As the buyer base for Build America Bonds continues to expand, Fitch Ratings has created a website so investors unfamiliar with the municipal market can visit a "one-stop shop" for all BAB-related research.
The complementary site, launched over the weekend at www.fitchratings.com/BABs, already has about 500 pieces of research, including credit reports, specific sector studies, and information comparing U.S. states with sovereign debt.
"We're providing comprehensive information on a sector-by-sector basis, in addition to over-arching commentaries in Build America Bonds specifically," said Dan Champeau, Fitch group head of business development for U.S. public finance.
Since BABs were created by the American Recovery and Reinvestment Act in February 2009, the taxable asset has grown to become a $116.6 billion market, according to Bloomberg LP.
The key incentive for issuers is that the federal government pays 35% of the interest cost, allowing municipalities to issue taxable debt with yields that are attractive to a much broader class of investors. The traditional municipal market was and remains more limited to domestic investors and wealthy individual investors aiming to earn interest income that on most muni debt is exempt from state and federal income taxes.
"Fitch and the other rating agencies do a very good job of providing detailed analysis on municipal bonds, but we may not have been doing a very good job speaking from 30,000 feet up — speaking to the buyers that haven't been in this market before," said Eric Friedland, group credit officer for U.S. public finance at Fitch. "There's sort of this assumption that they know as much as the other buyers know, and that's not the case."
The Fitch analysts said negative headlines in the media have been a factor in spurring the agency to provide detailed information in a more accessible way.
"A lot of these nontraditional buyers are somewhat scared by the reports they've heard — that there is systematic risk in the muni market, or that there's going to be this cavalcade of defaults," Friedland said.
Of course, there has been some credit deterioration in the market owing to the financial crisis and global recession. Fitch data indicates that from January to March, public finance downgrades outnumbered upgrades for the fifth consecutive quarter.
Actual defaults remain minimal, however. According to Municipal Market Advisors, about $22.9 billion of the $2.8 trillion universe of municipal debt has experienced a credit impairment event since July 1. And in most of those cases, payments to bondholders were not interrupted.
"There are a lot of unique aspects to these sectors that the nontraditional buyer may not be familiar with," Friedland said. "We want to point out that general obligation bonds have broad property tax support, and that most municipal utility providers are not regulated, so they can unilaterally set rates."
Among the new buyers in the muni market are overseas investors, who never had an incentive to be involved with the lower relative yields of tax-exempt debt, as they have no to U.S. income tax obligations.
Patrick Brett, a director in municipal securities at Citi, just got back from Tokyo where he was marketing BABs. He said foreign buyers could benefit from more detailed information about the market as many news articles have spooked them into thinking that municipal credits are all about to collapse.
"It's almost like there's a template for these articles," he said. "They just dredge up the same examples — like Orange County and Harrisburg, and Jefferson County. And they sort of link those four of five things together and just extrapolate that to the entire market. It's tantamount to saying that since a few small corporates defaulted, therefore you should avoid the entire corporate bond market."
Brett added: "The more people get up to speed, the more they realize that these are actually much stronger sovereigns than what they are used to."
Fitch analysts said some of the most common questions among investors that are new to the market are: How are munis different from corporates? How is California different from Greece? And how is a state different from a sovereign government?
"Obviously, before BABs, they weren't particularly interested in the municipal asset class," Champeau said. "Here, with this new page, we can offer more detailed information to them."
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