Investing In Distressed COVID Opportunity Municipal Bonds
Key Takeaways:
1) Despite an overall improvement in the outlook for the municipal bond market, some sectors may remain vulnerable to default until the economy turns the corner.
2) BondView has identified a group of Distressed COVID Opportunity Bonds that trade at fire sale prices, may have temporary default risk but are backed by strong underlying assets.
3) Traditional credit rating agencies processes are slow to downgrade bonds and once they do it is usually too late to take action.
4) BondView’s COVID CREDIT Ratings identify early warning indications about increased risk in COVID impacted bonds and help investors keep stay abreast of fast moving developments.
Summary:
It has been a roller coaster ride for munis since the emergence of the COVID pandemic at the beginning of the year. A positive market environment at the end of 2019 was thrown into chaos by the economic lockdown, with a sell-off in all financial markets being mirrored in municipal bonds.
Now that markets generally appear to have stabilized, assisted in part by Federal measures such as the Municipal Liquidity Facility and the CARES Act, it is worth noting that not all muni bonds are created equal. Several sectors remain vulnerable to default risk including airports, hotels, conferencing, stadiums, senior housing and others – especially those where the debt coverage ratio is low.
Some COVID impacted bonds trade at fire-sale prices that reflect long term problems. For example, the defaulted bonds for the Amsterdam Senior Housing project, a beautiful property on New York’ s North shore of Long Island, are last traded at a 75% discount from original offering price. The marketplace prices reflect that the mortgage holder, not the bondholders, are in 1st lien position. So if the bond goes bankrupt, and the property doesn’t get financial assistance, the bond holders stand to loose their entire investment. This is the opposite of what investors generally hope for in the category of safe municipal bonds investing.
However, there are plenty of COVID impacted distressed bonds that appear to be investment opportunities. BondView has identified Distressed COVID Opportunity Bonds that are backed by strong assets even though some are currently at risk of default, for example…
Consider, the Hilton in fabulous downtown Columbus, Ohio which is next door to the city’s Convention Center. New bonds were issued on the Convention and Hotel Center in December 2019, to expand the existing hotel, just before the pandemic hit. With as much as 80 percent of the 2,500 business conventions held nationally cancelled, hotel occupancy in Columbus was no exception and with filings showing bookings dropped by 80% during the COVID crisis.
Things are bad enough that the bond issuer has dipped into its rainy day Debt Service Reserve 4 times in 2020 so far. Certainly an early warning sign to bond holders of problems to come. BondView assigned both its Lowest Overall Quality Rating and its Highest COVID risk rating on the bond.
Note that the $151 mil bond proceeds were to go towards the beautiful expansion of the existing hotel including a new 28- story tower including 463 guest rooms, a new lobby, restaurants, a fitness center and connections to the Convention Center next door. The project is in a state of flux due to COVID shutdowns.
So Where Is The Opportunity?
Despite this negative news, credit rating agency S&P assigned a BBB-rating to the bonds in Dec 2019, ensuring that it continued to be included in many investment grade municipal bond indices. But a stale rating isn’t enough to keep investment professionals from selling a problem bond. Doing a little research shows that the bonds underlying collateral is tied to the hotel’s real estate development. So if the bond defaults, the bondholders may end up owning a new large hotel in a major urban market.
It seems the smart money is betting the project will be a success. Below is a list of 24 professionally managed bond funds that own in total about $50 million of this bond and others in the issue.
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This report was generated using BondView’s COVID Credit Ratings, which are an excellent way to help municipal bond investors stay on top of fast moving market developments. By tracking five key bond specific factors, these ratings offer a simple low-cost way of identifying and monitoring their municipal bond COVID risk.
You can see more at: https://cms.bondview.com/landing-page-ratings.
Notes: All investing is subject to risk, including possible loss of principal., Diversification does not ensure a profit or protect against a loss., Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.