Risk Rises in Municipal Bonds
22 January 2019 - 3:29AM
Dow Jones News
By Gunjan Banerji
When The Spires at Berry College sought to borrow money to build
retirement homes recently, the Georgia-based senior-living center
sold municipal bonds.
Even though investors typically consider retirement homes
riskier borrowers, and these bonds came without a credit rating,
there was enough investor demand that the project landed interest
rates below officials' expectations.
There has been a surge in sales from the riskiest parts of the
$3.9 trillion market for state and local debt. Retirement
communities like The Spires, charter schools and student-housing
projects were among sectors in 2018 that issued a greater share of
municipal bonds than at any time since the financial crisis.
That increase came even as bond yields, which rise as bond
prices fall, climbed for much of past year. Overall municipal-bond
issuance fell about 25% in 2018 from the prior year to the lowest
level since 2013, according to data from the Securities Industry
and Financial Markets Association. Money flowing into municipal
mutual- and exchange-traded funds also slowed.
The riskiest sectors in the municipal bond market -- including
junk and unrated borrowers in categories that tend to have the
highest rates of default or impairment -- made up about 20% of
total bond sales in 2018, up from 17.4% the prior year, according
to Municipal Market Analytics data. That was the most since 2008,
when they made up 24% of issuance.
Municipal investors in December even welcomed Detroit's first
stand-alone bond sale since the city's bankruptcy. Demand was so
robust that yields on the junk-rated deal came in below city
leaders' expectations, they said. They were still high enough to
lure investors.
"The yields got pretty attractive," said Daniel Solender,
director of municipal bonds at Lord Abbett & Co. "There was a
good range of opportunity available."
State and local debt remains historically safe for investors,
with few defaults, because bonds tend to be backed by issuers'
taxing power or revenue from essential services like water or
power. Many retirement communities, charter schools and hospitals
can use the market to sell tax-exempt debt because they play
important community roles, but they aren't government entities --
and analysts said a downturn could cause financial difficulties for
some.
About 4% of continuing-care retirement-community bonds were in
default as of Jan. 1, compared with the 1.8% of the broader market,
according to MMA. Excluding Puerto Rico, which is in restructuring
talks with creditors, 0.3% of municipal bonds were in default.
Junk and unrated municipal issuers continued to borrow in
December, traders say, even as market turmoil halted bond sales by
junk-rated corporations for 40 days through Jan. 10 -- the longest
stretch in more than two decades.
Still, there was enough demand for higher-yielding debt that
Adam Heffernan, a consultant who works with The Spires, said the
retirement community's final bonds priced with lower yields than
expected, by at least a quarter of a percentage point for some bond
maturities.
High-yield municipal bonds posted a 4.8% total return in 2018,
counting price changes and interest payments, above the broader
market's 1.3% return, according to Bloomberg Barclays data. Money
poured into high-yield munis even as investors pulled money from
the sector overall, Lipper data show.
Nicholos Venditti, a portfolio manager overseeing municipals at
Thornburg Investment Management, said he had largely avoided
lower-rated and riskier bonds. But at the end of 2018, as equity
markets roiled and investors fled high-yield corporates, at least
one deal looked attractive for him: a bond issuance linked to
natural gas.
"It's not a sector that we held prior to late November or early
December, Mr. Venditti said. "When we saw the market for those
change, we did take on a little bit of a position."
Issuance of these bonds more than quintupled in 2018 from the
year prior, hitting at least a nine-year high, the MMA data
shows.
Some worry the riskiest bonds could be hardest hit if concerns
about slowing economic growth, which have rattled markets lately,
and stock turbulence rise.
Adding to some investors' worries is the concentration of the
high-yield municipal market. Nuveen and Invesco Ltd., which
recently acquired Oppenheimer Funds Inc., hold at least 40% of
assets in municipal mutual and exchange-traded funds classified as
high-yield by Morningstar Direct, according to a Wall Street
Journal analysis of the data.
"Imagine a situation in which high yield hiccups....they're both
selling the same things at the same time," said Mr. Venditti.
"Where is that stuff going to go?"
Write to Gunjan Banerji at Gunjan.Banerji@wsj.com
(END) Dow Jones Newswires
January 21, 2019 11:14 ET (16:14 GMT)
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