"Success of California tollway tender leaves little remaining to refund" by Keeley Webster, The Bond Buyer.
Los Angeles-based Bel Air Investment Advisors is among investors who are interested in buying the shrinking volume of tax exempt debt, said Craig Brothers, the firm’s senior portfolio manager and co-head of fixed income.
In addition to the mountain of debt taken out through advance refundings in 2020, Brothers said that there is traditionally a dearth of new muni bond issuance from Thanksgiving through the first two weeks of every year.
“The muni market is suffering from a lack of supply, because taxables are crowding out tax-exempt,” Brothers said. “We have big inflows occurring, and then a lack of supply.”
The lack of supply has made munis “historically rich, and our market is shrinking every year, because we have bonds rolling off and the net issuance has been shrinking,” Brothers said.
Bel Air did not hold any of the existing F-ECTA debt, but considered the new deal before passing because the maturities offered didn’t match its current sweet spot. Bel Air is currently targeting shorter maturities, and the first year on the F-ECTA deal was 2026, which is right at five years, Brothers said.
“We passed on the deal, not on the credit,” Brothers said. “The structure wasn’t great for us, because we are bearish on the market.”
Bel Air is comfortable buying taxable muni debt, Brothers said. It just doesn’t care for all the competition coming from what are typically not muni buyers.
Risk-adjusted muni taxable debt is more attractive than corporate, Brothers said, and it’s an arena the firm knows well. But competition from European buyers has driven up the prices on muni taxable debt.
“There are too many buyers,” Brothers said. “The U.S. is the only place you can find positive yield across every product, and taxable munis are the place where non-U.S., and non muni buyers come into the market.”
Issuers are finding they can structure a deal that is longer weighted because investors in Europe are looking for deals with longer maturities, he said.
“We are fine seeing more taxable muni issuance,” Brothers said. “We don’t like that it’s being crowded out by non-traditional muni buyers, who are making it more expensive.”
Even so, he would like to the federal government overturn the restriction on tax exempt advance refundings.
“It would be better for everyone in the market if they decide to rescind the 2017 tax act,” Brothers said.
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