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I don’t evaluate municipal credits on the basis of hope; I am looking for security. I’m not simply looking for promises; I am looking for collateral, the more the better.

My Daily Travels

November 4th, 2016 by Kurt L. Smith
  • Working in the municipal markets on a daily basis is like having the opportunity to travel the country each and every day. I visit California and Texas most often as they are big states with numerous debt issuers. But by the end of each day I have generally made a wide swing across many states and then tomorrow I will get up and do it all again.

    Change doesn’t occur rapidly across the country but change does occur. Growing areas, primarily the biggest cities along the east and west coasts and in Texas, continue to grow. Everywhere else, and that’s a lot of everywhere else, seems to be doing a lot of nothing.

    If municipalities were stocks, odds are you would only buy the top five or so. Think of them as the Apple, Amazon, Facebook or Google of municipalities. That’s how few areas of the country are growing. Not that growth solves all problems, but lack of growth, particularly if you were counting on it, can add unforeseen risk to the situation.

    Thankfully, municipalities are not stocks. Our threshold for investing in them is not growth nor are they going to pay us extra income if the project is a blockbuster. Our threshold is that we are paid per the terms of the bond. We look for protection and as much of it as we can get.

    In my daily virtual travels across the country as well as my actual travels, I don’t have to travel far to find the unevenness of growth (and deterioration) across our country. Industries that were once the backbone of particular communities may no longer exist. This is not just the case with Rust Belt communities or in New England, but also high-tech communities such as in the Sacramento area that suffered immensely when Apple Computer and other high tech firms came and went in recent years.

    Change happens and assumptions can change, sometimes in a hurry. For this reason I have long told you I don’t trust municipalities any further than I can throw them. I don’t evaluate municipal credits on the basis of hope; I am looking for security. I’m not simply looking for promises; I am looking for collateral, the more the better.

    The municipal bond industry has been blessed with a fairly robust track record of almost non-existent defaults. Together with a preponderance of municipal bond insurance, one would think municipal bonds are a recipe for ultra-safe investing.

    Optimism is sky-high, or perhaps that is merely complacency. How else to explain historic high prices in both stock and bond prices after over thirty years of trading higher. Face it, odds are you know no other reality!

    The long-term uptrend in prices has also reinforced the dominance of yield over safety. Risk? What risk? And in a world of low yields, now for many years past and the prospect for many years in the future, the risks must be low to engender such high prices. BUNK!

    The problems that face our country are largely the problems that face municipalities. The uneven distribution of jobs along with the uneven distribution of incomes. The aging of America and how we address retirement, pensions and Social Security. The lack of a plan to replace an aging infrastructure.

    These are among the biggest issues facing our nation. Leadership on a national level has failed to even acknowledge many problems, let alone address them or formulate a workable plan. Municipalities waiting for leadership from Washington are failing their constituents here at home.

    While I am concerned for my country, I am strengthened by the knowledge that municipal entities are as different as they are numerous. Sure some entities are clueless, corrupt, lack leadership, or are near bankruptcy and these entities represent what does not work in America. But thankfully there are hundreds of entities that are well managed, have a plan and a track record of executing it. These are the entities that renew my faith in government. These entities have achieved results greater than any person or any company can achieve. These entities have achieved success and pay the debt service on their bonds like clockwork.

    As we prepare to inaugurate a new President, I believe it is important to remember that government is necessary. We have seen the democratization of our government with the tremendous growth in thousands of municipal government since the 1940s.  But the world has changed and it continues to change.  Some municipal entities do not work well and some are better than others just like some bonds are better than others. We don’t have to insure that all municipal bonds work — only the ones we chose to invest in.

    Needville Independent School District, Texas Refunding

    Moody’s Aaa (A1 Under) Fitch AAA (AA- Under)

    Permanent School Fund Guaranteed

    Due 8/15 Dated 11/1/16 Maturity: 8/15/2035

    Sale Amount: $32,675,000

    YEAR MATURITY COUPON YTM*
    1 2017 2.00% 0.85%
    3 2019 4.00% 1.13%
    4 2020 5.00% 1.25%
    5 2021 5.00% 1.38%
    6 2022 5.00% 1.51%
    7 2023 5.00% 1.64%
    8 2024 5.00% 1.80%
    9 2025 5.00% 1.94%
    10 2026 5.00% 2.06%
    11 2027** 5.00% 2.16%
    12 2028** 5.00% 2.26%
    13 2029** 5.00% 2.36%
    14 2030** 5.00% 2.43%
    15 2031** 4.00% 2.71%
    16 2032** 4.00% 2.77%
    17 2033** 4.00% 2.83%
    18 2034** 3.00% 3.13%
    19 2035** 3.00% 3.14%

      *Yield to Worst (Call or Maturity) **Par Call: 8/15/2026

    Source: Bloomberg

    This is an example of a new issue priced the week of 10/31/16

    Prices, yields and availability subject to change

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