The financial markets have experienced high levels of volatility these past few weeks due to the uncertainty and impacts surrounding the coronavirus (COVID-19) and its potential implications for the global economy. As municipal issuers begin to assess how to proceed with scheduled sales or planning for debt issuance in the near term, Ehlers offers the following general guidance:
Consider the timing of the sale and need for capital
If funds are not required in the near term for payments of project costs or if other funds are available to pay for initial project expenses, consider if accessing the capital markets at the present time is appropriate or if a delay is warranted. Issuers should make sure an official declaration of intent to reimburse is executed; or, a reimbursement resolution or initial bond authorization has been adopted by the governing body to allow for reimbursement of prior expenditures from tax-exempt bond proceeds. Sales can be rescheduled when the market settles down, if that is determined to be the proper course of action.
If delaying a sale presents significant cash flow concerns, work with your municipal advisor to revisit initial planning estimates and re-examine the fiscal impact of new money financings or the estimated savings for refunding issues based on market conditions. Additionally, the finance plan can be altered to include a form of interim financing, with permanent financing executed later.
Evaluating scheduled competitive sales
Although canceling or postponing a sale is usually the preferred alternative, should your competitive sale proceed as originally planned and the bids received are not favorable, rejecting those bids is always an option. Given current circumstances, underwriters are expecting that some bids will be rejected. We do not anticipate there will be any ramifications if these deals resurface in coming weeks. In fact, most sales scheduled to sell last Thursday, March 12th were postponed – a trend that may continue into early this week.
If a rating has already been obtained for the issue, do not feel pressured to access the market immediately. Ratings are generally still valid for up to 90 days. However, rating analysts may request a brief update prior to the revised sale date to determine if any material changes have occurred regarding the issuer’s financial condition and certain sale details in previously published rating reports may require revisions.
Strategies for delayed or pending sales
There are specific statutory requirements that need to be considered in some instances but exploring alternatives to competitive sales in consultation with your municipal advisor may be in order. Negotiated sales, direct or private placements with traditional bank lenders, or loan programs administered by other governmental agencies are always viable options as these sources of capital are not as heavily impacted by disruptive market volatility.
Adopting a parameters resolution when initially authorizing a debt transaction can provide a mechanism to react to rapidly changing market conditions. A parameters resolution delegates execution authority to a small group that is typically referred to as a “pricing committee”. The resolution establishes certain financial metrics that must be satisfied for a sale to be awarded. Specific parameters for the final true interest cost (TIC), not-to-exceed principal amount, maximum/minimum purchase price, or present value savings targets for refundings are examples of some of the parameters that must be satisfied for an award to occur. Your municipal advisor and bond counsel can assist with identifying and quantifying relevant parameters for your respective debt issue(s). Since the bond sale can be awarded without subsequent approval from the full governing body, provided the parameters are met, it provides more flexibility to schedule sales and target dates where there is less competition from other scheduled bond sales and temper the potential impacts of market volatility.
Putting it all into perspective
The news of late has been unsettling and the volatility in the capital markets should not be ignored, but it is worth noting that yields in the municipal bond market have been very favorable over the past few weeks, even after a general rise in tax-exempt yields the prior week. The Bond Buyer Index (BBI), which shows the average yields on a group of municipal bonds that mature in 20 years and have an average rating equivalent to Moody’s Aa2 and S&P’s AA, increased 26 basis points (1 basis point equals 0.01%) from 2.31% to 2.57% from March 6, 2020 to March 13, 2020. However, yields are still below the previous lows from the past ten years which occurred in 2016. Other daily measures of bond yields (e.g, the Bloomberg BVAL scale and the Refinitiv MMD scale), showed that muni bond yields decreased for much of the last two weeks, but then increased sharply late last week. Please consult your Ehlers municipal advisor to evaluate your needs going forward to determine the best method to access the capital markets. We are maintaining regular contact with our public finance partners to monitor capital financing alternatives on behalf of our clients.
On the front lines
Much of the personnel at the local units of government and school districts we are privileged to work with are dealing with the coronavirus on the front lines to keep our schools, public facilities, and communities safe. There are significant resources and time being devoted to deal with this public health emergency. Thank you for your ongoing efforts. We appreciate the steps you are taking for the betterment and safety of our communities.
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