HJ Sims Market Commentary: Forward Settlements

by Gayl Mileszko

Among those most immediately and severely impacted by the pandemic were the cruise lines and travel agents. Citizens of the world will never forget the plight of the MS Zaandam begging to dock at any port, the passengers and crew of the Diamond Princess quarantined for weeks off the coast of Japan with 712 cases. The no-sail order was in place for 15 months, leading to nearly $25 billion of losses in just 12 months for the cruise lines alone. Royal Caribbean, Norwegian and Carnival went to the capital markets to raise over $40 billion to literally keep their fleet and crews afloat. They got access but it was costly, with rates as high as 12.25%

The first cruise ship to board passengers at a U.S. port in 15 months sailed Saturday June 26th from Florida’s Port Everglades on a seven-night voyage to Mexico and the Bahamas. The Celebrity Edge, christened in 2018, sailed with 1,200 guests on board and Captain Kate McCue at the helm. She is the first and only American female captain of a major cruise vessel. Her employer, Royal Caribbean, along with the rest of the industry, are heavily reliant on the travel agent community to fill cabins. To help keep them in business during the lockdowns, Royal Caribbean initiated a “Pay it forward” program that made $40 million available to agents seeking three-year interest-free loans of up to $250,000 to literally tide them over.

Forward Settlements

Paying it forward has meant something different in the municipal bond market during these past 17 months. Nonprofit borrowers have reached for every lifeline, dipping into reserves, slashing expenses, applying for loans and grants, and trying every wing-and-a-prayer method to generate revenue. Frustrated by the prohibition on tax-exempt advance refundings, many have worked with creative investment bankers to refinance higher coupon debt not currently callable. A current refunding is a transaction in which the outstanding bonds to be refunded can be called and paid off within 90 days. To achieve debt service savings in cases where the call date is much further out, the HJS team has presented our clients with options for tenders, taxable refinancings, and forward delivery bonds.

In the case of forward deliveries, we rely upon the close relationships that our veteran sales executives maintain with major buyers, enabling us to structure bonds with prevailing fixed rates for settlement or delivery at a future date — for example, eleven months from pricing. The process requires that sophisticated investors sign a delayed delivery investment agreement acknowledging the conditions and risks of the purchase. Buyers seek a premium in exchange for assuming these risks. Our analysts and underwriters closely monitor all the forward deals in the market. In 2021, so far, we have seen 56 financings with future settlements averaging 213 days from the date of sale. In the case of the Aa3/A+ rated University of Arizona, they had a $23.1 million Aa3/A+ rated series dated January 15, 2020 that settled 483 days later on May 12, 2021 and priced only 71 basis points over the top-rated general obligation bond.

Forward Deals this Year

Most of the forward deals this year have come from major issuers such as the States of California, Connecticut, Ohio and Wisconsin. Some are private placements but the majority are public offerings. Most are refundings with ratings in the range of A but some such as Clarkson University are rated Baa1, others like the Government of Guam are rated Ba1, and still others like the Puerto Rico Aqueduct and Sewer Authority and Lutheran Services for Aging are non-rated. Borrowers have come from all sectors of the market, including Providence College, the North Carolina Turnpike Authority, Phoenix Children’s Hospital, Kern Valley State Prison, and New Jersey’s Union Township Board of Education.

Municipal Bonds Last Week

Last week saw three forward delivery deals, including one for BBB-minus rated St. Luke’s Hospital of Duluth. Bonds were issued through the local economic development authority for settlement in March of 2022. The 2039 maturity was structured with a coupon of 4.00% to yield 2.41%, or 118 basis points over the top-rated muni benchmark 6/15/39. In the high yield sector, the Military Installation Development Authority sold $260 million of non-rated tax allocation and hotel tax revenue bonds including a 2052 maturity priced at 4.00% to yield 3.65%. The City of Houston brought a $289.4 million B-minus rated airport bond for United Airlines terminal improvement projects due in 2041 and subject to the alternative minimum tax with 4.00% coupons priced to yield 2.875%.

Current Municipal Calendar

This week’s municipal calendar is expected to total $5 billion. Among the forward deals is a $113.2 million AA-minus rated refunding for the City of Akron and its community learning center, and a $10.9 million AA rated refunding for Rockland County, New York. In the high yield sector, the California Community Improvement Authority is bringing an $80.6 million non-rated essential housing social bond issue for Waterscape Apartments. The Abilene Convention Center Hotel Development Corporation has a $42.9 million revenue bond issue with a BBB-minus series and a non-rated series. The Philadelphia Authority for Industrial Development plans a $25.7 million BB rated sale for the Philadelphia Electrical and Technology Charter School. And the Illinois Finance Authority has a $24 million BBB-minus rated issue for Christian Horizons.

Current Market Conditions

The context for the bond market going into the long weekend is that investors, laden with cash, are continuing to allocate significant sums to mutual and exchange traded funds. During the week ended August 25, muni funds recorded a 25th straight week of net inflows and took in $1.87 billion, with $524 million targeted for high yield funds. Taxable bond funds attracted $6.7 billion, with $532 million flowing into high yield corporate bond funds. Traders are digesting field reports in the wake of Hurricane Ida, which shut down 95% of oil and gas production in the gulf on the sixteenth anniversary of Katrina. Americans everywhere have followed the withdrawal of troops and civilians from Afghanistan. The last official week of summer is darkened by COVID hospitalizations and rampant inflation. Consumer confidence is at a six-month low and all eyes will be on Friday’s jobs report.

On this, the last day of August, the major stock indices are all up on the month: the Dow at 35,360 is 1.2% higher, the S&P 500 at 4,522 is up 2.9%, the Nasdaq at 15,259 has risen 4%, and the Russell 2000 at 2,273 is up 2.1%.  Oil prices have fallen more than 7% to $68.52. Gold prices are flat at $1,815, silver is down 6% to $23.94 an ounce, and Bitcoin at $47,382 has gained 14.7%.  The 2-year Treasury yield at 0.2% is 2 basis points higher in August. The 10-year yield has increased by 8 basis points to 1.30%. The 30-year yield is up 4 basis points to 1.93%.  The 10-year Baa corporate bond yield is 3 basis points higher at 2.90%.  Most every bond index is down on the month with the exception of high yield corporates. Municipal returns are all negative. Tax-exempts are hard to come by.  Bloomberg half-jokingly reported that the loneliest place on Wall Street is the municipal bond desk, where the par amount of bonds traded is at a 22-year low.  The 2-year AAA general obligation benchmark at 0.11% is 5 basis points higher this month. The 10-year yield is up 10 basis points to 0.92%. The 30-year yield has increased 13 basis points to 1.52%.

Looking Forward to September

September promises to be an eventful month. There is much rescue and repair work to do in the wake of Ida. There are Americans struggling to return home from Kabul. Schoolchildren head back to classrooms. The nation marks the 20th anniversary of 9/11. The Congress returns to tackle infrastructure, reconciliation, the debt ceiling, and government funding. But first we pause. Markets will be closed on Monday as America takes a long weekend to celebrate the many contributions made by its workforce of 152.6 million to the strength and prosperity of our nation. We are also very mindful of the 6.5 million who are actively seeking work and the employers who are actively looking to fill 10.1 million job openings. We at HJ Sims wish all a safe and happy Labor Day.

We encourage you to reach out to your HJ Sims representative for guidance in reviewing your portfolio.

Exclusive Opportunities For Our Clients