The Fisc

There’s a saying in the oil exploration industry - “Oil is where you find it, but first you have to find it” – that I think is apt for issuers as they consider their financing needs in 2021. Large pools of new capital were actively buying in the municipal market in 2020, namely, new taxable investors. To tap into this new demand this year, issuers need to understand where to look, what’s needed to tap it well, and the immense value they can extract from doing so.

According to Bloomberg, state and local governments issued about $457 billion in 2020, largely driven by a sharp jump in the sale of taxable bonds. Of that amount, issuers sold $140 billion of taxable municipals, more than double the amount sold in 2019. That massive increase in taxable supply, coupled with ultra-low interest rates in other fixed-income markets, led to a swell of demand from both cross-over domestic taxable buyers as well as non-traditional, international investors. The outlook for 2021 from several Wall Street banks forecasts for even greater taxable supply in 2021.

For issuers, this is a huge development: there is now new demand willing to invest in taxable paper used to advance refund higher-coupon tax-exempt bonds. John Loffredo of MacKay Shields, one of the biggest tax-exempt and taxable buyers in the muni market, didn’t mince words when he spoke at BondLink’s IR Leadership Conference in 2020. For large issuers, pivoting your bond program to focus on this demand is more than just an opportunity, it’s really more like a necessity.

Three ideas came out of that interview with John:

1. Issuers should start by reviewing their list of existing tax-exempt investors to inquire if they also maintain a taxable desk. Knowing your current holders is always key, and this is one of the simplest ways to discover new opportunities.
2. A significant portion of international demand has mandates and incentives to invest in bonds designated as sustainable or to be used to create environmental benefits. If your bond sale is too small to be considered of benchmark size, a good way to still draw taxable demand is to go the extra step to create a sustainable offering.
3. Taxable buyers are not set up to undertake muni issuer credit surveillance. Proactive issuers in #muniland should take steps to ensure they are set up like corporate issuers: prioritize stronger transparency with regular investor communications, more accessible data, and a dedicated investor relations website.

This last point is critical for any large issuer hoping to tap new taxable demand as efficiently as possible. Tax-exempt issuers would do well to signal that future credit surveillance will be efficient for these new buyers.

How? Set up a dedicated IR website that centralizes all of your financial and other credit information that a buyer will benefit from in addition to disclosure filings on the MSRB’s EMMA website.

Here’s the link to the full interview if you’re interested in hearing Lofreddo’s perspective.