Financial Markets Update
March 2014
RBC Capital Markets, LLC
Paul M. Clancy, Director
Higher Education Finance Group
March 21, 2014
Section 1
Interest Rates Update
- US Treasury Market
- Municipal Market
Interest Rates Update
US Treasury Market
US Treasury Market Update
The Treasury Yield curve has similarly increased, as economic data has generally improved
U.S. Treasury Yield Curve Changes
4.00%
February 2014
3.50%
3.00%
2.50%
February 2013
2.00%
1.50%
1.00%
0.50%
0.00%
3 mo
6 mo
1 yr
2 yr
3 yr
02/07/2014
5 yr
7 yr
10 yr
15 yr
20 yr
30 yr
02/07/2013
Source: Bloomberg as of February 20, 2014
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US Treasury Market Update
US Treasury Yields reflect a gradual increase since lows in 2012
5, 10 and 30 year UST Rates: 2007 to Present
6.000%
5.000%
4.000%
3.000%
2.000%
1.000%
0.000%
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
5 Year UST
Jul-10
10 yr UST
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
30 yr UST
Source: Bloomberg as of February 20, 2014
5
Interest Rates Update
Municipal Market
Municipal Market Update
The tax-exempt variable rate demand note market has seen increased demand and lower yields;
bank letters of credit required. LOC charges ranging from 50 – 300 bps depending on borrower
credit quality. LOC may be replaced with SBPA for top rated universities; SBPA charges ranging
below 75 bps.
SIFMA vs. LIBOR
300%
250%
0.040% (4 bps)
Current 1M LIBOR:
0.155% (15.5 bps)
Average SIFMA:
0.546% (54.6 bps)
Average 1M LIBOR:
0.645% (64.5 bps)
%
200%
Current SIFMA:
150%
100%
50%
0%
May-08
Nov-08
May-09
Nov-09
May-10
Nov-10
May-11
SIFMA vs LIBOR
Nov-11
May-12
Nov-12
May-13
Nov-13
Average
Source: Bloomberg as of February 20, 2014
7
Municipal Market Update
The “AAA” MMD has increased relative to 2013 yields, due to a variety of technical factors,
including the discussion of quantitative easing by the Federal Reserve and bond fund flows
Municipal GO “AAA” MMD Yield Curve Changes
4.50%
February 2014
4.00%
3.50%
3.00%
2.50%
February 2013
2.00%
1.50%
1.00%
0.50%
0.00%
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29
Year
Year of
Maturity
02/07/2014
02/07/2013
Source: Muni DSS
8
Municipal Market Update
53 Year Historical Perspective
Bond Buyer 20 GO Index since January 1961
% of Time in Each Range Since 1961
Yield Range
14.0%
Bond Buyer 20 GO Bond Index
Today's Rate at 4.44%
12.0%
10.0%
8.0%
Less than 3.50%
3.50% - 4.00%
6.49%
4.01% - 4.50%
10.42%
4.51% - 5.00%
10.85%
5.01% - 5.50%
15.18%
5.51% - 6.00%
10.57%
6.01% - 6.50%
8.19%
6.51% - 7.00%
7.46%
7.01% - 7.50%
6.74%
7.51% - 8.00%
6.0%
8.84%
Greater than 8.00%
Total
3.97%
11.29%
100.00%
4.0%
2.0%
0.0%
Today’s 4.44% level is lower than 76.20% of historical rates since January 1961
Source: Bloomberg as of February 20, 2014
Weekly yields and indexes released by the Bond Buyer. Updated every Thursday at approximately 6:00pm EST. 20 Bond General Obligation
Yield with 20 year maturity, rated AA2 by Moody's Arithmetic Average of 20 bonds' yield to maturity.
9
Municipal Market Update
35 Year Historical Perspective
Bond Buyer Revenue Index since September 1979
% of Time in Each Range Since 1979
Yield Range
15.5%
Bond Buyer Revenue Bond Index
Today's Rate at 5.27%
13.5%
11.5%
9.5%
Less than 3.50%
0.00%
3.50% - 4.00%
0.00%
4.01% - 4.50%
3.23%
4.51% - 5.00%
12.64%
5.01% - 5.50%
21.94%
5.51% - 6.00%
13.92%
6.01% - 6.50%
9.41%
6.51% - 7.00%
3.95%
7.01% - 7.50%
6.96%
7.51% - 8.00%
Greater than 8.00%
Total
5.57%
22.38%
100.00%
7.5%
5.5%
3.5%
Today’s 5.27% level is lower than 72.22% of historical rates since September 1979
Source: Bloomberg as of February 20, 2014
Weekly yields and indexes released by the Bond Buyer. Updated every Thursday at approximately 6:00pm EST. 25 Revenue Bond
Yield with 30 year maturity, rated A1 by Moody's and A+ by S&P Arithmetic Average of 25 bonds' yield to maturity.
10
Municipal Market Update
While long-term interest rates have risen, floating rates remain extremely low
SIFMA vs. Revenue Bond Index
9.00%
8.00%
Revenue Bond Index
Feb 20, 2014 Rate at 5.27%
SIFMA
7.00%
6.00%
5.00%
4.00%
3.00%
524
bps
2.00%
1.00%
0.00%
Currently, SIFMA is trading at 4 basis points – 524 basis points difference between long term
debt
Source: Bloomberg as of February 20, 2014
11
Municipal Market Update
The recent decline of current “AAA” MMD reflects a decline in supply and recent bond fund inflows
“AAA” MMD January 1, 2007 to Present
Shift in “AAA” MMD Since Feb 2013
5.000%
6.000%
4.500%
5.000%
4.000%
4.000%
3.500%
3.000%
3.000%
2.000%
2.500%
1.000%
01/02/2007
01/02/2008
01/02/2009
01/02/2010
10 yr
01/02/2011
20 yr
01/02/2012
01/02/2013
01/02/2014
2.000%
30 yr
1.500%
Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb
January 1, 2007 to Present
10 Year
20 Year
30 Year
Maximum
4.860%
5.740%
5.940%
Minimum
1.470%
2.100%
2.470%
3.520%
3.840%
Current
2.500%
Shift in 30-year "AAA" MMD
2007
2008
2009
0.250%
0.790%
-0.900%
2010
0.520%
2011
-1.130%
2012
-0.740%
2013
+1.330%
Source: TM3, Thomson Reuters
10, 20, and 30 year “AAA” MMD shown to represent different average lives of municipal transactions
Rates as of February 21, 2014
Feb 1, 2013 to Present
10 Year
20 Year
30 Year
Maximum
3.040%
4.270%
4.510%
Minimum
1.660%
2.490%
2.790%
Average
2.381%
3.407%
3.730%
12
Municipal Market Trends Update
Municipal Market Trends Update
The diminished supply has resulted in tightening credit spreads between highly rated issuers and
lower rated issuers
Credit Spreads for Municipal Issuers
Basis Point Spread to AAA MMD
250
AA Spread
A Spread
BBB Spread
200
150
100
50
Feb-14
Jul-13
Dec-12
May-12
Oct-11
Mar-11
Aug-10
Jan-10
Jun-09
0
Source: Bloomberg as of February 20, 2014
14
Municipal Market Trends Update
RBCCM’s forecast for 2014 reflects diminished municipal supply relative to previous years
Muni Bonds: 2014 Issuance versus Redemptions
70
RBC Forecast Supply
Redemptions
60
$ Billions
50
40
30
20
10
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
Feb
Jan
0
Source: US Municipal Notes dated December 2, 2013
Available at: https://research.rbccm.com/sellside/EmailDocViewer?encrypt=678430e4-7c36-4040-a81cc1f32071e6f0&mime=pdf&co=rbcnew&id=Chris.Hamel@rbccm.com&source=mail
15
Municipal Market Trends Update
Municipal issuance in 2014 has lagged the historical average
Municipal Weekly Issuance: 2013 to Present
Competitive
14,000
Negotiated
Average
12,000
$ millions
10,000
8,000
Average: $6.1 billion
6,000
4,000
2,000
Feb-14
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
Aug-13
Jul-13
Jun-13
May-13
Apr-13
Mar-13
Mar-13
Feb-13
Jan-13
0
Source: Thomson SDC
16
Municipal Market Trends Update
RBCCM anticipates 2014 issuance to decline by 12% relative to 2013
Proportion of Higher Education Issuance to Total Municipal Issuance by Par Amount
12%
350,000
10.16%10%
300,000
9.69%
9.33%
8.69%
250,000
8.54%
8.24%
8.26%
8%
7.83%
7.59%
6.99%
200,000
6.59%
US$ MM
6%
150,000
4%
100,000
2%
50,000
301,172
281,668
268,131
21,156
18,926
2003
2004
300,772
316,373
287,051
324,406
28,659
25,772
26,627
32,258
32,544
2005
2006
2007
2008
2009
326,797
200,486
269,691
242,556
30,530
18,040
22,901
27,436
2010
2011
2012
2013
0
0%
Higher Education Issuance
Other Municipal Issuance
Higher Education Issuance as % of Total Municipal Issuance
Source: US Municipal Notes dated December 2, 2013; Thomson SDC
Available at: https://research.rbccm.com/sellside/EmailDocViewer?encrypt=678430e4-7c36-4040-a81cc1f32071e6f0&mime=pdf&co=rbcnew&id=Chris.Hamel@rbccm.com&source=mail
17
Municipal Market Trends Update
Municipal bond funds reflect modest inflows, further increasing demand for the limited supply
Muni Bonds: 2014 Issuance versus Redemptions
2,000
1,000
1,000
0
0
(1,000)
(1,000)
(2,000)
(2,000)
Fund Flows ($ Millions)
2,000
(3,000)
(3,000)
Weekly Fund Flow
4-Wk Moving Avg
(4,000)
(4,000)
(5,000)
Jan-11 Mar-11 Jun-11 Sep-11 Dec-11 Feb-12 May-12 Aug-12 Nov-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14
(5,000)
1/17 1/24 1/31
2/7
2/14 2/21
Source: Lipper Fund Flow Data
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Higher Education Financing Trends
Higher Education Financing Trends
Public Capital Markets
Public Capital Markets
•
Traditional Fixed Rate Bonds
– Tax-Exempt Rates
– Taxable Rates
•
Bond Insurance
– Build America Mutual (NR / AA / NR)
– Assured Guaranty Municipal (A3 / AA- / NR)
– Municipal Assurance Corporation (NR / AA- / NR)
•
Variable Rate Demand Bonds
– Bank Letter-of-Credit or Standby Bond Purchase Agreement
– Self Liquidity
•
Commercial Paper Programs
•
Floating Rate Notes
– Longer terms; fewer moving parts; less market risk
21
Higher Education Financing Trends
Private Financial Arrangements
Public Capital Markets
Becoming more popular as commercial banks and investment banks are utilizing
their own balance sheets to provide “credit” to clients
•
Direct Purchases (Commercial Banks and Investment Banks)
• Floating Rate Notes
• Flexible Drawdown Bonds
• Lines of Credit
•
Traditional Commercial Bank Loans
• Construction Loans
• Permanent Project Funding
• Fixed Rate Loan, Long Term, Short Term
•
Derivative Arrangements
– Interest Rate Swaps
– Rate Caps
– Rate Collars
23
Contact Information
Paul M. Clancy
Higher Education Finance Group
(215) 832-1518
paul.clancy@rbccm.com
24
Disclaimer
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