NEWS // 06.23.20
Market update: Impact of the pandemic on bond sales, refinancing and credit ratings
Huckabee’s next three on-demand webinars highlight the state of the market in three key areas: Bond Sales / Financing, Real Estate and Construction. The first of this series looks at the school bond market and the impact of COVID-19 on bond sales. Our guest is Derek Honea of RBC Capital Markets, a financial advisor and underwriter for public school districts.
Derek walks through the current state of the municipal bond market and the impact to school districts who are looking to sell bonds, move up the sale of bonds or refinance, as well as those concerned about underlying credit ratings.
We’ve broken out each question for MORE Momentum #4: Bond Market below. You can view the webinar in its entirety by clicking here.
Introduction
What are you seeing in the bond market today with the impact of COVID-19?
It’s rare to see the municipal bond market shut down. School districts couldn’t access the capital markets, and it’s one of the only times in the past couple of decades that we’ve seen this, except for in 2008 / 2009. We are through that time now and getting back to normalcy.
Interest Rates + Moving up the Sale of Your Bonds
The municipal bond market essentially shut down at the beginning of the pandemic. Today, it’s open for business as usual and rates are steadily returning to at or near all-time lows. It’s an attractive time to lock-in a long-term rate.
Determining if it’s the right time to move up bond sales and take advantage of the rates is case-by-case. Typically, clients fall into two camps: Fast-growth districts who have strategically timed out their capital improvement plans and districts who have bond authorizations approved but have flexibility in their timing to sell. Things we consider in either case include impact to current rates, taxable assessed values, enrollment and the economy.
Interest Rates + Refinancing
We operate in two markets: Tax exempt and taxable interest rates. Both markets were shut down for awhile; tax exempt markets came back much sooner. The taxable market is just now returning to where we were in February, and we are seeing a lot of interest in refinancing taxable rates. These look really attractive, and we are generating a lot of debt-rate savings for school districts. If we can capture significant savings for clients, we will recommend that they refinance now.
Bond Market + Assessed Values
There is increased demand from investors for Permanent School Fund guaranteed paper, some of the highest credit bonds on the market. These are especially appealing given what’s occurring with corporate debt and corporate credits becoming distressed. We are seeing crossover buyers and European buyers investing in taxable bonds. Over the short term, we don’t see this demand decreasing. We are in a stable spot for interest rates over the next six months, although the presidential election could impact the market, including state and local debt.
In regards to taxable assessed values, we anticipate a large protest process which may impact certified values. Values for this school year were assigned before the pandemic; next year’s values will have fully accounted for its impact. We are advising clients who have flexibility in their sales to wait and see what the certified values look like. This gives you more data when structuring the debt. There may be ongoing impact in the coming years as well, and this is something for school districts to consider as they are developing bond programs.
Underlying Credit Ratings
Outside of local issues, RBC has been asked about the impact of COVID-19 to a district’s underlying credit rating, which could increase borrowing costs in the long-run. The rating agencies have put out a lot of information on what the impact could be, but we haven’t seen many credit rating downgrades for Texas school districts. This is something to keep an eye on as the impact of the pandemic continues to flow through the market.
Final Takeaways
The market is open, and school districts who have needs, have a plan in place and feel confident about their local economy can lock in historically-low interest rates. For those who have flexibility, it’s a good idea to stay in touch with your advisors and demographer to asses changes to enrollment, local economy and community needs.
To learn more about RBC Capital Markets, click here.
About MORE Momentum
Huckabee’s MORE Momentum series highlights how our educational partners are investing their time, energy and focus to keep the momentum going during this unprecedented “pause.” We will explore themes related to bonds, planning, design and safety and security, among other topics that impact Texas public education. Follow us @HuckabeeInc on Facebook, Twitter, Instagram and Linked In, or complete the form below to get a first look as new content is released.
