The Biggest Names in Municipals Reflect on an Unprecedented Year

(Bloomberg) -- The municipal bond market’s top bankers say they’re worried about the continued impact of the pandemic next year, potential hiccups with vaccine distribution, a lack of federal aid to state and local governments and possible waning demand from investors.

Bloomberg News surveyed the heads of public finance at the market’s top investment banks about how they fared in 2020 and their outlook for 2021. They say the $3.9 trillion market’s resilience was on full display earlier this year when municipals experienced a record-setting sell-off and a quick rebound that has state and local debt returning 5%, heading for the seventh straight year of gains.

John Heppolette, Citigroup Inc.’s head of municipal markets and finance, said “the only thing more surprising than the most dramatic selloff in muni bond market history was the speed of the recovery.”

Here’s what the group had to say:

What surprised you most in 2020?

The speed and forcefulness of the municipal market’s recovery -- and the creation of the Federal Reserve’s Municipal Liquidity Facility -- stood out as the most unexpected parts of this year, according to head bankers at RBC, Stifel and Citigroup.

“It was as if 2008 and 2009 were combined into a six-month period,” said Mark Maroney, RBC Capital Markets, co-head of global spread products.

“There were many surprises in the markets this year but the immediate and comprehensive Fed support directly to risk markets (in both the municipal and corporate markets) with the support of Congress was a surprising outcome,” said Jamison Feheley, head of public finance banking at JPMorgan.

How do you think the coronavirus pandemic will change the municipal market?

Charles Peck, head of public finance at Wells Fargo and Citi’s Heppolette said that the pandemic hastened the muni market’s transition away from a focus mostly on rates, with investors more and more looking at credit analysis and researching the fundamentals of individual governments and public issuers.

The virus changed the way the market thinks about municipal credits with investors more focused on “kicking the tires today as compared to pre-Covid,” Peck said.

“Covid has further affirmed our 12-year transition from a Rates market to a Credit market,” Heppolette said. “Munis were once homogenized by strong credits and monoline insurance and only a small niche of high yield. Our market now has the full credit spectrum with dynamic fundamentals and technicals in a variety of sectors and names. It is much more exciting than ever before.”

What are you pitching to state and local governments that have seen budget pressures?

States and city budgets have been hit as the pandemic cut into two major sources of revenue -- income- and sales-tax collections -- while the coronavirus drove the economy into a steep downturn.

“We are pitching financings that reduce overall costs of funds, relieve payment burdens alongside carve-outs and extensions to increase budget flexibility,” said Betsy Kiehn, head of municipal capital markets at Stifel Financial Corp. “Many issuers were more cautious entering the market than one would have expected given the favorable rate environment.”

After the market rebound, municipal benchmark yields hovered near record lows for much of the year spurring a slew of refinancings by state and local governments. Such deals accounted for 37% of all sales this year.

Gary Hall, head of municipal finance at Siebert Williams Shank & Co., said that his group has been working with issuers on “mitigating budgetary pressures” by facilitating restructuring transactions or deferring annual pension or OPEB contributions.

That trend should continue next year with issuers being “opportunistic toward refinancings,” said Ted Sobel, head of public finance at Ramirez & Co. “I think issuers will likely act cautiously on new money.”

What worries you most about next year?

“I have a concern that aid to state and local governments is not enough and an austerity midst sets in and puts off critical infrastructure investment,” said Ramirez’s Sobel.

“Anyone that knows anything about States/City/County government and school districts know that they all operate on really tight budgets,” said Gavin Murrey, head of public finance at Raymond James Financial Inc. “It is hard for them to cut their way out of crises like this, because they still have to keep schools open, keep the roads in good shape.”

Brian Wynne, head of public finance at Morgan Stanley, is worried about “how long it will take for issuers to fully recover.”

Bob Spangler, head of municipal finance at RBC, shares a similar view. A slower than expected recovery, a shift in buying patterns and a “long lasting recession for local small businesses that greatly affects sales tax receipts and will eventually depress property taxes,” he said. “That combination will greatly reduce our clients’ ability to fund needed new infrastructure projects.”

Peck at Wells Fargo said that if credit spreads continue to dislocate he is concerned that there aren’t enough high yield buyers of size to support major infrastructure projects. “Can we lean on other investor bases outside of Munis to fill in the gaps?” he asked.

What is the next big thing in muni finance?

Bankers at Citigroup, Morgan Stanley, Wells Fargo and Raymond James all mentioned environmental, social and governance emphasis as the newest trend for the municipal market.

“The focus on ESG factors is going to continue to grow in importance and will take on more and more ‘social’ considerations versus what had historically been mostly ‘green’ considerations,” said Wells Fargo’s Peck, adding that the pandemic has disproportionately impacted poorer communities.

Citi’s Heppolette said that he expects international investor participation to “increase significantly, particularly with a focus on ESG principles.”

What are you most looking forward to in 2021?

Like much of the world, almost every banker said they’re looking forward to a return to normalcy next year after a vaccine is widely distributed. They miss seeing their colleagues in person and meeting with clients on business trips.

“I’m looking forward to having 2020 in the rear-view mirror,” said Sobel. “I don’t know how an answer by anyone else can be any different.”

©2020 Bloomberg L.P.