HJ Sims Market Commentary: Built by Municipal Bonds

by Gayl Mileszko

The $1.2 trillion Infrastructure Investment and Jobs act was signed into law on Monday by President Biden, who appointed former New Orleans Mayor Mitch Landrieu as his senior advisor responsible for coordinating its implementation. Our analytic, trading and sales teams have identified a number of industry sectors and companies who stand to benefit from many of the transportation, broadband, water, and energy grants and contracts in the coming years. But, as has been the case for the past 86 years, our day-to-day work has us immersed in the $4 trillion municipal market which has financed most of the roads, bridges, mass transit, schools, hospitals, power, water and sewer systems, and other essential public service projects built by bonds in America.

Most Public Infrastructure is Funded at the State and Local Level

The Center on Budget and Policy Priorities estimates that state and local governments account for nearly 75 percent of public infrastructure spending, three times more than the federal government. And about 90 percent of this capital infrastructure spending is financed with debt, mainly in the form of municipal bonds. One of the earliest municipal bonds financed the construction of the Erie Canal in 1818, and tax-exempt munis have been a fundamental feature of the U.S. tax code since 1913. Today, there are more than 50,000 muni issuers with about 1 million different securities. In 2020, more than $494 billion of new financings came to market, and $12 billion traded every day.

$4 Trillion Muni Market Ignored in Infrastructure Bill

Municipal bonds are the original public-private partnership, the first ESG investments. But the municipal market was left out of the big federal infrastructure deal despite pleas from governors, treasurers, mayors and other local officials for tried and true provisions that would immediately create jobs and spur renovation and new construction projects at the local level without the need for all the time and onerous red tape involved in creating and implementing new federal government programs. Their simple wish list included restoring the federal tax exemption to allow for early refinancings in this low rate environment as well reauthorize a Build America Bonds-type program. These requests were not included in the final version of the bill, so few of the historic workhorses of U.S. infrastructure were represented at Monday’s White House signing ceremony. Instead, the muni market chugged along, out of the limelight, quietly bringing another $3 billion of new infrastructure projects to market, offering $15 billion of outstanding bonds for sale, and processing more than 33,000 retail and institutional trades on the day.

Senior Living as Essential Public Infrastructure

At HJ Sims, we view senior housing as essential public purpose infrastructure and have been among the most active in financing non-profit facilities and communities.  So far this year, there have been more than 90 senior living financing projects with combined par value over $6 billion. Last week, we brought two to market. We underwrote $19.7 million of BBB rated Massachusetts Development Finance Agency bonds for Loomis Communities in Amherst and South Hadley, pricing the 30-year term bonds for settlement in October of 2022 with a 4.00% coupon to yield 3.20%.  In addition, we had a $21.1 million BB+ rated financing for Wesley Woods of Newman, Georgia. Bonds were issued through the Coweta County Residential Care Facilities for the Elderly Authority and structured with five terms, including a 2046 maturity that we priced with a coupon of 4.00% to yield 3.05%. 

Also Built by Bonds Last Week

During the Veterans holiday-shortened week, the municipal slate exceeded $11 billon of par. Also on the senior living calendar was a $67 million BBB-minus rated revenue and refunding deal for Indiana’s Greencroft Obligated Group that had a 2037 final maturity for settlement in August of 2023 priced at 4.00% to yield 3.35%, and the $35.4 million BB+ rated refunding for Boulder, Colorado’s Frasier Meadows Retirement Community which had 2048 term bonds priced with a 4.00% coupon to yield 3.51%. In other high yield sectors, the San Antonio Education Facilities Corporation had a $23.5 million non-rated sale for Hallmark University with 30-year bonds priced at 5.00% to yield 4.52%, and the Citizens Memorial Hospital District in Missouri issued $9.3 million of non-rated refunding bonds structured with a 2032 final maturity that priced at 3.375% to yield 3.44%. 

Charter School Bonds: Increasingly Popular Investments for Tax-Exempt Income

There were seven transactions in the increasingly popular charter school sector last week. Arizona’s American Leadership Academy sold $207 million of non-rated refunding bonds that included a 2057 maturity priced at 4.00% to yield 3.69% for settlement next March. The Brilla Schools Network in the Bronx had a $14.5 million BB+ rated deal with 30-year bonds priced at 4.00% to yield 2.73%.  Brighter Choice Elementary Charter Schools in Albany brought $12.1 million of BB+ rated refunding bonds; the final maturity in 2037 was priced at 4.00% to yield 2.35%. Paladin Career and Technical High School in Blaine, Minnesota borrowed $8.2 million in a non-rated transaction that came with a 2056 term bond priced at 4.00% to yield 3.875%.  And the Wisconsin Public Finance Authority had three deals in the market: a $29.5 million BBB-minus rated financing for Triad Education Services in Cary, North Carolina that had 2.85% maximum yield bonds in 40 years priced with a 4.00% coupon; a $13 million non-rated bond issue for Alamance Community School in Graham, North Carolina that had a 35-year term bond priced with a 5.00% coupon to yield 4.71%; and an $8.5 million non-rated sale for Coral Academy of Science in Reno, Nevada  that came with a 5-year term bond priced at par to yield 4.20%.

HJ Sims in the Market This Week with Two Investment Grade Senior Living Financings

This week, investors will see as much as $16 billion of municipal sales. HJ Sims is bringing two additional senior living financings. We have a $51.9 million BBB-minus rated revenue refunding for Good Shepherd Village at Endwell. Bonds are being issued through the Local Development Corporation of Broome County, New York to finance existing bank-owned bonds and provide $15 million of new money for community capital improvements on the 120-acre campus. In addition, we are underwriting a $32.5 million revenue and refunding issue for BBB rated Plantation Village in Wilmington, North Carolina. Bonds will fund expansion projects on its 56-acre campus.

This Week’s Municipal Calendar

Among other senior living transactions, Otterbein Homes is in the market with a $45.7 million A-rated refunding and Aberdeen Ridge in Colorado Springs has a $143 million non-rated start-up financing. The calendar includes two social bond issues, two green bonds, two sustainability bonds, at least one delayed delivery deal, and four college deals being sold in the corporate bond market. Taxable sales are expected to total $4 billion, including $1.2 billion for Grand Canyon University in Phoenix. The Wisconsin Health and Educational Finance Authority has a $38.8 million non-rated sale planned for Hope Christian Schools, and the Wisconsin Public Finance Authority will issue $27.7 million of BB rated refunding bonds for The Methodist University in Fayetteville, North Carolina. There are six more charter school transactions scheduled for Urban Academy of Greater Pittsburgh, Virtus Academy of South Carolina, Imagine School at Broward, Ivy Academia, Beehive Science & Technology Academy, and College Achieve Charter Schools.

Market Movers Ahead of Thanksgiving

Markets will quiet next week ahead of the Thanksgiving holiday but in the meantime, investors digest the latest jobless claims, consumer sentiment, retail sales, inflation, industrial production, and housing starts data. Stock, bond and commodity traders are tracking new COVID-19 waves, court cases on mandates, volatility in the cryptocurrency sector, stimulus debate on Capitol Hill, tensions in Taiwan, Poland and Ukraine, earnings reports from the largest U.S. retailers, and any news related to the status of Fed Chair Powell in the presidential nomination process. At the close on Friday, the Dow at 36,100 and Nasdaq at 15,860 were down slightly on the week, the S&P 500 at 4,632 and Russell 2000 at 2,411 were down more than 1%. Domestic equity funds had net withdrawals of $2.7 billion in a twelfth straight week of outflows. Oil at $80.79 a barrel was a notch lower while gold at $1,864 ended 2.6% higher and silver at $25.31 was up nearly 5%.

Bond Yields and Fund Flows

Treasuries have been weaker across the board: the 2- and 10-year yields rose 11 basis points in the last week alone and stood Friday at 0.51% and 1.56%, respectively. The 30-year yields was 5 basis points higher at 1.93%. Three-year and 30-year auctions were poorly received against the backdrop of rising yields and a higher than expected increase in inflation. Treasury funds nevertheless saw $1.53 billion of inflows. Ten-year Baa corporate bond benchmark yields at 3.21% were up 9 basis points last week.  Investment grade corporate bond funds took in a net of $2.53 billion and high yield corporate funds added $2.57 billion. Munis, however, diverged from their taxable counterparts. Prices were up last week and yields fell. The 10- and 30-year year AAA general obligation benchmark yields closed 5 basis points lower at 1.08% and 1.53% respectively. Investor demand for tax-exempts remained strong.  Municipal bond funds and exchange traded funds have seen 36 straight weeks of inflows; last week high yield muni funds alone took in $1.2 billion, the second largest amount on record for low investment grade, below investment grade and non-rated bonds that finance charter schools, toll roads, life plan communities, colleges, dormitories, and industrial development projects all across America.

For more information on the municipal bond market, as well as on investing in long term care, please contact your HJ Sims representative.

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