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With Uncertainty Driving Illiquidity, Be Proactive and Communicate with Investors
March 11, 2020
For more than a year now, issuers in the muni bond market have experienced a steady decline in interest rates and weekly reports of cash pouring into the market. Rates seemed to go lower every day, and changes to the federal tax code set expectations that investor demand would be steady for the foreseeable future. When 10-year rates sunk below 1% less than two weeks ago, market professionals were describing conditions as “free money” for issuers.
The period of issuer bliss has quickly been interrupted. Last week, Lipper reported the first outflow of investor cash from the muni market in over a year, breaking a string of 60 consecutive weeks of inflows. Trouble in the corporate bond market spilled into munis. While credit spreads had already begun to widen, yields on tax-exempt bonds have sharply corrected to higher levels this week. The financial press has reported that some pricings have been postponed and others downsized.
The driver, of course, is the coronavirus, with investors in all markets concerned about their investments in businesses and economies. The Wall Street Journal wrote a story on the potential impact for certain muni issuers.
I’m not a lawyer and I’m not offering legal advice in this blog. But when the market’s liquidity has been interrupted, as seems to have occurred this week, my instinct as a former issuer would be to communicate proactively with my investors. It’s good customer service, and good investor relations. Here are some thoughts:
- All issuers should consult with bond counsel on the legal requirements around disclosure driven by the effects of the coronavirus. These requirements will be different depending on whether you are in an underwriting period of issuing bonds or not;
- If you’re not in the market, even if there are no 15c2-12 requirements to disclose right now, it’s good investor relations in our opinion to communicate with investors. Let them know how you may be impacted, what you’re doing, what you’re measuring, and give them confidence that they will hear from you as this period of uncertainty extends;
- All businesses in the U.S. have quickly become remote because of the coronavirus, making electronic channels of communication central to efficient operations. Investor conference calls or roadshows are good channels to use to update the market, especially as in-person investor meetings and conferences are canceled;
- This period will place an emphasis on issuer-to-investor connectivity. If investors continue to migrate to corporate bonds and dividend yielding stocks over munis, outflows will continue to be negative, which will force investors to be much more selective of the bonds they are willing to buy. Easy access to issuer data in this environment will become more valuable to investors, so issuers should look for opportunities to share more timely information on their investor websites or on EMMA; and
- This period of remote communication may become the new normal, especially if the coronavirus’s impact on the bond market continues for some length of time. Issuers who are quick to adapt to using electronic channels like websites for sharing data, as well as conference calls and roadshows, will be preferred by investors.
Our view at BondLink is that over the long-term, capital will flow more efficiently to issuers who are transparent, communicate with investors, and make their data easier to access using electronic channels.
This becomes much more important in the short-term whenever the market becomes illiquid and investors are under stress as they try to assess the impact of the coronavirus on their muni investments. What would I do as an issuer? I would look for ways to minimize that stress and reduce the uncertainty: more transparency and more communication.