March 17, 2014
Last week proved to be very interesting as Puerto Rico came to market with a $3 billion deal that ended up over-subscribed. In a sign of the level of sophistication needed to understand the risk, the bonds were issued with a minimum denomination of $100,000 and we saw firms such as Wells not allow for the bonds to be purchased for retail (we heard rumors of other firms not providing for allocations to retail as well). Perhaps prudent when you consider, a few weeks back, a certain daily publication quoted financial advisors saying they would buy pretty much anything yielding over 5% for their clients (this was part of a story around, none other than Puerto Rico and arbitration claims).
This leads me to two focal points for this week’s commentary – the first is looking at Puerto Rico against a place like Detroit. You may ask why as this analysis has already been explored. This week, Barron’s ran a story “Detroit Will Rise Again” which prompted me to look at some underlying data as well as some of the key points made around Detroit rising again. The second focal point is around the importance of disclosure at the time of trade in the primary and secondary market, especially for retail and non-sophisticated market participants. On this second point, I will keep it very short and link you to two other documents.
So as not to single out Puerto Rico, I also looked at Detroit, Flint, Victorville, CA, Mississippi and Nevada – all at the bottom of the DIVER Geo Score for February. Given the Barron’s article cited certain data, I used several of the measures they focused on including Population, Poverty, Home Values and, of course, Pension data.
| Data Set/Locations |
Detroit, MI |
Puerto Rico |
Mississippi |
Nevada |
Flint, MI |
Victorville, CA |
| Poverty (%) – 2012 |
42.3 |
44.9 |
23.8 |
16.2 |
38.9 |
26.7 |
| Pension Plans Funded Ratio – 2012 |
91.45 |
8.4 |
57.91 |
68.62 |
67.93 |
87.31 |
| Pop. 18-64 Change (#) 2008-2012 |
-39,520 |
62,357 |
-18,600 |
-46,443 |
455 |
1,648 |
| Pop. 18-64 Change (%) 2008-2012 |
-8.28% |
2.79% |
-1.01% |
-2.68% |
0.73% |
2.46% |
| Median Home Value Change ($) 2009-2012 |
-$27,900 |
-$8,800 |
-$1,800 |
$56,900 |
-$23,500 |
-$38,200 |
| Median Home Value Change (%) 2009-2012 |
-41.64% |
-6.91% |
-1.80% |
37.76% |
-41.81% |
-23.99% |
DIVER Analytics, Data Access, US Census, CAFRs,
The objective is not to pick on these locations but to point out the complexity of assessing the risk/reward associated with purchasing debt of places like Puerto Rico. Those institutions that purchased the $3 billion are undoubtedly sophisticated but there were many professionals who questioned if the yield was enough for the risk and wondered who would ultimately step in as the long-term holder of this debt. Below I single out the Poverty Rate and Median Home Value Change. On this second data point, Nevada looks to be the shining exception, however, one must not forget from where Nevada came following the real estate bubble.
DIVER Data Services
Staying with the Detroit comparison, the Barron’s article went on to note the private investment being made, and steps being taken beyond bankruptcy. Perhaps this is truly the distinguishing factor at this time. Certainly worth a read.
Turning now to disclosure. The Puerto Rico deal was incredibly complex with pages of disclosure and even a change in the law the bonds are subject to – New York v. Puerto Rico. This week also saw the SEC approve the MSRB’s rule around time of trade disclosure. To be sure, this new rule was a codification of years of interpretive guidance and notices around the principle-based G-17 but, to most, raises the reality of the need for better and more comprehensive disclosure around the purchase and sale of municipal bonds to and from all but sophisticated market participants. I am attaching a link to the SEC approval and MSRB Regulatory Notice for you review.
SEC Approval: https://lumesis.com/pdf/SEC-Approval-Order.pdf
MSRB Regulatory Notice: https://lumesis.com/pdf/SEC-Approves-MSRB-Rule-G-47.pdf
As our world becomes increasingly more complex, the reality of better disclosure and information to protect investors and issuers is something we all must embrace. It is a consistent message from the SEC, FINRA and others. Here is another link to a paper released last week on the subject of time of trade disclosure and suitability.
Municipal Time-of-Trade Disclosure & Suitability White Paper: https://lumesis.com/pdf/Time-of-Trade-Disclosure-Final-Rule.pdf
Have a great week,
Michael Craft, CFA, Managing Director, Credit
Lumesis, Inc.
CLICK HERE to Subscribe to the Weekly Commentary
Detroit, Flint, Puerto Rico & Others – What Can Distinguish These Places?
March 17, 2014
Last week proved to be very interesting as Puerto Rico came to market with a $3 billion deal that ended up over-subscribed. In a sign of the level of sophistication needed to understand the risk, the bonds were issued with a minimum denomination of $100,000 and we saw firms such as Wells not allow for the bonds to be purchased for retail (we heard rumors of other firms not providing for allocations to retail as well). Perhaps prudent when you consider, a few weeks back, a certain daily publication quoted financial advisors saying they would buy pretty much anything yielding over 5% for their clients (this was part of a story around, none other than Puerto Rico and arbitration claims).
This leads me to two focal points for this week’s commentary – the first is looking at Puerto Rico against a place like Detroit. You may ask why as this analysis has already been explored. This week, Barron’s ran a story “Detroit Will Rise Again” which prompted me to look at some underlying data as well as some of the key points made around Detroit rising again. The second focal point is around the importance of disclosure at the time of trade in the primary and secondary market, especially for retail and non-sophisticated market participants. On this second point, I will keep it very short and link you to two other documents.
So as not to single out Puerto Rico, I also looked at Detroit, Flint, Victorville, CA, Mississippi and Nevada – all at the bottom of the DIVER Geo Score for February. Given the Barron’s article cited certain data, I used several of the measures they focused on including Population, Poverty, Home Values and, of course, Pension data.
DIVER Analytics, Data Access, US Census, CAFRs,
The objective is not to pick on these locations but to point out the complexity of assessing the risk/reward associated with purchasing debt of places like Puerto Rico. Those institutions that purchased the $3 billion are undoubtedly sophisticated but there were many professionals who questioned if the yield was enough for the risk and wondered who would ultimately step in as the long-term holder of this debt. Below I single out the Poverty Rate and Median Home Value Change. On this second data point, Nevada looks to be the shining exception, however, one must not forget from where Nevada came following the real estate bubble.
DIVER Data Services
Staying with the Detroit comparison, the Barron’s article went on to note the private investment being made, and steps being taken beyond bankruptcy. Perhaps this is truly the distinguishing factor at this time. Certainly worth a read.
Turning now to disclosure. The Puerto Rico deal was incredibly complex with pages of disclosure and even a change in the law the bonds are subject to – New York v. Puerto Rico. This week also saw the SEC approve the MSRB’s rule around time of trade disclosure. To be sure, this new rule was a codification of years of interpretive guidance and notices around the principle-based G-17 but, to most, raises the reality of the need for better and more comprehensive disclosure around the purchase and sale of municipal bonds to and from all but sophisticated market participants. I am attaching a link to the SEC approval and MSRB Regulatory Notice for you review.
SEC Approval: https://lumesis.com/pdf/SEC-Approval-Order.pdf
MSRB Regulatory Notice: https://lumesis.com/pdf/SEC-Approves-MSRB-Rule-G-47.pdf
As our world becomes increasingly more complex, the reality of better disclosure and information to protect investors and issuers is something we all must embrace. It is a consistent message from the SEC, FINRA and others. Here is another link to a paper released last week on the subject of time of trade disclosure and suitability.
Municipal Time-of-Trade Disclosure & Suitability White Paper: https://lumesis.com/pdf/Time-of-Trade-Disclosure-Final-Rule.pdf
Have a great week,
Michael Craft, CFA, Managing Director, Credit
Lumesis, Inc.
CLICK HERE to Subscribe to the Weekly Commentary