Municipal Finance Investing Alert: 2021 May Be Your Year

November 13, 2020


David Ashley, CFA, is Portfolio Manager and Managing Director of Thornburg Investment Management. He joined Thornburg as associate portfolio manager in 2011 and was named portfolio manager in 2019. Mr. Ashley earned a B.S. in finance and MBA from the University of Delaware in 2001.

Eve Lando is Portfolio Manager and Managing Director of Thornburg Investment Management. Ms. Lando joined Thornburg’s municipal team in 2019 as associate portfolio manager and was named portfolio manager in 2020.

Ms. Lando holds a B.A. in urban studies from Columbia University and a J.D. from Brooklyn Law School, with a concentration in business law studies. She has extensive experience in municipal bond research and analysis, with particular focus on deal structures and legal covenants.

These two portfolio managers are excited about their prospects for returns in the market and reveal several top picks in this 4,272 word interview, exclusive to the Wall Street Transcript.

“In terms of how we are approaching the market, we are positioning the portfolio. March was a pretty exciting period. We did a lot of interesting things in the portfolios.

We were one of the sole bidders during that week to week and a half in March, when there was no liquidity.

We were able to add some decent securities to the portfolios, so some Illinois general obligation bonds, which we weren’t heavy buyers of because of credit and valuation concerns, but during that period, we added around $30 million to Limited Term itself at 6% yields and $0.92 on the dollar.

Right now, those are valued at $1.12 to $1.13 for price. The valuation is under 3% now. We did that with Illinois, and we did it with a lot of high-grade credits, with nothing too long there, unfortunately, because everybody was selling the shorter higher-grade paper. We worked more on the one- to eight-year range.”

The COVID 19 pandemic has added many risk points:

“On the desk, as early as the start of the year, we started credit discussions on immediate or future impact of the epidemic on municipal credit.

In the beginning, we were talking about restrictions on air travel to Asia, as in declines in shipments, so we want to talk about U.S. sport sectors. We started projecting the impact of lower oil and gas prices on states that are oil-producing.

Realize there was a heavy toll on hospitals, with the surge of numbers of cases. Things were moving to emergency care that historically has a lower reimbursement cost. As more states and local governments went into complete lockdown, and more COVID-19 cases were reported here, we proceeded in expanding.

We started with what we call a worry list. Airports were on the list, and ports, hospitals and long-term care facilities.

Those were the most immediate group of credits that had immediately rising expenses and/or drastic drops in revenues.

Then, we added everything connected with the tourism industry, so we are talking about hotels, concert halls, museums and anything with direct links to the occupancy tax or ticket sales or appropriations for nonessential projects. Those made our worry list as well.

It is true that munis historically have very low default rates, but our market is also fragmented, so we have nearly 80,000 issuers operating through 50 different states, meaning that they are issuing debt using 50 different legal frameworks and regulations. In this situation, we are consumed with understanding the resiliency of revenue streams.”

The portfolio managers familiarity with their municipal bond issues is impressive:

“For MTA — Metropolitan Transportation Authority — we have pared back that position across portfolios but not completely.

We also did some swaps during the March period to reset book yields. But in terms of the Strategic Municipal fund, we had $5 million roll off on September 1 of this year. That weighting is going to go down organically, so we have not addressed that one since it is organically going to roll off.

Connecticut is also one of our larger positions in that fund, so two for the state of Connecticut and one University of Connecticut, which is wrapped by an assured guarantee, so no issues there with the credit per se, especially based off the book yields. We are comfortable holding a slight overweight to those positions.

Kentucky is a prepaid gas bond. Those are backed by corporate credits with Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC), etc.

Those performed really well. When we first bought them back in 2018 and then 2019, we continue to rally so we are able to book those at really good yields. They sold off really hard during the March period.

During that period, we pared back some of prepaid gas just because of the downside performance that we didn’t like. Today, though, they rallied way back and are even tighter than they were before.”

Get the complete picture on municipal securities risks and opportunities by reading the entire 4,272 word interview with these two portfolio managers, exclusive to the Wall Street Transcript.