NEW YORK, NY--(Marketwire - December 8, 2010) - The municipal bond environment is shifting rapidly, and investors and analysts require a new outlook and better tools to manage it.
The current municipal landscape is suffering from fiscally strapped state and local governments, a product of the recession and the stagnant economy, overstretched resources and an electorate unwilling to support new taxes or federal support for local government. All this coupled with continuing questions about the reliability of credit ratings and the limited availability of bond insurance has led to increased concern about this "safe" sector of the market.
Bond investors and analysts need to look beyond agency ratings and financial statement review to more accurately measure the underlying credit-worthiness of municipalities, according to a new commentary, "The Growing Crisis in the Municipal Bonds Market: Do Analysts and Investors Have the Right Mindset and Tools to Handle It?," by Gregg Bienstock, principal at Lumesis LLC, a software firm that develops analytic and decision-support tools, including Demographic Information Visualization for Economic Research (DIVER), for the municipal bond market.
Investors and analysts must embrace and focus on current demographic and economic data that directly reflects a municipality's ability to generate revenue and repay its obligations, argues Mr. Bienstock. "Data that can help foretell the direction of critical drivers of credit health and augment even timely financial disclosures will grow in importance."
Risk is heightened in part because many municipal bonds are no longer the General Obligation or essential purpose type common in the past. Municipal debt now includes non-essential purpose government credits and not-for-profit credits. Municipalities at all levels are struggling with the reality of existing debt, pension and other post-employment benefit obligations, shrinking tax receipts and Federal government support, aged infrastructure and an economy that is, at best, sputtering, according to the commentary.
"Given the increasing risk, those responsible for managing municipal exposures need more and better resources so they can look ahead," Mr. Bienstock added. "Looking back at stale financials and relying on the work of the agencies that, in many cases, can be more than a year old are no longer optimal choices."
Mr. Bienstock's paper addresses...
- Why munis are now at increased risk: "Today, state and local governments are massively challenged -- costs are escalating, the tax base has been severely impacted by the prolonged economic downturn, and the 2010 election strongly suggests that voters won't support new taxes or federal spending to ease the burden on the states," Mr. Bienstock said. States and municipalities are talking about things previously unthinkable -- cutting work forces, demanding concessions from municipal unions and, in some cases, taking steps to simply meet payroll (not merely balance their budgets).
- Why the rating agencies aren't a reliable source of information on muni debt risk: "While the agencies admittedly have strong historical track records when it comes to analyzing municipal credit, two factors cannot be ignored: the time lapse from an initial review of an issue to the agency revisiting the credit -- up to twenty-four months -- and the reality that the agencies have succumbed to political pressure and increased the ratings of many states even as fundamentals deteriorated," Mr. Bienstock said. Recalibration has caused confusion among some investors, as many municipal issues are "recalibrated" up the ratings scale at a time when the creditworthiness of municipalities is suffering more than it has in decades.
- Why municipal bond insurance is rarely an option for investors: The bond insurance industry steadily eroded during the financial crisis leaving only one active issuer of financial guarantees. "Starting in late 2007 and culminating in October 2010, the insurers all lost their triple-A rating," Mr. Bienstock said. "The restructuring of the major players in the bond-insurance market meant that in 2010 fewer than 10% of new municipal bonds were insured -- down from more than 50% in 2007. The significantly diminished availability of bond insurance means that investors will have to focus even more on the quality of the underlying credit."
- Why municipal financial statements suffer from a lack of consistent, timely reporting: "Municipal securities are exempt from the registration and reporting requirements of the various securities acts and not always prepared in accordance with GAAP," Mr. Bienstock explained. A recent survey by Merrit Research Services found that audited financial statements of municipal bond issuers take about twice as long to reach investors as corporate borrowers' statements -- six months, as opposed to 60 to 90 days.
- How demographic and economic data give better insight into risk -- and how investors can use this information to supplement or replace traditional risk measurements: "Meaningful demographic and economic information may be the best predictors of tax base, tax rolls, tax receipts and indicators of government spending," Mr. Bienstock says. Those variables in turn reflect directly on the municipality's fiscal health and its ability to meet its obligations. Potentially relevant data include statistics on commerce, crime, education, housing, income, pension, politics, population, tax rates/receipts and employment -- with detailed sub-categories within each category. It's then possible to measure and manage these credit metrics and risk concentrations against relevant indices or other internal barometers of stress or well-being. The combination of direct insight into the economic realities of the community and accurate analytic tools should lead to the development of new, more meaningful municipal credit metrics.
"Warren Buffet has said that he is a big advocate of doing your own due diligence, and that at Berkshire Hathaway, he doesn't rely on ratings," Mr. Bienstock said. "We agree -- ratings and traditional measures may be useful, but cannot be the end all and, given current trends, there is no substitute for using the best analytics to take a long hard look under the hood."
About Gregg Bienstock
Gregg L. Bienstock is one of the founding Members of Lumesis LLC. Immediately prior to co-founding Lumesis, Mr. Bienstock was the Chief Operating Officer and General Counsel of RangeMark Financial Services. Prior to joining RangeMark, he spent more than thirteen years with Ambac Financial Group. For most of his last two years, he was responsible for Strategic Initiatives where he led efforts to evaluate new business opportunities and co-led acquisition and joint venture teams. During his Ambac tenure, Mr. Bienstock rose to the level of Senior Vice President, Chief Administrative Officer and Employment Counsel and was responsible for the management of the global Technology, Employment Law, Corporate Governance and Compliance, ERISA, Human Resources, Marketing and Administration functions. Prior to joining Ambac, he served as a Director of Human Resources for Bristol-Myers Squibb. From 1993 through February 1996, he was an associate in the Labor and Employment Law Department of Proskauer Rose, LLP and from 1992 through September 1993 he was an Assistant Deputy General Counsel for the Mayor's Office of Labor Relations for the City of New York.
Mr. Bienstock is a 1991 graduate of Brooklyn Law School. He received his B.S. in Business and Economics from the University of Maryland. Mr. Bienstock is a member of the American Bar Association and the New York State Bar Association. Additionally, he serves as a member of the Board of Directors of The Children's Village, leads a fund-raising initiative ("Tri-ing for CV") for the Children's Village and is an amateur triathlete.
About Lumesis
Lumesis (http://www.lumesis.com) is an analytical software firm dedicated to analyzing demographic and economic data in the United States and its territories. Lumesis currently provides Demographic Information Visualization for Economic Research (DIVER), an off-the-shelf analytical platform primarily for investors in municipal debt. Lumesis is dedicated to delivering timely data and robust analytical tools for domestic entities with analytical needs. Lumesis provides relevant and timely data and analytical tools that enrich analysis and decision-making. Lumesis' analytic tools are used by analysts, portfolio managers, risk managers, investment bankers, government stakeholders, academics and other professionals.
About DIVER
Lumesis has developed a proprietary credit analytical tool, Demographic Information Visualization for Economic Research (DIVER), for the fixed income municipal market. The DIVER platform encourages a new approach to municipal credit evaluation which uses demographic and economic information as leading indicators of tax rolls, receipts and expenditures in order to evaluate a municipal issuer's ability to meet its capital markets obligations. DIVER brings together more than 90 data sets (ever-expanding) and allows the user to utilize various tools to analyze municipalities. DIVER also allows portfolio managers to evaluate issuer and regional risk concentrations as well as a portfolio's exposure to areas with favorable or unfavorable demographic and economic characteristics. DIVER, as a new technology, has used state of the art, open source tools to create its platform.
To obtain a copy of "The Growing Crisis in the Municipal Bonds Market: Do Analysts and Investors Have the Right Mindset and Tools to Handle It?," please visit http://www.lumesis.com/misc/The_Growing_Crisis.pdf.
For more information, or to arrange an interview or bylined article, contact Katarina Wenk-Bodenmiller of Sommerfield Communications at (212) 255-8386 or katarina@sommerfield.com.
Contact Information:
For more information, or to arrange an interview or bylined article, contact:
Katarina Wenk-Bodenmiller
Sommerfield Communications
(212) 255-8386
katarina@sommerfield.com