March 7th, 2016
This week we review our proprietary Geo Score and highlight which states are improving and which are not. We also dig into recently released information on the overall municipal market.
February DIVER Geo Scores
This morning, we released the most recent DIVER Geo Scores for States, counties and cities. The DIVER Geo Score represents a relative score of the economic health of a U.S. State, county or city. Based on a scale of 0-10, with 10 being the best, this data is updated monthly and is calculated from multiple economic and demographic factors related to three primary data categories—employment, income and housing.
The DIVER Geo Scores are available here.
The economic weakness of the Oil Patch States is reflected in rating actions by the credit agencies. Alaska was downgraded last week by Moody’s and put on negative watch by Fitch. Alaska had already been downgraded by S&P in January.
Moody’s moved West Virginia’s outlook to negative last fall.
At the State level, Texas retains the confidence of the raters. Texas’s ratings were recently confirmed with outlooks stable. The agencies believe that Texas’s economy is sufficiently diversified to allow it to withstand the oil market induced weakness. The agencies did include a few cautionary comments regarding oil in their discussions of Texas’s ratings.
Last week, the Texas Comptroller released data on February sales tax revenues. This data confirmed that Texas is continuing to feel the impact of low oil prices.
In an effort to add a positive spin to the large, continuing declines, the Comptroller pointed out: “…in the coming months we expect comparisons to last year’s collections to be more favorable, because collections in the last half of fiscal 2015 didn’t grow as fast the first half.” You are struggling when you hang your hat on things looking better because you are transitioning to weaker comps.
While the ratings of the State of Texas are secure for the near to medium term, the ratings of less diversified local governments could be pressured. Moody’s has placed 11 local governments under review for downgrade.
Each of these local governments are in areas with oil employment above both the U.S. and Texas averages and each of these has seen large increases in unemployment rates, albeit from low levels.
While the State of Texas, Midland City and Odessa City all still have unemployment rates below national averages, the underperformance of their labor markets over the last year is dramatic.
MSRB Fact Book Reveals Interesting Trends
The MSRB recently released its 2015 Muni Fact Book. The Fact Book is a compilation of statistics distilled from its trade reporting system and the EMMA Continuing Disclosure system.
The data shows a 4.6% increase in trading volumes (par) for fixed rate securities and a -41.4% decline in trading of variable rate securities.
The decline in variable rate trading is the continuation of a multi-year slide since the financial crisis. This decline can be attributed to several factors:
- Due to increased cost and decreased availability of credit enhancement, issuers have been shifting their variable rate exposure to loans from banks and away from traditional variable rate securities.
- Many issuers have also been taking advantage of what they believe are low fixed rate instead of variable rate borrowings.
- The low level and compressed range of municipal variable rates may also be a factor: at higher levels of rates, holders routinely swapped in and out of various securities to try to pick up a yield advantage. With less differential in yields between securities, there is much less benefit from doing these swaps.
- We suspect that there also may be market structure driver as well. Prior to the crisis, remarketing agents were content to process “tenders” as “trades”. After the crisis, several remarketing agents moved to require tenders to be processed through tender agents. These tenders are likely not reported to the MSRB.
According to the MSRB statistics, the top fifteen fixed rate securities by trading par amount represented just 2.1% of the total of all bonds. The top-trading bond (Puerto Rico 8.00 ’35) accounted for 0.5% of the total by itself. Nine of the fifteen were high yield bonds.
The data also reflect a slight decrease in dealer market share concentration. The top five dealers lost market share to dealers in all the other categories.
Dealer Trading Market Share by Par Amount
Dealer Trading Market Share by Number of Trades
Have a great week,
Michael Craft, CFA