Smaller muni deals offer potential for spread, but credit is key, portfolio managers say - Debtwire

Smaller muni deals offer potential for spread, but credit is key, portfolio managers say

29 July 2020 - 12:00 am

Big municipal bond deals may get the spotlight, but smaller ones potentially can offer better spreads, according Cumberland Advisors’ Shaun Burgess, who’s finding opportunity these days in new issues in the USD 25m to USD 100m range.


Cumberland typically focuses on the higher end of the muni market – credits rated single-A or better–, said Burgess, a portfolio manager and fixed income analyst at the Sarasota, FL-based firm.


“It’s a popular area of the pool to swim in so to speak,” he said. “The higher-grade stuff, a lot of the essential service revenue stuff, that tends to be pretty desirable.”


Smaller deals can sometimes offer a bit more spread because of their size, Burgess said. Though the firm is on the hunt for any higher-rated small deal that might offer additional spread, recently it’s been purchasing insured deals, he said.


“You get the added layer of an insurer, coupled with the underlying [credit], which is still going to be fairly strong at single A or above, so we like those kinds of structures,” Burgess said. “Even if you can pick up 15 or 20 basis points — it doesn’t seem like much — but with yields where they are, it’s all additive.”  


Cumberland recently participated in a deal by the Wilkinsburg-Penn Joint Water Authority, Pennsylvania-based issuer, which last week issued approximately USD 26m of Series of 2020 water revenue bonds, insured by Build America Mutual Assurance Company, he said.


While small deals can offer opportunity, credit is still paramount, Burgess said.


Mary Talbutt, lead portfolio manager for fixed income at The Stanley-Laman Group, Ltd, agrees with Burgess, both when it comes to the potential for additional spread small deals can offer as well as the need for credit vigilance, especially now.


“You do get extra basis points on smaller deals,” Talbutt said. “The shops that will have problems doing this are large mutual funds, pension plans, insurance company portfolios, etc. …  because they are too large to take on the smaller deals.”


Buying more smaller deals also leads to greater diversification of credit exposure, she said. Still, now is a good time to avoid certain sectors and states, Talbutt said.


A number of the smaller issuers are using the bond market to raise the equivalent of a bridge loan, she said. They are taking on more debt to keep the lights on and the bond holders paid.


Meanwhile, an initial proposal for the next round of federal COVID-19 relief released Monday (27 July) by the US Senate drew criticism from Clarence Anthony, chief executive officer and executive director of the National League of Cities.


“The draft coronavirus relief package released [Monday] is out of touch with the grim reality facing communities large and small across the nation,” Anthony said in a statement issued Monday.


Credit ratings “are king right now,” Talbutt said.


by Kathie O’Donnell