Looking for more information on investor relations, muni market trends and BondLink? You’ve come to the right place.We expect financial transparency and investor engagement to play more important roles for issuers in 2023.
When pressure on the muni bond market’s secondary market eases and the primary market re-opens for new-issue bonds, issuers in every sector will be facing a stark new reality: significantly higher interest rates, wider credit spreads, and credit reviews by rating agencies looming on the horizon.
Transparency, access to information, and the ability to communicate with key officials and staff are all paramount to manage a bond program as efficiently as possible in this new environment. With that in mind, issuers should take advantage of these three tools:
Dedicated Investor Websites: With all market professionals working remotely for the foreseeable future, consistently providing up-to-date interim financial information like monthly revenue collections or budget updates via an investor website is really critical. It will reduce uncertainty for investors in both the primary and secondary markets, and provide much-needed confidence that a steady stream of current data will be easily accessible in the future. These websites should be free and open to institutional investors as well as non-traditional and retail buyers. Disclosing your information once in a single location will also decrease administrative stress on your team, allowing you to focus on more strategic initiatives throughout the issuing process.
Investor Calls & Virtual Roadshows: The more progressive issuers in the muni market will follow best practices undertaken by corporate leaders over the last few weeks by speaking to investors as soon as data on the coronavirus’ credit impact starts to become available. This can include live conference calls or recorded, virtual roadshows – both are valued channels of communication for bond investors. An issuer can conduct calls on a regular basis – say, monthly or quarterly with key staff – which is another way of reducing the uncertainty gaps for the market. I also think that, in this environment, it would be very beneficial to include top officials like governors, treasurers, and mayors in these communications. Adding the support of these major officials has the power to reassure investors and signal they’re a top priority.
Streamlined Distribution Tools: Updates to the MSRB’s EMMA website are critical, and under certain circumstances, legally required. All issuers should work with their counsel to identify required updates to be made to EMMA while also looking for opportunities to make voluntary filings to EMMA as often as possible. To do this seamlessly, use technology that allows simultaneous posting of documents to an investor website as well as the compliance repository.
The lowest cost of capital is always going to flow to those issuers who provide current data to investors. In a challenging credit environment, this is going to be even more true. Using the tools and channels outlined above to share data will help ameliorate the pain of higher rates and wider spreads.
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:
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.
Two common traits of the municipal bond market are its size and fragmentation. It also maintains a high volume of muni bond selling in the new-issue market, often called the primary market. The last five years of market data show that every week, on average, there are more than 200 new bond sales representing more than $7 billion in par amount of bonds – more than $1 billion a day.
Keeping up with this volume is increasingly difficult for analysts, who usually cover dozens of credits. This is why, for years, bond investors have recommended to issuers that they provide longer notice for an upcoming bond sale.
Generally, issuers provide notice of a bond sale with the publication of the preliminary official statement (POS), often about a week before the financing.
For the first time, BondLink has measured the level of investor interest generated with a typical 7-day notice of an upcoming bond sale and quantified the benefit of providing earlier notice to the bond market.
This analysis is the first of its kind, and we will be releasing these new insights later this week. We’re excited to share the results with our community as the benefits to issuers, in the form of greater investor interest and engagement, are significant.
We’ll also continue to share more insights this year about the impact of stronger investor relations in the municipal industry.
You’ve heard both me and our industry articulate the value of muni issuers taking their complete credit story directly to investors. In a nearly $4 trillion market with hundreds of weekly sales, it’s continuously critical for muni issuers to separate themselves from the crowd in order to gain investors’ attention and earn the best possible price on their bond sales.
Investors, after all, buy bonds. They can choose, or choose not, to invest in an ample inventory of sales every week, all year. Their selection criteria are usually a mix of their own priorities and credit requirements, market conditions, and the issuer’s level of transparency. It is especially with investor transparency that issuers can distinguish themselves.
An issuer who understands and takes advantage of this is Washington, D.C. A few weeks ago, D.C. published its 2018 Long-Range Capital Financial Plan Report. While D.C. is a BondLink client, I’m not sharing this with you to advertise for the District. D.C.’s report is its own organic initiative, and I wanted to highlight the report’s industry significance, benefits generated, and some related best practices that other issuers can easily adopt.
The report itself provides an ongoing and comprehensive status report for all projects. Both policy makers and investors need this information to assess risk and make decisions. We certainly see this in infrastructure projects, which is a critical government responsibility and major focus for both civil servants and investors.
Project funding requests don’t exist on their own; they are part of a larger financial picture that must be evaluated on the whole. D.C. knows this. It has also paired its annual report with a proprietary Capital Asset Replacement Scheduling System (CARSS), providing a one-stop view of all projects and the District’s overall capital asset health.
Delivering these reports (and the processes required to create them) is a strategic commitment. It’s not an incremental resource everyone will produce, and that’s always an opportunity.
While D.C. has created what’s best for the District and its taxpayers, the insights other issuers can draw from this lie in answering one question: “In what new ways or areas can I be creatively transparent?” This often brings its own rewards, here are some of D.C.’s positive results:
Public corporations spend a lot of effort and money on their annual reports to investors. This is partly to comply with financial regulation and mostly because they know it helps them gain an edge with investors when it’s executed well.
D.C.’s report is a good example for how all issuers can take the effort and money they spend on disclosure and rating agency meetings, repackage and innovate with it, and bring something new and useful to their community, government, citizens and investors. From the benefits achieved, I expect this will be a continuing trend and our muni industry will be better for it.
The Bond Buyer last week ran a very interesting series of stories reflecting on the events and market changes that have occurred over the past ten years since the global financial crisis. Each story in the series reflected on a different issue or topic, and I highly recommend market participants find the time to read them.
One, in particular, is critical for issuers to digest: Robert Slavin’s article of the changing role of the rating agencies. This is a must-read in #muniland and you can click here for the article.
Slavin notes that most bonds issued in the municipal bond market continue to be rated, with S&P and Moody’s assigning about 92% of them. That’s not a big surprise, as I think ratings – like online product reviews – are never going away. A third-party opinion of a security is still a valuable part of any investor’s evaluation process. Fitch and Kroll also continue to provide ratings to a larger and larger share of the market.
The key take-away, however, is the role ratings now play in the evaluation process. Again, quoting from the article:
“The rating agencies are better than they were before the financial crisis,” said Marylin Cohen, president of Envision Capital Management. “But we use the ratings as suggestions and not the Holy Grail.”
Suggestions and not the Holy Grail. This is the same perspective we hear every day in our discussions with institutional investors of all sizes.
At the Association of Public Treasurer’s conference held in Memphis in July 2018, I was joined on a panel by Vanguard’s Akiko Mitsui. We discussed what investors need and prefer from issuers prior to a bond sale. She stressed that more investors than ever before undertake their own credit analysis of bonds. As such, issuers would benefit if they shared more current information with investors sooner in the pre-bond sale process.
From experience, I know that most issuers leading up to a bond sale spend nearly all of their time and effort focused on the rating agencies. They spend little to no attention focused on bond investors, even though investors – and not rating agencies – are the ones who will actually purchase bonds and lend them the necessary capital to finance their infrastructure. That is a big miscalculation, and Slavin’s article illustrates this market perspective is ten years out of date. For all muni issuers reading this, what’s your plan to reach more investors directly?
In Shakespeare’s "Julius Caesar," a fortune teller warns the Roman emperor of bad things to come on a specific period of the calendar. The warning was not heeded, and poor Julius was murdered by Brutus and his fellow Senators.
Stakes aren’t as high but some warning signs started blinking last week for issuers. First, long-term yields started to widen significantly. On Thursday, the 30-year MMD hit a yield of 3.20%. That’s 17 basis points higher than it was three weeks prior, reflecting a steepening of the yield curve that will translate into higher costs for issuers needing to access capital on the long-end. According to a story by Bloomberg’s Danielle Moran, investors on the long-end this month experienced the highest loss relative to other maturities due to the market’s downturn.
The spike in 30-year rates was coupled with more data that indicates the investor-base on the long-end has weakened considerably. According to Michelle Kaske, banks have sold close to $27 billion of their muni holdings over the first two quarters of 2018, the first time these investors have been net sellers in over eight years. This should be really concerning for any issuer needing to access large amounts of capital on the long end, as banks and property & casualty insurance companies are the two most important buyers. Both of these investors have stopped buying – only banks right now are sellers, according to Fed data – due to changes in the corporate tax code.
The first story from last week might be a short-term blip – a little bit of rate volatility. Or it might be a result of the second story. Market risk is always going to be present for any issuer, and good ones know how to be proactive to hedge or minimize that risk – like adjusting the method of sale. But the longer-term warning sign indicates we’re in a new bond market and the investor base is very thin. Not adjusting for this new reality is like Caesar brushing off the fortune teller.
As a former issuer, I know firsthand the challenges of alerting and attracting investors to a bond sale. In my role as Executive Director of New York City Municipal Water Finance Authority, I had the resources to institute a sophisticated and robust investor outreach program, but we had to do it all manually – planning our annual investor event and organizing tours, sending invitations, and meeting one-on-one with investors. I couldn’t help but imagine there had to be an easier way to reach more investors.
And as the marketplace continues to evolve, the need for easier and more efficient investor outreach is becoming more important than ever. Just recently, Bloomberg’s Michelle Kaske wrote about the largest U.S. banks cutting their municipal bond holdings by more than $16 billion in the first half of 2018. The result of tax reforms is that these banks simply don’t need to hold as many munis. That means one of the biggest groups of buyers in a typical market is no longer as reliable for an issuer. What do you do?
If you’re an issuer looking to lower your borrowing costs, you have to drive demand for your bond sales. And with banks holding fewer munis, you have a lower number of buyers to attract. I joined BondLink less than two weeks ago, and every day I come to work I’m more and more confident that this company is the answer to these new market dynamics. BondLink provides the tools issuers need, from a customizable IR website, to unlimited roadshows hosted on the site, and investor analytics that enable issuers to better understand their bondholders’ interests. And all of this creates dramatic efficiencies across the market.
Plus, the BondLink platform enables issuers to tell their own story.
If you’re an issuer who doesn’t communicate directly with bond investors, then investors will turn to the only other source to provide context for the raw data they are consuming: the rating agencies.
Rating agencies are a necessary and important part of the process of accessing capital. The need of investors to garner a third-party evaluation of an issuer is never going to go away. Like the reviews of a product offered on Amazon.com, rating agencies’ opinions of an issuer’s creditworthiness help buyers evaluate a bond offering. But most importantly, investors want the agencies’ context for the issuer’s numbers and the interpretation of the numbers.
Despite the value of ratings, leaving that role up to the rating agencies is a shortcoming that can create a big exposure for issuers. Rating agencies will interpret an issuer’s financial position based on their own criteria, which can change over time. They can also emphasize one aspect of an issuer’s fundamentals and not another, and they often don’t really measure what’s not seen.
It's easy to see that I’m excited to be here. I’m looking forward helping issuers realize the massive long-term impact of a robust investor outreach program, and I’m thrilled to know that the market finally has a single tool that can help issuers optimize their borrowing costs.
I know a lot of people dread September because it represents the end of summer, but it’s one of my favorite months of the year.
There are a couple of reasons for this, including the fact that my kids go back to school (finally). The weather in Boston is near-perfect this time of year as well, with the humidity abating. But September also kicks off the stretch-run in baseball. As part of that final push of the baseball season, each team is allowed to expand its roster in what is known as the “September Call-Ups.”
Here at BondLink, I’m thrilled to announce our “September Call-Ups” for 2018, all with deep experience in the muni market: Tom Paolicelli, John Murphy and Brendan McGrail. We’re not driving toward a pennant or anything like that. We’re scaling our business to provide more tools and technology in order to bring issuers and investors together more efficiently.
Their areas of responsibility at BondLink – on issuers, bond investors and communication, respectively – speak to the company’s mission to move the bond market forward through enhanced transparency.
Tom’s focus will be on issuers as he brings more than two decades of experience in various roles. He was most recently the Chief Deputy Treasurer for the County of San Diego, overseeing the Treasury and Investment Division. Prior to joining the County, he was the Executive Director of the New York City Municipal Water Finance Authority, one of the largest financing entities in the U.S. during its most active period, issuing over $30 billion in bonds. He was also a Vice President/Senior Analyst for Moody’s Investors Service in their U.S. Public Infrastructure Team. Tom was also active in the GFOA, an incredible organization of issuers that develop and recommend best practices. Tom was on the GFOA’s Treasury & Investment Management Committee and Online Financial Transparency Taskforce.
John’s focus at BondLink is on developing tools and solutions for investors, after having spent nearly three decades on the buy-side. He joins BondLink from Fidelity Investments, where he was a senior bond trader and later senior research analyst in a career spanning nearly 20 years. He previously served as vice president in trading and structured products for J.P. Morgan Securities after working as an associate with Banker’s Trust.
Disclosure is not as effective if it’s not communicated effectively, and that’s Brendan’s area of expertise. He spent most of the last decade in corporate communications with J.P. Morgan, and previously wrote the daily municipal bond market column as a reporter for Bloomberg News. He most recently served as Director of Communications for a private ski resort in Vermont and also worked as a writer for Massachusetts Governor Mitt Romney after beginning his writing career with the Worcester Telegram.
We’re thrilled to have individuals who are that accomplished and experienced to help BondLink continue to meet the growing demand for our suite of products.
You can read more about BondLink's "September Call-Ups" in The Bond Buyer.
Investors and issuers got two different messages out of Washington in the past 10 days or so, both pertaining to approaches to disclosure to markets. One is a really bad idea to make certain investor disclosure less frequent; the other is a very good enhancement of disclosure requirements in the municipal bond market.
First, President Trump tweeted that he has directed the Securities and Exchange Commission to study whether to shift public companies’ reporting to a semiannual schedule from quarterly public reporting. The theory is that quarterly reporting discourages firms from making long-term investments. According to the Wall Street Journal, the SEC has required quarterly earnings disclosures since 1970 in order to protect public investors and enhance corporate accountability.
Requiring less frequent disclosures is a really bad idea for any market and can lead to less liquidity, higher transaction costs, less certainty in valuations, and more opportunity for insider trading with longer dates between public reporting. There is also very little evidence that quarterly reporting has hindered the ability of long-term focused companies from raising capital. For example, pharmaceutical and biotech companies are able to raise capital efficiently despite drug pipelines that can be many years long. Amazon is another example. CEO Jeff Bezos is famously long-term focused, and yet the company has a market cap of over $929 billion. In every one of his annual letters to investors since 1997, Bezos has reminded investors that the company will plow resources back into research and development.
"…We believe that a fundamental measure of our success will be the shareholder value we create over the long-term…We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions...”
More frequent reporting improves the efficiency of public markets, whether it’s the stock market or #muniland. The President has the right to ask the SEC to study whether there are indeed benefits to less frequent reporting, but I suspect the study will come up empty.
Just a few days after the President’s tweet that seemed to encourage the idea of less frequent disclosure, the SEC broke its own news with a statement that it has finalized amendments to Rule 15c2-12. Currently, this rule defines 14 material events that issuers have to disclose to bond investors.
With the latest amendment, the SEC is requiring further enhancements to disclosure in the muni market. To wit, the disclosure of bank loans and private placements. We’ve written before about the need for issuers to disclose these obligations. They’ve exploded in popularity with both banks and issuers partly for their lower cost and efficiency of execution. However, these agreements typically involve large sums of public dollars, and can include provisions like acceleration that could give a first lien over bondholders.
Like the comment above about the President’s tweet, I think the focus for issuers should always be long-term. Your relationship with your bond investors are long-term, as you will be relying on bondholders to buy your bonds over the next 50 or 100 years. If you think a private placement is in the best interest of your bond program and your constituents, by all means pursue that structure. Just disclose the fact that it was executed and disclose its terms.
Credit goes to the MSRB and its former chair, Nat Singer. Nat is one of the smartest people in #muniland, advising some of the top issuers in the market. When he was chair of the Municipal Securities Rulemaking Board in 2015 and 2016, it circulated a concept release to see whether it should require municipal advisors to disclose information about their issuer clients' bank loans in reaction to the plethora of private placements getting done. This got the ball rolling. As such, I will now refer to this rule change as the “Nat Singer Enhancement to 15c2-12.”
Officially, the compliance date for the rules will be 180 days after they are published in the Federal Register. But issuers should recognize the long-term importance of disclosing these agreements and start to voluntarily post them to EMMA and their investor websites as early as possible.
It’s been two months since the GFOA hosted its 2018 annual conference in St. Louis, and, before it gets too far in the rearview mirror, I wanted to offer a few takeaways for issuers.
The conference was excellent overall. Given the huge success of the GFOA’s 2017 conference in Denver, I thought going into the 2018 event that St. Louis had its work cut out for it to match. It delivered big time. The GFOA did another terrific job packing the schedule for issuers, including timely sessions on topics such as the new normal for the municipal bond market post-tax reform. The sessions were augmented by speakers who really framed success for members. Kudos to Chris Morrill and Pat McCoy for putting together a great event.
The GFOA’s annual conferences continue to get better and better, and if you’re an issuer and not regularly attending this event, you should give it a try in 2019 when L.A. hosts the next one. You’ll come away more knowledgeable and energized from the interaction with your finance colleagues from around the country. It’s a tremendous amount of professional development packed into three days.
Again, comparing the 2018 conference with 2017, I didn’t think the keynote in Denver (Jim Collins) could be matched in terms of offering valuable advice and perspective to public sector CFOs. But the address by New York Times columnist Thomas Friedman was outstanding.
I wanted to highlight a theme that was covered by Friedman in his presentation to the membership. He covered several aspects of his new book, “Thank You for Being Late,” and I was particularly struck by his message about the differences between stocks and flows.
When I hear the term “stocks and flows,” I think about a balance sheet and an income statement. Or about a bathtub and a faucet. Friedman was talking about stocks and flows in the context of trade and culture and information. He pointed out that most of the big and enduring cities in the world are built near water, either streams, rivers or the ocean. Why? Because water brings life. Running water can provide energy and bring fertility to the ground, but also to society. He tied this back to some of the most successful technology companies of today -- they are built close to the flows of information and tap into it.
This concept of stocks versus flows is also meaningful for issuers who are looking at how best to attract more investors, diversify their investor bases, and position themselves to issue bonds successfully for the next 20 or 30 years. The new dynamic in the muni bond market -- driven by investor demands, stepped up regulatory concerns, and a more expensive yield curve -- requires issuers who want to be successful to do more when it comes to their investors.
By “do more” I mean provide bond investors with a better experience and with real efficiency gains. This starts by thinking of investor disclosure as a flow, not as a stock. Producing a thorough and easy-to-read Appendix A to your POS prior to your next bond sale is a stock; providing a stream of current data and documents to investors in between bond sales is a flow. The stock is important and meaningful, but it represents a quantity or quality existing at a single specific point in time in the past. For issuers, this might mean your financial position as of the month prior to the bond sale. A flow by contrast, is all of the financial data that you or your government produce over time. It shows investors the changes over time. That’s a lot more valuable.
Investors need and want that flow of issuer information; they want to open the faucet and receive a steady stream. Successful issuers know that it’s a much more valuable investment to establish a good disclosure flow, rather than simply fill the tub when it’s time to issue bonds.
I welcome your thoughts.
BondLink is excited to celebrate the sixth annual National Infrastructure Week. It truly is #TimetoBuild.
We’ve written more than once on our disappointment in the so-called infrastructure deal unveiled by the Administration earlier this year. That proposal lacked substance, lacked speed and lacked scale – three things that a true infrastructure plan needs to succeed. From top to bottom, our country is in desperate need of infrastructure investment. The American Society of Civil Engineers gave America’s overall infrastructure a grade of D+ in 2017, illustrating the relatively poor condition and performance of the country’s infrastructure.
There are so many opportunities to improve. Think about it. How was your commute to work today? Was traffic stalled on the highway? Was your train slow? And public schools: what condition was your children's school in this morning when you dropped them off?
Let's start with infrastructure repair that everyone supports: better roads and bridges. Every year, it seems, highways are more jammed with vehicles and public transportation gets slower. We can do so much better. And we have an amazing tool at our disposal. Municipal bonds offer the cheapest way to finance the new infrastructure that the U.S. needs, and this is a great week to highlight and promote policies that support the growth and development of the muni bond market. It starts and ends with more tools for issuers: first, resurrecting the Build America Bond program to enable issuers access to a greater pool of capital; second, enhance the Federal Highway Trust Fund to finance road, bridge and surface rail transportation projects across the country; and third, flexibility with the tax code to allow for things like advanced refundings or the ability for issuers to reopen an existing/outstanding CUSIP to enhance the liquidity of their bonds.
And beyond the discussion of tools for issuers, let’s get into tools for investors. How do we encourage more investment in these infrastructure projects? How do we make financing public projects as compelling for individual investors as watching the stock ticker on CNBC? The answer is simple: issuers should take steps to connect investors with the projects their bonds are financing. And beyond the initial bond financing, issuers should incorporate technology to enable a strong social connection with these projects by proving ongoing project updates. This is easily achievable with a dedicated investor platform like Bondlink. And this week, through our social media channels, we’ll be highlighting projects our clients are undertaking, and showing how effective their investor relations sites are at keeping bondholders informed.
Last month, the Climate Bonds Initiative released its annual report on Green Bond issuance in the U.S. Municipal Bond Market. It’s excellent, and we encourage all to read it.
The data reveals an exciting trend: since the Commonwealth of Massachusetts brought the first $100 million to market in 2013, issuance of Green Bonds has soared. More than $11 billion in the debt was sold in 2017, up from just over $7 billion the previous year. The largest issuer is the New York Metropolitan Transportation Authority, followed by the State of California.
But despite the amount of bonds issued to date, Green Bonds remain an emerging asset class, with issuers and investors finding their way in terms of definitions and criteria. Today, California State Treasurer John Chiang is taking a strong leadership role in gathering market participants to outline best practices for Green Bonds. He’s hosting a two-day Green Bond Symposium at the Milken Institute. Check out the agenda.
In terms of the issuance process itself, issuers really need to focus on three things. First, they have to clearly define what they are considering a Green Bond. Second, they have to clearly outline their process and criteria for selecting environmentally beneficial projects to be financed by the Green Bonds. Third, and most importantly, they have to be committed to providing ongoing impact reports to Green Bond investors.
The most efficient and effective way to do this is by harnessing available technology to interact with investors. By incorporating a BondLink-powered investor relations platform, issuers can easily provide ongoing status reports on their Green Bond projects on a regular basis to their investors (and taxpayers), with automatic updates and photos/videos being pushed to investors who have signed up for alerts.
Like the project updates, issuers can develop written impact reports – acres of open space preserved, number of gallons of water cleaned, or miles of new rails laid for mass transit, for example – that can be automatically disseminated to investors. These details are an important piece of the investment for major investors who have dedicated Green Bond funds, such as Blackrock and State Street, but also for retail investors. The gold standard is the World Bank’s impact report.
If you’re an issuer who is thinking about Green Bonds, it will pay to focus on impact reporting in the months and years after the initial bond sale. How that reporting is handled, and the ease of use for investors, is absolutely critical.
However, a bond sale – even if it’s a once-a-year event - usually involves huge sums of public dollars. The interest costs associated with a bond sale are almost always locked-in for decades based on a single day’s pricing. And the channels to communicate with investors – things like investor websites - make it easy and cost effective even for small bond issuers to do well effectively. With the stakes so high and the channels to communicate available, issuers should engage bond investors in order to tell their story.
If you don’t tell your story, someone else will
The above adage is directly relevant to issuers as they think about attracting more investors to their bond program. Investor outreach is all about telling your story as an issuer. It’s that simple: provide some context for the financial reporting that accompanies a bond sale or an annual disclosure filing. Not only does this foster differentiation from other issuers, but its critical to clarify technical and financial content for investors so they understand where a government is headed and how they will get there.
If you’re an issuer who doesn’t communicate directly with bond investors, then investors will turn to the only other source to provide context for the raw data they are consuming: the rating agencies.
Rating agencies are a necessary and important part of the process of accessing capital. The need of investors to garner a third-party evaluation of an issuer is never going to go away. Like the reviews of a product offered on Amazon.com, rating agencies' opinions of an issuer’s creditworthiness help buyers evaluate a bond offering. But most importantly, investors want the agencies’ context for the issuer’s numbers and the interpretation of the numbers.
Despite the value of ratings, leaving that role up to the rating agencies is a shortcoming that can create a big exposure for issuers. Rating agencies will interpret an issuer’s financial position based on their own criteria, which can change over time. They can also emphasize one aspect of an issuer’s fundamentals and not another, and they often don’t really don’t measure what’s not seen.
Let’s use debt burden as an example. For a general government, all of the rating agencies measure the affordability of a government’s outstanding debt. A lower debt burden is a credit positive relative to a higher debt burden. But what if an issuer has a low debt burden – let’s call it City 1 – simply because it is avoiding necessary infrastructure improvements? And conversely, a second government – call it City 2 – develops a high debt burden because it aggressively tackles its infrastructure needs while interest rates are low.
If City 2 doesn’t provide context for its front-loaded capital program to bond investors, it is likely to pay a penalty relative to City 1 to access the market. The key takeaway for issuers is that the opinion of a rating agency should not be the only interpretation that finds its way to the buy-side community.
Provide the context behind your government’s financial performance.
To get a better sense of the value of telling your story as an issuer directly to bond investors, think about how you would go about describing yourself to a stranger. Would you simply hand him a copy of your resume? No, of course not. The resume would be a good starting point, but it would paint a very incomplete picture of who you are.
Like a resume, a financial report or audit without context provides the investor an incomplete picture. And in the muni market, audits tend to be completed and published months after the end of the fiscal year, making the data very stale. Bonds are usually structured over many decades – 20- or 30-year bond issues are common. So if you’re asking for a long-term investment, it pays to provide investors with more than just stale historical financial documents.
According to Rivel Research from 2013, investors in the stock market paid a median premium of 10% to those companies that employ effective investor relations, while discounting a company a median of 20% for ineffective investor relations. That’s a 30% swing in an investor’s valuation based on investor outreach. For a municipal government issuing bonds, that could mean tens of thousands or more of public dollars.
Build your investor outreach program as if you were an investor
Investor outreach is not a short-term, one-off project to improve the pricing of your next series of bonds. No matter how big or small you are as an issuer, it requires a signal to the buy-side that you are a borrower that will help investors better understand your credit. But you should signal that you are committed to investor outreach for the long-term.
It certainly helps to provide more data and more documents to the market as they become public and are shared with taxpayers and ratepayers. But it’s also important to inform and educate investors who may own your bonds for decades about that data. Why should an investor buy your bonds, and why should they buy now? Even if the news is bad – or perhaps more importantly if the news is bad – provide context to the data you are releasing in order to engage investors.
The story you can tell to bond investors – including about the management team – should explain where you’re headed as an issuer and how you expect to get there. Bring alive your long-term financial and debt financing goals, and articulate what you trying to accomplish.
In 2017, with the availability of channels to communicate directly with investors like investor websites, an issuer should do more than simply publish historical data in a POS. Use technology to efficiently let investors know every detail about you as an issuer, because if they do, the chances of them being long-term investors – and repeat investors – will go up.
Issuers of all types of securities – stocks and bonds – in all different capital markets around the world continually debate the value of investor relations. The debate comes down to this: is an investor outreach program a necessary cost, or is it an investment from which an issuer can expect a return on it’s investment over the long-term?
The smart issuers view investor outreach as an investment. They proactively take steps to tell their story to the market, to make it easy for investors to understand their credit, and use every tool available to enhance and diversify their investor base. In return for their investment, these issuers know that they will see a return in the form of reduced cost of capital over the long-term. Enhanced transparency to investors may also help attract more buy-and-hold investors, increase the liquidity of the issuer’s bonds, and provide more stable spreads/bond valuations.
In the municipal bond market, we have a good case study on the question of investor outreach as a cost or investment in the City of Saint Paul, the capitol city of Minnesota. Saint Paul issues bonds through several different credits. It’s main borrowing program, the General Obligation (or G.O.) bond program, is rated AAA/AAA by Fitch and S&P Global. It’s sewer bonds are also rated AAA by S&P Global.
In recent months, the City has taken steps to improve the transparency of its financial operations. This included their debt financing program, and Saint Paul launched a new, dedicated investor website – www.stpaulbonds.com - powered by BondLink. CFO Todd Hurley and Treasurer Michael Solomon sought technology that would attract more investors to their bond program, including local investors like local banks, trust departments, financial advisors, and individual investors.
Ahead of its competitive bids on March 8th, the City launched its new investor website. This was featured in The Bond Buyer, as well as the local Saint Paul and Minneapolis press. The City held a total of three competitive sales that day, of which two mirrored competitive sales sold in prior years based on analysis by City’s municipal advisor. According to the City, the number of bidders who participated in the bidding jumped by more than 20% for each auction.
Good news on the number of bidders. But how were the bids?
Despite the fact that the municipal bond market weakened every day that week with the AAA yield curve re-setting higher in yield every day, the bids came in substantially stronger than in prior years. For the $9.96 million G.O. bond sale, the City’s average spread to the AA scale was reduced by 9 to 12 basis points relative to prior years. On a present value basis using some back-of-the-envelope calculations, the reduction in borrowing costs on the G.O. bond sale ranged from $63,000 to nearly $85,000.
For the City’s $7.795 million Sewer Revenue bond sale, bids were tighter on a spread to the AA curve basis of 12 to 24 basis points in different maturities. This is a reduction in interest costs of roughly $85,000 to $170,000 for Saint Paul’s taxpayers. These results are even more impressive because one of the rating agencies had recently assigned a ‘negative outlook’ to the rating on the AAA sewer bonds. But the City used its dedicated investor website to tell its story, and not let it’s story be defined solely by the rating agency. Taken together, the City’s reduced borrowing costs were over $250,000 on the higher end of the range.
“BondLink was a tool that we used to increase transparency and drive investor interest in our bond sale,” said Treasurer Michael Solomon.” Even though the City has high bond ratings, the finance team is always looking for ways to reduce borrowing costs and we are very excited about the results of the first bond sales with the City’s new investor relations website in place.”
Obviously, there are a number of different factors that go into how a bond prices on a given day. But it certainly did not hurt that the City had taken steps to attract more investors using their new investor website. They invested in investor outreach, and saw a strong return in the form of reduced borrowing costs.
In a couple of different measures, the municipal bond market looks like a deep and diverse capital market. Bonds outstanding total close to $4 trillion. In 2016, nearly $1.8 billion in bonds were issued on average for every day the markets were open over the course of the record-breaking year. But in other, less obvious ways, the market can seem small for issuers at times. How? There are a small handful of very important bond investors that dominate the primary market, determining the prices/yields that issuers will pay for capital over the life of their borrowings. These include big mutual funds and insurance companies.
For large issuers, these investors are absolutely critical and they play an important role in the market. But with plans for a new, $1 trillion federal push for enhanced infrastructure investment, there’s a big opportunity for large issuers to tap new, deep-pocketed investors to raise additional capital for future projects: foreign investors.
Last month, the Wall Street Journal ran an interesting story about the head of Japan's Government Pension Investment Fund expressing interest in investing in U.S. infrastructure. One way they could do this is to invest directly in a cash-flowing entity like a port or transit authority, buying the entity or becoming an equity investor. But another way – one that offers more liquidity - is to purchase the bonds of an issuer. Some of the largest issuers in the muni bond market in 2016 were these types of issuers, including the New York MTA, the Pennsylvania Turnpike, the La Guardia Gateway Partners, Chicago O’Hare International Airport and San Francisco International Airport.
The Government Pension Investment Fund is one example of a new foreign investor, and a big one at that: they have $1.2 trillion to invest. I think they would be very interested in taxable municipal bonds of certain large issuers like the ones mentioned above. That could be a distinct possibility if a 2.0 version of the Build America Bonds program was developed by the incoming administration and Congress as part of an enhanced infrastructure program.
As an issuer, the opportunity to diversify your investor base and/or diversify your capital structure is one that can’t be ignored. Diversification offers long-term benefits to issuers and their constituents, as many large traditional municipal investors can be full or nearly-full on a given issuer’s bonds. This is particularly true for large and frequent muni issuers.
But foreign investors will only deploy their capital with issuers who are transparent and easy to find online like a large corporation would be. If you’re a large issuer in the muni market, it’s time to do a self-assessment to ask yourself if you’re ready for new taxable investors that have certain expectations about disclosure and transparency. I think it requires three things: first, access to and direct participation in bond financings by top issuer officials like governors, mayors, treasurers, and executive directors; second, direct communication with investors through regular, live investor conference calls; and third, a dedicated investor relations website to make it very easy for these new investors to understand a credit and have confidence in the ability to efficiently do due diligence in future years. In other words, present yourself like a corporate issuer would present themselves to investors. If you want access to taxable capital, meet the expectations of taxable investors.
One final thought: this is the same opportunity that presented itself in 2009 when the initial Build America Bonds program was authorized under the federal stimulus act. In terms of accessing foreign investment under this program then, unfortunately it was a swing-and-miss for most issuers for a variety of reasons. That could change with a second generation BABs program, but it will be up to issuers to make it happen.
According to statistics, about 45% of Americans set New Year’s resolutions each year. Perennially, the top goal is to lose weight.
Unfortunately, only 8% report that they achieve their goal to drop the pounds. How about setting a more realistic New Year’s resolution this year? Instead of dropping weight, set a goal to drop the yields in your next bond sale.
The way to do this is pretty straight-forward: make it easy for bond investors to find you as an issuer and to find your most recent interim financial data. Essentially, it requires a change in mindset towards disclosure and investor outreach. If you can view investor relations as a tool and not as a chore, the benefits could be long-lasting for your organization.
Replace the old, so-2016 way of thinking...with the new, 2017 way of thinking. For example:
2016 Thinking: Bond investors don’t care about current data...2017 Thinking: Yes they do! Investors care more about where an issuer is going (an operating budget) than where an issuer has been (an audit)
2016 Thinking: If I do the bare minimum disclosure as an issuer, I’ll be fine when I issue bonds...2017 Thinking: Maybe that's true from a strictly compliance perspective. But if your data is not reliably easy to find, investors may charge an uncertainty premium to your next bond sale that may cost thousands or hundreds of thousands of dollars
2016 Thinking: Investors only care about bond ratings...2017 Thinking: No, most of the big investors who largely determine a bond's pricing in the primary market undertake their own internal credit process. Ratings matter, but to a lesser degree than they did 10 years ago. Data matters - and current data matters a lot
2016 Thinking: I’ll let my advisor or banker handle investor outreach...2017 Thinking: Issuers shouldn't delegate such an important and potentially costly aspect of a bond pricing. It's up to the issuer to look for ways to distinguish their bond programs from others
2016 Thinking: The markets are very favorable to issuers, and access to low-cost capital is easy...2017 Thinking: The market has changed - or at the very least, is in the process of changing - to one that is much less favorable to issuers. Bond funds are experiencing sharp redemptions, insurance companies may curtail their buying until they have a clearer picture of their future tax rates. Tax rates may make muni's less desirable overall...all of this adds up to a market environment in which bond investors will be very selective going forward
2016 Thinking:Investor relations is a cost...2017 Thinking: Investor relations is an investment, not a cost, and one that may provide a very healthy return over the long run to issuers and their constituents. Just look to the corporate bond market as evidence of its value: corporations view IR as an essential tool of their financing programs
2016 Thinking: Investor outreach is costly and time consuming...2017 Thinking: Not with BondLink's investor platform. BondLink is affordable and very easy to use. An issuer can update their "profile" by sharing a new document or data point with investors in a matter of seconds
2016 Thinking: There are no tools to help with my disclosure/investor relations...2017 Thinking: BondLink is the only company providing investor platforms for municipal issuers
We hope you can achieve all of your New Year's resolutions in 2017. But when it comes to your debt financing program, aim high and take steps to distinguish your bond program by making it easy for investors to buy your bonds!
While not as prevalent as issuers in the corporate bond/equity markets, municipal bond issuers are devoting more and more resources to the development of dedicated investor relations (IR) websites to connect and communicate directly with bond investors. These platforms allow issuers to provide more information to investors about who they are and what they do, including public documents and data, and make a social connection between the bonds and the capital projects that are being bond-financed. They can also provide a boost to the compliance aspect of issuer disclosure from a regulatory perspective. In response to the growing trend of municipal IR websites, last year the Government Finance Officers of America approved a best practice for its members called “Using Technology for Disclosure” that encourages issuers to use dedicated IR websites to communicate with the municipal bond market.
The purpose of IR websites is to attract more investors to the issuer’s bonds. Better disclosure can lower the yields on bonds, lead to more stable bond valuations, and result in more trading activity and liquidity in the secondary market. The idea is to make it as easy as possible for investors to find out more information about the bonds. But in order for an issuer to provide productivity gains to investors, the IR website has to be designed in a way to meet the changing credit surveillance behavior of investors. Not only should an IR website be visually engaging and easy to navigate, but the platform should be flexible enough so that investors can access key documents, presentations, the finance calendar, etc. using any type of device. It may not seem obvious, but many investors do their investing research using devices other than desktop computers. According to a study by Rivel Research, 67% of corporate investors surveyed accessed corporate IR websites via tablets. 63% said they regularly accessed sites using phones. In terms of the types of devices used, Apple tablets and phones were the most popular of the investors surveyed.
The need for IR websites to provide investors with access to data on all types of devices is probably even greater just based on the fact that much of the outstanding municipal bonds are held by individual investors. Federal Reserve data regularly show that roughly 70% of municipal securities are held by individuals either directly or through mutual funds.
Responsive web design refers to websites that "respond" to the device on which they are being accessed. In short, as an issuer you want an investor’s experience – including its access to documents, data and other tools – to be just as useful whether they are an institutional investor accessing your website from their desktop terminal or a private wealth advisor accessing your website while presenting to his/her clients. With fully responsive web design, an IR website’s content is optimized and is as easily available via a large screen like a desktop computer or a small screen on an iPhone.
Try it out for yourself. On your phone or tablet, visit a fully responsive corporate site like the Microsoft investor relations website (https://www.microsoft.com/en-us/investor). You will notice that the company is still able to provide a wealth of content to investors no matter the size of the screen of the device accessing the site. Documents, stock quotes, and financials are all visible and accessible when using a phone.
The key take-way for municipal issuers: mobile matters. It is a certainty that existing and potential investors are researching issuers and conducting credit surveillance via mobile devices. If your goal is to be a leader in disclosure in order to attract as many investors as possible to the next bond sale, build in the necessary flexibility to your IR website. Don’t ignore the huge pool of investors – many of whom may be individual investors – who shop for bonds like they shop for new cars or houses. When there is so much competition for low-cost capital in the municipal market, you can’t afford to have an IR website that does not offer tools to investors across all devices.
In our next post, we’ll talk about how IR websites democratize data in the municipal bond market.
This week is infrastructure week, seven days in which 150 different organizations ranging from the U.S. Chamber of Commerce to the National League of Cities put together events to educate taxpayers and policymakers on the benefits of addressing the nation’s public infrastructure. As the organizers put it, “infrastructure really matters”. Infrastructure touches all aspects of our daily lives, from public safety to quality of life to commerce and economic development. Just in the past few months we’ve been reminded of its importance, with the water crisis in Flint, Michigan and the problems with the Washington, DC Metro.
Despite its critical importance, the state of the nation’s infrastructure is not in good repair. The American Society of Civil Engineers (ASCE) recently released a report that estimated the gap between funding and infrastructure spending needs in the country stands at $1.44 trillion, a deficit that will grow to over $5 trillion by 2040 without additional funds. According to ASCE, the U.S. will sacrifice 2.5 million jobs and $4 trillion in gross domestic product over the next 10 years if it can’t address its infrastructure needs. That economic drag translates into a cost of about $3,400 to each American family.
Surface transportation has the greatest disparity between funding and needs, and arguably the most pressing in this category is the repair of bridges. The U.S. Department of Transportation regularly provides an inventory of the roughly 610,000 bridges across the country, and about 10% are currently deemed “structurally deficient”. Think about that for a minute: one in ten bridges that drivers rely upon to cross waterways, canyons and other roadways are rated deficient. Bridges are considered structurally deficient when they have significant deterioration of the bridge deck, supports or other major components of the bridge. This designation doesn’t necessarily mean that they pose an immediate safety hazard, but the bridge’s defects are significant enough that it may limit its ability to bear weight. The American Road & Transportation Builders Association estimates that at the current pace of investment it would take at least 21 years to replace or upgrade all structurally deficient bridges nationwide. We have to do a lot better than this.
One idea for infrastructure week is to have federal and state policymakers focus on a single type of infrastructure to be addressed quickly. If I was in charge, I would focus on bridges by creating a national accelerated bridge repair program. Bridges are a good candidate for an accelerated construction program because early investments to maintain their repair can cost-effectively extend their useful lives, not to mention the obvious safety benefit to the driving public.
If the repair of bridges became a priority of policymakers, what would be needed? First, I would use existing funding channels for such a program and not try to reinvent the wheel with new ideas like a national infrastructure bank. Of all the public infrastructure in the country, about 75% of it is built by state and local governments, with a large majority of funding for the projects coming from the municipal bond market. Second, policymakers could provide additional tools to local governments that are utilizing the municipal bond market to sell bridge bonds, like authorizing a limited, new version of the taxable Build America Bond program to be used specifically for a national bridge repair program. The original Build America Bond program was part of the 2009 federal stimulus. The benefit to issuers of these types of bonds is the ability to sell to taxable investors, expanding issuers’ available pool of capital beyond the traditional tax-exempt investor. Third, policymakers could consider additional revenues, like indexing federal and local gasoline taxes to inflation. Revenues from the federal gas tax, which haven’t been raised in more than two decades, flow back to states through the Federal Highway Trust Fund, another existing funding channel that has worked extremely well providing infrastructure funding since the 1950’s.
Massachusetts launched an accelerated bridge repair program in 2008, dedicating user fees and taxes generated by motor vehicles, as well as funds from its share of the Federal Highway Trust Fund, to finance the massive program. The program won awards for its financing and construction innovation, and succeeded in reducing the state’s inventory of structurally deficient bridges by an estimated 25%. Now would be a perfect time to take a program like this nationally, with interest rates low, the price of gas relatively low, and a big slump in commodities globally.
Here's a link to an interactive map of all of the bridges in the country, courtesy of The Atlantic's City Lab:
Check out how many structurally deficient bridges are in your neighborhood!
Last week, the National Federation of Municipal Analysts held their annual meeting in Chicago. So it seems to me like a good time to discuss ways that municipal bond issuers can develop stronger relationships with their existing bondholders, while also attracting new investors in order to diversify their investor base. A common tool from corporate investor relations practices that could be replicated in the municipal bond market is to host an investor meeting every year.
Corporations are generally required to hold an annual or regular shareholder meeting under most state laws. A lot of companies, particularly the larger, higher profile ones, turn these events into an important aspect of their investor relations programs. An annual investor day is seen as an opportunity to allow company executives to connect directly with small and large shareholders, as well as buy-side analysts who may cover the company and the financial press. The strategy is to enhance the company’s brand with investors, and the focus is to ability to access low-cost capital over the long-term. In the municipal bond market, however, annual investor conferences are rare even though some large issuers like states have as many bondholders or bonds outstanding as major corporations. That’s a big missed opportunity to develop relationships with investors, showcase the issuer’s financial management team, and provide context to the issuer’s capital budget and future infrastructure needs.
Probably the most widely covered annual investor event in the U.S. is the one hosted by Warren Buffet’s Berkshire Hathaway. Berkshire has been hosting an annual investor event for the last 50 years. This year’s event saw 40,000 shareholders attend and was held in Omaha’s convention center. It was even live-streamed on Yahoo Finance. In February, Jamie Dimon hosted JP Morgan’s investors and analysts at its annual “Investor Day”. Not only does the CEO present at these events, but he regularly participates in a Q&A session with attendees. The same is true for a number of other CEO’s and CFO’s across many industries in the corporate world.
Annual investor conferences are far less common in the municipal bond market. Only a few states and a handful of cities now host annual investor events. For example, in my time with the Commonwealth of Massachusetts, we started hosting investor conferences in 2011 that regularly drew more than 200 investors and other market participants to Boston each year. The Commonwealth – which has more bonds outstanding than computer chip maker Intel - just had its fifth consecutive investor conference in December. And at each of these events the state’s governor and treasurer participate and meet with investors. New Jersey is another state whose state-level issuers come together to present to investors at an annual event each year. On the municipal side, the city of Chicago has been hosting investors annually since 2012. Chicago’s conferences include tours of the city’s different infrastructure priorities. New York City and its various financing agencies do the same. This past fall, Washington, DC held its first event. And the city of Houston hosted its fourth annual event a few weeks ago.
From my experience as an issuer and member of a few different issuer trade associations, I know there are a couple of challenges that tend to make it difficult for municipal issuers to not invest in direct investor outreach like annual conferences. First is the time and resources involved: it takes a lot of work to put on a conference. There’s also an upfront cost of hosting the event. Although growing investor relationships can provide significant benefits to an issuer over the long-term, the initial outlay of hosting an investor day can give issuers pause. Second, there’s not a lot of industry practice around engaging investors outside of a bond sale. The more typical practice is for issuers to conduct investor conference calls or even go visit a few investors in their offices, but these are mostly associated with a specific bond financing. And third, interest rates have been low for a long time now. Since the Great Recession, a lot of issuers have sold their bonds at excellent levels and don’t see the need for direct outreach to investors.
There’s definitely some validity to these points, but I still think that the long-term benefits of a proactive investor relations program to issuers and their taxpayers are true great to ignore. On the cost side, there are ways to minimize the use of public dollars while also engaging investors. For example, muni issuers can take a page out of the playbook of corporations that are now hosting virtual annual investor conferences. In 2015, HP hosted its shareholder meeting entirely online for the first time. A virtual conference also addresses the challenge of getting investors to attend and/or participate in an event for an issuer that is not located in a large financial center like New York or Chicago or San Francisco. And as I mentioned above, the more conventional practice of issuer-investor meetings is for issuers to conduct mini road shows and meet with investors in their offices right before a bond financing. These have limited value over the long-term. Investors will appreciate the opportunity to meet with an issuer and hear their pitch, but they know the issuer’s there only to sell bonds at the next sale – not primarily to grow the relationship. Giving investors access to the decision-makers of a state or a city or a non-profit on a regular basis is much more meaningful, and should be part of the IR program of large and frequent muni issuers. Importantly, it gives the issuer the opportunity to receive feedback from investors on credit issues, bond structures, etc.
Does an issuer see a return on their investment in hosting an annual investor conference? I think the answer is ‘yes’, and for evidence I would look no further than the practices of very successful organizations like Berkshire Hathaway who have made investor conferences a centerpiece of its investor relations strategy. Is this just for large issuers? No, smaller issuers in the same region or industry could join together to jointly host investors on a regular basis. I think the return to all issuers for developing relationships with investors - through investor conferences, or providing more timely continuing disclosures, or utilizing a dedicated investor website - only gets bigger over time, especially when the interest rate curve normalizes to higher rates and wider spreads, when every single basis point counts more.
But the key to maintaining access to low-cost capital, diversifying the investor base, and reducing the volatility around a bond’s valuation is to grow investor relations through long-term, proactive investment in the needs of investors. This may not produce an immediate return at the next bond sale, and issuers should not expect it to. Since governments and non-profits will almost always need investor capital to fund their infrastructure needs going forward, issuers should focus on a longer horizon. What are the first steps? Develop a five-year investor relations strategy that includes multiple tools that provide investors with what they need to evaluate your bonds more efficiently. When you do that, and provide them with productivity gains, those gains will flow back to you as the issuer.
In my last post, I discussed the presence of Alternative Trading Systems (or ATSs) in the municipal bond market that handle the majority of trades in the secondary market. More ATSs are active today in the muni market, which is a good thing for investors because of the liquidity that they can provide. For large and frequent muni issuers, however, I think there are big opportunities to take advantage of the efficiencies and networks of electronic trading systems in the primary market, where new-issue bonds are priced and sold.
The benefits of using electronic trading platforms for debt financings fall into three buckets: better pricing, less market risk, and better investor distribution. To walk through these benefits, let’s consider how a large issuer in the muni market typically issues bonds. Large issuers like states – who may have as many bonds outstanding as a major corporation - will come to market once or twice a year and sell hundreds of millions of dollars in bonds over the course of one or two days. With a large amount of bonds being offered over such a short period, there’s a good chance that the natural investor demand in the market for a single issuer’s bonds on a single day does not perfectly match the supply of bonds being offered. When the supply of bonds exceeds the real investor demand on the day of pricing, the issuer has to sell its bonds at higher yields just to get all of the bonds sold and clear the market to complete the financing. In a lot of cases a relative value buyer is the investor who buys the bonds at the higher yields, who will then re-sell the bonds to retail investors over time at different yields than the levels at which they were originally purchased from the issuer. While for the issuer the bond pricing is complete and the funds are raised, the bonds are likely fixed at higher yields that the issuer and its taxpayers must live with over the life of the bonds. That’s not an efficient pricing process for the retail investors who end up with the bonds, and its certainly not ideal for the issuer.
With an electronic trading system, an issuer has the opportunity to offer bonds to investors very efficiently over the course of multiple days, not just a single day. A longer offering period could be structured like a rolling offering, or a shelf registration, that is commonly used in the taxable bond market by large corporate issuers in order to attract new investors to the muni market. Offering bonds over an extended period promotes better pricing for the issuer and its taxpayers because the market’s natural investor demand is not being overwhelmed by the supply of bonds being offered on a single day. Instead, bonds can be offered to investors via an electronic platform over multiple days, a selling process that allows each day’s natural investor demand for bonds to determine the supply of bonds that are actually sold. In effect, the issuer plumbs the market on a daily basis to gauge the investor demand for bonds. The issuer has better control of the pricing process, and can cut out the middle man – the relative value buyer - and instead offer bonds directly to retail investors if that’s the goal. This is better for both issuers and investors.
Market risk is another large risk that all issuers face but is difficult to hedge if the bond pricing is being executed on a single day, as it is for the typical bond sale. The risk is that on the single day that an issuer chooses to come to market, the volume of bonds being offered market-wide in the primary or secondary market overwhelms investor demand. Market risk from the secondary market is even more difficult to manage for issuers because bonds are put out for the bid by existing holders on an unscheduled basis, which could compete with the bonds being offered in the primary market. Other factors like domestic or international economic news or events can impact the U.S. Treasury market which, in turn, impacts investor demand in the muni market. A longer offering period, however, reduces the market risk that the issuer experiences, as it is effectively dollar-cost-averaging the bonds into the market by selling over multiple days or weeks. This can be done in a standard bond sale too, but it's a lot more efficient and transparent for the issuer and investors if the sale is being managed via an electronic trading platform.
The final opportunity of using an electronic trading platform – which probably provides the biggest benefit to an issuer’s debt program over the long-term – is the ability to diversify the investor base, including the ability to connect with more retail investors. The primary market for muni bonds is really dominated by 10 or 20 very large institutional investors. These include investors with large, state-specific mutual funds. These investors are very important to issuers as they provide a lot of liquidity to the market every single day. At any point in time, though, they may have strong demand for an issuer’s bonds or they may not for various reasons, like negative fund flows, credit concerns, or the portfolio may be full on an issuer’s bonds. When their demand is weaker, the issuer’s pricing is going to suffer. Using an ATS to sell bonds can augment an issuer’s investor base to include firms that don’t typically participate in the primary market for municipal bonds. Who are these other firms that an issuer may be able to access using an open-architecture trading platform? UBS is a good example, with 7,000 brokers it is one of the biggest wealth management firms in the U.S.; LPL Financial has 14,000 brokers while Pershing has six million active accounts in the US; Ameriprise is a good candidate because it has approximately 10,000 brokers; Commonwealth Financial Network is another good example, with its $100 billion in client assets.
I witnessed first-hand the benefits of an electronic trading platform when I was in charge of the MassDirect Notes program. We offered bonds to individual investors using the trading platform TMC Bonds, and made sure the platform offered bonds to any firm representing retail investors in the country that might be interested. Our primary goal was to widen the state’s investor base because we knew better distribution would translate into better pricing, and that’s what we achieved. We were able to sell bonds to 44 different first, including those listed above, at better prices and yields than we had before, and it was a very efficient process because it was done using a trading platform.
It’s important to note that selling bonds through an alternative process like this is not for every issuer. I think it works best for large issuers with frequent borrowing needs, who can augment a traditional bond sale with one using an electronic platform to reach new investors. However, all issuers should be exploring how technology in the bond market can be used to improve their financing results and elevate their debt management programs.
In proceeding posts I will follow up on two points that we didn’t have time to cover today: first, the disclosure requirements that go along with selling bonds using an electronic trading platform. For the MassDirect Notes program, we adopted a regular schedule of disclosure releases and used our dedicated investor website to enhance our disclosure to the market. And second, the really big benefits that electronic trading platforms provide to retail investors.