealth to a record $8.05 trillion. During the pandemic, some seniors have turned to reverse mortgages to assist with expenses, including in-home care, while others have refinanced their homes or taken out home equity lines of credit. Total cash-out refi’s surged 42% year over year in 2020 averaging $50,000 per borrower and adding up to $152.7 billion in total according to Freddie Mac. Home equity line of credit volume more than doubled to $74.9 billion in 2020 from a year earlier. Many seniors are looking in shock at area home sale prices and wondering if this is the ideal time to sell the family home and move to something smaller or perhaps better located. Prices could certainly rise further — but how much more? The market looks ripe for a correction. At some point, who will be able to pay these high prices for existing homes plus all the necessary repairs, remodeling, and refurnishing costs? The average American family in 2020 consisted of only 3.15 people. So how much interest will there be in a four-bedroom home? Maybe it is better to seize the moment and sell rather than wait until there may be no real choice. We are not getting any younger, after all. The 65-and-older population has grown by 34.2% or 13.7 million during the past decade. And more and more of us are living alone. That includes 27% of adults ages 60 and older. Do we want to be home alone for the next decade (or more) cooking and cleaning for ourselves and waiting for visitors and the occasional offer of help?

For some who have struggled in isolation during this pandemic, the thought of a safe, caring, well-managed senior living community has become very appealing. Thousands of folks in their 60’s, 70’s and 80’s are researching options on line and taking virtual tours of neighborhoods with similarly aged and active people, organized social activities, high quality dining, cleaning services, concierges, and higher levels of service when needed. Life plan communities present countless options and configurations for garden homes, cottages, and high-rise apartments, assisted living, memory care, rehabilitation and nursing facilities. At Bailey Station in Collierville, Tennessee they offer seniors a “Return on Life”. At Ingleside at Rock Creek in Washington, D.C, they attract residents with “Truly Engaged Living”.  At Broadview at Purchase College in New York, they promote “Think Wide Open Lifelong Learning”. At Sinai Residences in Boca Raton, they say “No One Does Livable Luxury Like This.”  At The Homestead at Anoka in Minnesota, they assure “It’s your life. We’re Here to Help You Live It.”

Throughout the COVID-19 crisis, life plan communities have evolved with new safety procedures, technology, and services. Many have continued with expansion and renovation plans, uninterrupted or only slightly delayed for labor or material-related reasons. Several have come to the bond markets for financing projects on a tax-exempt basis. In the past few weeks, this included Plymouth Place in La Grange Park, Illinois (“The Time and Place For You”) which sold $23.9 million of BB+ rated bonds structured with 5% coupons due in 2056 to yield 3.61%. In the secondary market, bonds issued for Ralston Creek at Arvada in Colorado traded at $89.95 to yield 6.552% (19648FCK8). Arizona’s Great Lakes Senior Living Communities’ 5.125% bonds traded at $85 to yield 6.20%. 04052TBV6 The Shelby County, Tennessee’s Farms at Bailey Station 5.75% bonds due in 2049 traded at $100.332 to yield 5.70%. 82170 KAE7 Roanoke County’s Richfield Living 5.375% bonds due in 2054 traded at par. 76982TAE8.

Unlike the corporate bond market which has seen record high yield issuance this past year, the municipal market has not seen much in the way of high yield financings and this is vexing many investment strategies. Demand for yield in this low rate environment has been insatiable.  Individuals, funds, insurers, banks, and foreign buyers cannot find enough to meet their investment needs. Prices remain extremely elevated. Among the few higher yielding deals of late, a Georgia issuer brought $439.5 million of BBB-minus rated hotel and convention center bonds to market with a final maturity in 2054 that priced with a 4% coupon to yield 2.95%. The Public Finance Authority sold $135.9 million of Ba2 rated taxable bonds for Noorda College of Osteopathic Medicine due in 2050 priced at 5.625% to yield 5.75%. The Latrobe Industrial Development Authority in Pennsylvania had a $42 million BBB-minus rated transaction featuring 2051 term bonds priced at 4.00% to yield 3.30%. The California CSCDA Community Improvement Authority brought a $112.9 million non-rated social bond issue for Moda at Monrovia Station due in 2046 that priced at par to yield 3.40%. The Pennsylvania Economic Development Authority brought a rare $75 million Caa1/CCC rated solid waste disposal financing for CONSOL Energy that was subject to the alternative minimum tax; it had a sole term bond in 2051 priced at par to yield 9.00%. The Capital Trust Agency in Florida issued $17.2 million of non-rated bonds for St. John’s Classical Academy structured with a 2056 maturity that came with a 4% coupon priced to yield 4.075%. The 2-year AAA rated general obligation bond benchmark yield currently stands at 0.15%, the 10-year is at 1.11%, and the 30-year is at 1.73%.

As we begin the second quarter of the year, technical factors continue to buoy the municipal market. Cash continues to flow into bond funds and ETFs, buying activity is at the highest levels since 2009, issuance is below average, bids in the secondary market for many bonds are strong as the gusher of federal funds is making many credits appear stronger and not much product is available. In addition, the tax chatter in Washington and several state capitals is getting louder, muni/Treasury ratios have dropped below historic averages. Economic data reports also appear to reflect a solidly recovering economy. New orders, employment, business activity, and prices all increased last month. High yield muni performance has been good: returns on the S&P High Yield Muni Index in the first quarter were +1.77%; the ICE BoAML High Yield Muni Index was up 2.1% . However, investment grade tax-exempts posted negative returns (-0.26% for S&P, -0.4% for ICE BoAML). The best performing sectors so far this year have been airport and transportation. Away from munis, markets have been volatile due to surging inflation expectations. U.S Treasuries lost 4.61% in the first quarter, and corporate bonds were down 4.49% while the Dow gained 8.2%, the S&P 500 6.1% and the Nasdaq 2.95%. Oil prices have dropped in recent days but are still up26% on the year. Gold and silver prices have fallen. Bitcoin is up more than 100%.

HJ Sims has an 86-year history of guiding our individual and institutional clients through changing markets. In addition, we have either financed, advised on, or followed the progress of continuing care communities in every major U.S. market area. So, whether you are seeking assistance with executing your investment plan, in need of a trained eye to review the credits in your bond portfolio, searching for higher yielding bonds to boost your income, looking for specific advice on how best to meet your community’s financial and capital needs, or researching suitable senior living or care communities for a friend or family member, we encourage you to contact your HJ Sims representative. We aim for amazing.

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HJ Sims Partners with Gurwin Healthcare System to Finance New Community with 55% Pre-sales

FOR IMMEDIATE RELEASE

CONTACT: Tara Perkins, AVP | 203-418-9049 | tperkins@hjsims.com

HJ Sims Partners with Gurwin Healthcare System to Finance New Community with 55% Pre-sales

FAIRFIELD, CT– HJ Sims (Sims), a privately held investment bank and wealth management firm founded in 1935, is pleased to announce the successful closing in March 2021 of a $102.1 million financing for Fountaingate Gardens, an independent living community to be located in Commack, NY.

The Gurwin Healthcare System has been providing healthcare services to Long Island residents since 1988, through the Gurwin Jewish Nursing and Rehabilitation Center and the Fay J. Lindner Assisted Living Residences.  Gurwin Jewish Healthcare Foundation acquired land adjacent Fay J. Lindner Residences with the goal of completing the continuum of care through development of an independent living community to be known as Fountaingate Gardens. Working with Eventus Strategic Partners and Perkins Eastman, Fountaingate Gardens will initially add 129 independent living apartments and offer various services/amenities to its residents. Healthcare services will be provided at the Gurwin facilities contiguous to the community.

The Foundation donated $4 million to cover early expenses and loaned nearly $16 million for pre-development capital. It also donated the 10.5-acre site, appraised at $4.675 million. Total development costs, including the tax-exempt bonds, is approximately $113.8 million. The Foundation has committed $25.5 million to the project, providing confidence to investors and enabling the bonds to be issued with only 55% of the independent living units reserved with deposits from future residents.

The Foundation agreed to an Entrance Fee Guaranty Agreement, whereby it would advance up to $2.85 million, equal the entrance fees on six independent living units, in the event occupancy did not meet expectations upon opening. It also committed $10 million in the form of a Liquidity Support Agreement.

The $102,115,000 tax-exempt bond issue was divided into two short-term Entrance Fee Principal Redemption BondsTM series and a long-term bond series. The Series 2021C bonds ($31,000,000) will be repaid when occupancy reaches 48%. The Series 2021B bonds ($32,500,000) will be repaid when occupancy reaches 86%, expected to occur in 2023. The Series 2021A ($38,615,000) has a final maturity of 2056.

Sims closed on the Series 2021 Bonds with $10.5 million of the issue purchased by Sims’ Private Wealth Management clients and the remainder purchased by 28 institutional firms. The yield on the Series C bonds is 3.125%, the yield on the Series B bonds is 4.125% and the yield on the Series A bonds maturing in 2056 is 5.375%, demonstrating demand for the project and strength of the Gurwin name in the local market.

“With tremendous support from the Sims’ team, we successfully secured bond financing for Fountaingate, Gurwin Health’s new independent living community. Despite the challenges we faced the past year, with the impact of the pandemic, Sims found creative solutions, with a firm determination to bring this project to completion. Sims not only serves as a lender; they are a model for senior housing and development. They embrace the same goals that we have as a healthcare provider: caring, quality and excellence. Thank you, Sims for all you have done to help secure the future for our community,” said Stuart Almer, CEO, Gurwin Healthcare System.

Financed Right® Solutions—Andrew Nesi: 203.418.9057 |  anesi@hjsims.com

 

ABOUT HJ SIMS: Founded in 1935, HJ Sims is a privately held investment bank and wealth management firm. Headquartered in Fairfield, CT, Sims has nationwide investment banking, private wealth management and trading locations. Member FINRA, SIPC. Testimonials may not be representative of another client’s experience. Past performance is no guarantee of future results.  Facebook, LinkedIn, Twitter,  Instagram.

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Market Commentary: Aiming for Amazing

by Gayl Mileszko

1784 was another one of those years when nothing was normal. The Treaty of Paris with Great Britain was ratified, ending the American Revolutionary War.  New guidelines were being adopted for adding to the original 13 states. The New York Governor asked Congress for a declaration of war against Vermont. The first successful daily newspaper was published in Pennsylvania, and the bifocal spectacles needed by some to read it were invented by Benjamin Franklin. In Massachusetts, Governor John Hancock signed the charter for Leicester Academy, a private school initially funded by the town and its citizens, later supported for a time with state monies. Its purpose was to “promote true piety and virtue” along with the study of the English, Latin, Greek, and French languages, arithmetic and the art of speaking. Soon after its founding, the Academy broke some new ground by admitting young women. Among its earliest graduates was Eli Whitney and one of its most prominent buildings was a stop on the Underground Railroad.  Over the decades, the school moved, expanded and contracted several times, adapted to new laws making education compulsory and then prohibiting public funding of private schools, and trained cadets that served in the Union Army and World Wars I and II. The Academy eventually merged with Leicester Junior College in 1954 and with Becker Business College in 1977. Becker College, as it became known, features two campuses six miles apart in Leicester and Worcester, and offers 40 undergraduate degrees including veterinary science and e-sports management along with master’s degrees in nursing and mental health counseling. It has been the home of the state-designated Massachusetts Digital Games Institute and proudly features one of nation’s the top five video game design programs.

As with many small, private colleges, however, Becker has suffered from declining enrollment in recent years and in the 2020 Fall Semester the total fell to a low of 1,500 students. Several years of hundred thousand-dollar deficits were plugged with endowment funds that have rapidly declined to $5 million. College leadership tried mightily to bolster its finances by renegotiating contracts, selling assets, consolidating departments, cutting staff and salaries, and aggressively pursuing affiliations and mergers. But the Pandemic exacerbated the revenue loss and no alliances materialized. Despite $3.31 million from the Paycheck Protection Program, and $1.6 million of CARES Act funds, the state’s Department of Higher Education concluded in early March that the school’s financial situation was such that it was unlikely to make it through the next academic year. After a weekend of agonizing discussion, the school which has boasted its status as one of the 25 oldest academic institutions in the country, just announced on Monday that it would close in August and arrange for its students, all Becker “Hawks”, to transfer to one of 18 other local schools to complete their degrees.

The closings of longstanding schools and businesses — unimaginable just one year ago — continue to make headlines, although at a rate well below the terrifying forecasts of last Spring in large part due to the $5.2 trillion of federal stimulus that has propped up income for millions. The American “can-do” spirit is, however, never to be discounted. Despite many devastating losses, more than 4.4 million new businesses have been created in the past year according to the Census Bureau, a half million this past January alone. This is an extremely hopeful sign for those of us who still remain hesitant to take public transit, sit in a crowded stadium, attend a church service, wedding or college graduation, or open or expand a dream business whether it is a restaurant, barber shop, senior living facility, charter school, mask distributor, ionizer manufacturer, entertainment venue, residential and commercial building contractor, home care provider, or reliable news source.

We join the hundreds of millions thrilled with every new report of students returning to classrooms, workers returning to offices, drivers back on toll roads, fans back in arenas, shoppers returning to brick and mortar stores, travelers booking flights and hotel rooms, seniors and their families once again scouting best places for retirement and care. The first quarter of 2021 has come to an end and the country yearns for what some call a return to normal, with hopes fueled by the widespread COVID-19 vaccinations. But the Google searches for “normal” which spiked highest last April, ebbed then rose once more with the start of the new school year and again over Thanksgiving, have since fallen off.  With no disrespect to our veterans and the sacrifices that they and their families  have made in time of war, this Pandemic has cost our nation in dollar terms far more than World War II and it has a death toll now counting greater than that of WWII, Korea and Vietnam combined.  Our aspirations for having control over our lives once again have escalated but we are still unsure about how persistently vicious this coronavirus and its variants could be.  After 14 months of the unthinkable, we are adjusting to a new normal, perhaps and hopefully on its way to a becoming better one. As the poet Maya Angelou once so aptly put it, “If you are always trying to be normal, you will never know how amazing you can be.”

In Washington, where no day is ever normal, and the cherry blossoms have peaked early this year, intelligence agencies are scouring for details of the new 25-year, $400 billion China-Iran pact. Among other threats, our military is monitoring the three Russian nuclear submarines putting on a show in the Arctic. Immigration and border patrol agents are overwhelmed with the migrant surge on the Mexican border. Health officials are studying whether new vaccines or treatments will be needed to counteract new variants in countries with low vaccination rates, if booster shots will be required in four or six months, how much value to place in the recent World Health Organization study on the origins of Covid-19. Labor and Commerce officials are exploring the implications of various policies for mandating vaccinations for certain employees, for requiring proof of vaccinations for certain activities. Education officials are addressing the myriad of issues related to in-person versus virtual instruction. NASA is focused on the Mars rover searching for signs of past life and its potential for habitation.

On Wall Street, throughout this Pandemic and indeed for the past 13 years, most normal days have involved rallies for stock and bond investors. Many are being rattled by the prospect of inflation linked to federal stimulus that may exceed $8 trillion by the end of the year if another $3 trillion of major infrastructure proposals are adopted. In response, Treasury yields have risen alongside the belief that the Federal Reserve will step in to raise rates well in advance of the 2024 target reflected in its latest dot plots. As if we have not had enough of new entries in the U.S. record books, we have just seen one of the largest margin calls of all time. Archegos Capital Management is a family office that has been employing total return swaps to amass huge stakes in major companies without having to disclose them to regulators. Archegos (Greek for “one who leads the way”) has leveraged trading partnerships with major banks including Nomura Holdings Inc., Morgan Stanley, Deutsche Bank AG and Credit Suisse Group AG, all of whom have had to liquidate huge chunks of shares in block trades at many fire sale prices. The first quarter results of these banks are now being impacted to the tune of $5 to $10 billion.

In the wake of years-long risky high yield trading and huge IPO and SPAC investment by those in desperate search of positive real yield and returns, traditional risk management tools developed in Manhattan, London, Zurich and Tokyo appear no longer appear to prevail. With respect to risk to the global supply chain, last disrupted by the shutdowns in the airline industry, the world has truly been shaken by the sight of hundreds and hundreds of ships laden with cargo blocked from entry into the Suez Canal by just one beached container vessel, the Ever Given. In the context of data privacy, hackers have reduced and revealed the little that apparently remains.

At this writing, with two days to go until the close of the first quarter in the financial markets, stocks are up across board since the start of the year. The Dow is up over 8%, the S&P 500 more than 5%, the Nasdaq over 1% and the Russell 2000 well over 9%.  Oil prices at $61.56 have gained 27% while gold is down 9.6% to $1,713 per ounce and silver is down 6% to $24.75. Bitcoin has doubled in value to $57,610. In the bond markets, yields in short maturities have been stable: over the past three months, the 2-year Treasury has increased only 2 basis points to 0.14% while the tax-exempt AAA municipal general obligation bond yield has remained flat at 0.14%. The comparable Baa rated corporate bond yield has fallen 5 basis points to 1.73%. The 10-year and 30-year Treasury benchmark yields have, however, risen by more than 76 basis points to 1.70% and 2.40%, respectively. 10-year Baa corporate yields are up 61 basis points to 3.26%.  Municipals have outperformed their taxable counterparts by the most of any quarter since 2009, although intermediate and long-term yields have increased by more than 34 basis points since January: the 10-year AAA muni currently yields 1.10% and the 30-year yields 1.73%. Returns in the general municipal market are expected to be in the range of negative 0.3% for the quarter, while Treasuries will end the quarter down 4.2%. High yield municipal bond returns are among the fixed income leaders, with index returns in the range of 2.11% year-to-date.

Investor demand for tax-exempt securities has been magnified by tax chatter in Washington. The Biden Administration is proposing some of the largest tax increases since 1942 and this is enhancing the perceived value of munis, even at these still relatively low historic yields.  There are also several other favorable conditions prevailing for muni buyers. Investors have added $26.1 billion to muni bond funds and ETFs so far this year, reflecting retail demand for every available tax-advantaged dollar. History also shows that the muni market does well during the first 100 days of a Democratic president’s first 100 days in office. In addition, supply has been suppressed as state, local and nonprofit borrowers have awaited news of agreement on the extent of stimulus funds for more than six months. Now that federal funding has reduced the need for some deficit borrowing, volume could decline for several months to come.  On top of all this, the IRS has delayed the 2020 tax filing deadline to May, which forestalls the need for some of the usual seasonal sales for another month.

This is a week in which many around the world celebrate very precious holidays. We at HJ Sims wish you and your families happy and healthy celebrations. Your HJ Sims representatives look forward to sharing the best of these moments and, based upon your investment goals and sensible risk parameters, helping you to try and improve results you have come to see as normal in your portfolios. We appreciate all that you have endured and managed during this past year and stand alongside you as you look to move forward with your investment and borrowing plans.  We are dedicated to working for you and, as always, aim for amazing.

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Market Commentary: Galloping in on a White Horse

by Gayl Mileszko

It is said that the difference between a good lawyer and a bad lawyer is that a bad lawyer can let a case drag out for several years while a good lawyer can make it last even longer. This is just one of the dozens of jokes we tell about attorneys. But it is no laughing matter when we have been hurt or wronged and need to hire the best legal mind to represent us. In the wake of the Pandemic, hundreds and hundreds of claims have been filed in state and federal courts against airlines, cruise lines, fitness chains, hospitals, colleges, insurers, and nursing homes, among others, challenging decisions made by companies, institutions and government officials during the crisis. These cases reflect much of the devastation, loss, and hardship suffered by individuals, families, employees, patients, residents, citizens, and consumers. They remind us of the steep economic toll that the coronavirus has taken, and that it is still rising.

Hunton Andrews Kurth is just one firm tracking cases and complaints related to the Pandemic. At last count, there were 9,521 in the U.S. Some ask for corrective actions, others seek monetary damages. There are family members who accuse senior care facility managers of failing to protect their residents and public health departments for failing to properly monitor the facilities they regulate. There are nurses suing the hospitals, cashiers suing grocers, ticket takers suing railways where they work for failing to provide proper protective equipment. Concert-goers and frequent flyers and cruisers are seeking cash refunds, students want tuition refunds, prisoners are seeking release, laid off workers are chasing unpaid wages, hospitals are suing patients for outstanding medical debt, restaurants are trying to have their business interruption insurance claims paid. Landlords, wedding reception venues and others are testing force majeure and other legal concepts alongside workplace class actions on compensation and discrimination. No doubt new standards if not precedents will be set in the months, perhaps years, to come.

To forestall waves of action, a number of states have imposed various immunity measures for certain health care providers. Discussion of liability shields or protections for businesses has been underway in Washington for the first time since Y2K. Financial markets have been provided with a form of loss prevention shield for more than a dozen years now. The Federal Reserve has stepped in to protect, if not sustain, and propel markets in every way imaginable with dozens of heretofore unheard-of programs. Starting with tools first brought out in 2008 and new ones devised within days of the 2020 Pandemic’s declaration, the Fed has shielded the so-called free market from itself and kept the global markets afloat as well. Since March of 2009, there has been intermittent volatility, sometimes very pronounced, but the Dow is up 330 percent, the S&P 500 is up 394 percent, the Russell 200 has gained 436 percent, and the Nasdaq has gained 436 percent. Gold prices are up 89% to $1,740, and silver prices have doubled to $25.73. The 2-year Treasury yield has fallen 82% to 0.14%. The 10-year is down 37% to 1.69% and the 30-year has fallen 32% to 2.39%. The 10-year Baa corporate bond yield has dropped 409 basis points to 3.25%. In the tax-exempt market. The 2-year AAA general obligation bond benchmark yield has fallen more than 80% to 0.19%. The 10- and 30-year yields are down 63% to 1.16% and 1.79%, respectively.

This week, the Fed chair and Secretary of the Treasury appear together before the House Financial Services Committee and Senate Banking Committee to discuss the government’s response to the Pandemic plus the fear du jour – inflation – and explain why the Treasury and central bank have to keep galloping in on a white horse to save markets that were meant to be driven by supply and demand, not controlled by central authorities. Our economy is widely expected to surge in the next few months as a result of the nation’s extraordinary vaccination campaign and the multi-trillions of federal stimulus funds. Inflation, as calculated by the PCE (personal consumption expenditures) index will be 2.4% at the end of 2021 according to the Fed’s median forecast. But the Administration is planning another package of relief that could add another $3 trillion to the deficit. There could be some offsetting tax hikes proposed simultaneously or separately. Markets have suddenly turned aflutter over the prospect of big jumps in consumer prices, China’s new posture, the Fed’s decision to end regulatory capital relief for banks, and the resiliency of a Treasury market which will see $183 billion of new sales this week alone.

Municipal bonds have reacted with somewhat of a yawn to most of the goings on in Treasuries and the stock market. The Fed’s plan to keep short term rates as low as possible until 2023 and continue buying $120 billion of corporate and mortgage-backed bonds every month came as no surprise to the tax-exempt market, which has been fueled by all the Democratic leadership talk of tax increases, continued inflows into bond funds and ETFs, and light supply. High yield issuance, the center of most demand, has been paltry. Last week, buyers scooped up $1.25 billion of State of Illinois general obligation bonds at the lowest end of the investment grade scale at Baa3/BBB-/BBB-. The huge demand for bonds from the Land of Lincoln elevated prices to the point that buyers could only register a 2.75% maximum yield which came on term maturities in 2046. Among other higher yielding new issues, the Government of Guam sold $58 million of Ba1 rated refunding bonds due in 2040 with a 2.66% yield. Brooks Academies of Texas borrowed $42.9 million through the Arlington Higher Education Finance Corporation, including non-rated 2051 term bonds priced with a 5% coupon to yield 4.20%; Royal School System came 3 days earlier with a $9.9 million deal due in 2051 with a 6% yield. Oak Creek Charter School of Bonita Springs in Florida sold $17.8 million of non-rated revenue bonds structured with a 2055 term maturity that priced at par to yield 5.125%. As always, we encourage you to contact your HJ Sims representative for our latest views on pricing and our secondary market offerings.

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