Do your homework. Don’t underestimate the resourcefulness of states and municipalities. Diversify your holdings.
These are the lessons to be learned by municipal bond investors from the coronavirus pandemic. They may sound like bromides, but if you were one of those investors who dismantled their muni portfolios in a panic last March and have regretted it ever since, they may be good to keep in mind next time cataclysm visits. Maybe you should sew them into a nice sampler and frame it and hang it over your desk. No, the pandemic isn’t over, but a new administration and heightened scrutiny and criticism of vaccine distribution makes me think that at some point the pandemic will be a subject we think about in the past tense.
So what did we learn? First, not everyone experienced the pandemic in the same economic way. This was a big surprise, because most people thought the shock of shutdowns and the loss of in-person events, tourism and most restaurants would torpedo all state budgets. But then in the fall we started seeing tax revenue come in
higher than expected, and thought, wait a minute, what’s going on here? The best graphic I saw illustrating this phenomenon was contained in a Dec. 18 New York Times article headlined “Why Some States Are Seeing Higher Revenue Than Expected Amid Job Losses.” The graphic was a bunch of blocks representing each state, and it showed that some states’ revenue between March and October 2020 and 2019 was off by more than 15%: Hawaii, Wyoming and Oregon. At -32%, Alaska wasn’t even on the chart. But more than half the states, including California, Illinois, New York and Ohio, were only down between 1% and 5%. And 13 states were actually ahead, including Georgia, Colorado, Utah and Idaho. New York City collected $985 million more revenue than forecast for the first four months of its fiscal year thanks to the rally on Wall Street.
It appears that a relatively few entities, chiefly those involved in mass transit, were slammed, while others emerged almost unscathed. And some issuers that you thought for sure would founder kept paying the bills. It turned out, for example, that most major airports had hundreds of days of cash on hand, while convention centers never rely on business, but citywide taxes, to pay debt service. “Every municipal credit is unique and needs to be evaluated individually, and coverage and cash are king,” Suzanne Finnegan, chief credit officer at Build America Mutual, the bond insurer, reminded me via email this week. “For example, early concerns about sales tax reliance in smaller communities turned out to be wrong as sales taxes held up in these places and the communities actually impacted were the larger cities.”
Second, states and municipalities are resourceful. Unlike businesses, they have an almost unlimited range of things they can do to handle adversity. They can fire employees, postpone projects, raise taxes and fees, engage in scoop and toss bond refundings, tap reserves. This is why hysteria really doesn’t play well in MuniLand. Thousands of businesses’ lives will be claimed by the pandemic. Not one city or state will. Defaults will rise, but it will be the usual suspects: nursing homes, dirt bonds, speculative projects. Then there’s the wisdom of not putting all the eggs in one basket. As Gary Pollack, head of fixed income for private wealth management at Deutsche Bank, pointed out to me in an email this week: “Diversity is another important factor -- having all of one’s bonds in just one state does not provide protection when that state experiences difficulties.”
Finally, they can’t do it alone. Congress has provided billions of dollars in direct and indirect relief to states and localities, and there’s probably more on the way with a new administration. This, plus actual leadership on inoculation from the federal government, will go a long way toward returning the country to normalcy in the months ahead.
*This article is published by Joe Mysak and can be found on www.bloomberg.com
(Joe Mysak is a municipal market columnist who writes for Bloomberg. His opinions do not necessarily reflect those of Bloomberg LP and its owner, and his observations are not intended as investment advice.)
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