Municipal Bonds
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Alabama finds underwriters for $725 million worth of tax-free prison bonds
(28 Jun 2022) Breaking down a rather complicated series of events, here is what is going on in Alabama with respect to the improvement of conditions for prisoners, and the funding of these upgrades. The state faced a lawsuit from the DoJ which alleged that inmates housed in the state’s prisons were being exposed to “cruel and unusual punishment” due to dilapidated conditions. One such building, the Draper Correction Facility, had been in operation since 1939. To answer these concerns, the state contracted with CoreCivic Inc (CXW $12), a specialty REIT, to build and operate newer facilities, leasing them back to the Alabama Department of Corrections. To fund the projects the state planned to offer municipal bonds, with the debt being backed by annual appropriations to the Department of Corrections. After backlash over the privately built and managed facilities, Barclays Plc and KeyBanc Capital Markets, the primary underwriters, dropped out of the deal. A CoreCivic spokesperson called the activists “reckless and irresponsible” for (apparently) preferring to have inmates remain in the outdated facilities rather than support a public-private enterprise. Now, the deal has a new set of underwriters: Alabama-based Stephens Inc and The Frazer Lanier Company will co-manage the sale, along with help from Raymond James, Wells Fargo, and several other backers. The bonds will carry an Aa2 rating by Moody’s and a AA- rating by S&P Global. The yield on these tax-free general obligation (GO) bonds has yet to be announced, but they should hit the muni bond marketplace within the next month. As rates bottomed out and the world was in the midst of the pandemic, there was a dearth of new muni bond issues. While the US faces a probable recession early next year, higher rates and the need to rebuild the American infrastructure should present investors with a huge wave of new tax-free bonds. Who knows, they may even get close to the 5% range many of them offered income-oriented investors back in the early years of the century. We would settle for a 3% tax free rate.
(28 Jun 2022) Breaking down a rather complicated series of events, here is what is going on in Alabama with respect to the improvement of conditions for prisoners, and the funding of these upgrades. The state faced a lawsuit from the DoJ which alleged that inmates housed in the state’s prisons were being exposed to “cruel and unusual punishment” due to dilapidated conditions. One such building, the Draper Correction Facility, had been in operation since 1939. To answer these concerns, the state contracted with CoreCivic Inc (CXW $12), a specialty REIT, to build and operate newer facilities, leasing them back to the Alabama Department of Corrections. To fund the projects the state planned to offer municipal bonds, with the debt being backed by annual appropriations to the Department of Corrections. After backlash over the privately built and managed facilities, Barclays Plc and KeyBanc Capital Markets, the primary underwriters, dropped out of the deal. A CoreCivic spokesperson called the activists “reckless and irresponsible” for (apparently) preferring to have inmates remain in the outdated facilities rather than support a public-private enterprise. Now, the deal has a new set of underwriters: Alabama-based Stephens Inc and The Frazer Lanier Company will co-manage the sale, along with help from Raymond James, Wells Fargo, and several other backers. The bonds will carry an Aa2 rating by Moody’s and a AA- rating by S&P Global. The yield on these tax-free general obligation (GO) bonds has yet to be announced, but they should hit the muni bond marketplace within the next month. As rates bottomed out and the world was in the midst of the pandemic, there was a dearth of new muni bond issues. While the US faces a probable recession early next year, higher rates and the need to rebuild the American infrastructure should present investors with a huge wave of new tax-free bonds. Who knows, they may even get close to the 5% range many of them offered income-oriented investors back in the early years of the century. We would settle for a 3% tax free rate.
What is behind the rally in Puerto Rican bonds in default?
(03 Apr 2018) When I worked at a regional brokerage firm in the late 1990s, Puerto Rican municipal bonds were all the rage. For munis to be triple-tax-free, investors had to select from issuers in the same state where they resided. For residents of Kansas, for example, the disadvantage was great—think of how many more revenue and general obligation bonds were issued in states like California, Texas, or New York. There was one exception to that rule: investors in any state could buy triple-tax-free municipals from Puerto Rico.
It seemed almost too good to be true, and now we know why. When Puerto Rico went into default, bondholders saw the values of their debt holdings drop to around 20 cents on the dollar. A $10,000 face value bond became worth $2,000 on the secondary market. All of a sudden, however, prices on the island's largest issues have been rallying, reaching a high of 45 cents on the dollar. What is the reason for this bizarre rally on bonds in default? There have been some positive signs of life stirring as Puerto Rico emerges from its fiscal disaster. More money appears to be on hand, which should equate to more favorable treatment by creditors during the debt-restructuring talks.
They need all the help they can get: 45% of the island's population lives in poverty, yet government entities were able to issue over $70 billion in debt instruments. Sounds a lot like the sub-prime loan crisis of 2008/2009—sell all of the debt you can, and then leave someone else holding the bag.
(03 Apr 2018) When I worked at a regional brokerage firm in the late 1990s, Puerto Rican municipal bonds were all the rage. For munis to be triple-tax-free, investors had to select from issuers in the same state where they resided. For residents of Kansas, for example, the disadvantage was great—think of how many more revenue and general obligation bonds were issued in states like California, Texas, or New York. There was one exception to that rule: investors in any state could buy triple-tax-free municipals from Puerto Rico.
It seemed almost too good to be true, and now we know why. When Puerto Rico went into default, bondholders saw the values of their debt holdings drop to around 20 cents on the dollar. A $10,000 face value bond became worth $2,000 on the secondary market. All of a sudden, however, prices on the island's largest issues have been rallying, reaching a high of 45 cents on the dollar. What is the reason for this bizarre rally on bonds in default? There have been some positive signs of life stirring as Puerto Rico emerges from its fiscal disaster. More money appears to be on hand, which should equate to more favorable treatment by creditors during the debt-restructuring talks.
They need all the help they can get: 45% of the island's population lives in poverty, yet government entities were able to issue over $70 billion in debt instruments. Sounds a lot like the sub-prime loan crisis of 2008/2009—sell all of the debt you can, and then leave someone else holding the bag.