(Bloomberg) – Investor worries about crises within the financial industry are bleeding in a corner of the $4 trillion municipal bond market where big investment banks are backing power for utilities.
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Spreads widened on so-called prepaid gas bonds, which government agencies use to buy long-term supplies of natural gas. Large institutional banks act as transaction facilitators, guaranteeing supply and providing investors with tax-free exposure to bank credit. Now, with global markets on edge over the turbulence at Credit Suisse Group AG and the collapse of some US regional banks, these bonds have depreciated.
Unlike traditional municipal bonds which are backed by government revenues such as taxes or household utility bills, these securities are more closely correlated to the corporate market on a credit basis. So while the broader municipal bond market rallied, prepaid gas bonds underperformed as a key rating factor is the quality of the bank involved in the transaction.
Debt due 2038 sold by the Public Authority for Colorado Energy traded at an average spread of 193 basis points on Tuesday, 31 basis points higher than where bonds changed hands in early February, the data shows. trading compiled by Bloomberg.
Similarly, a bond sold by the Lower Alabama Gas District maturing in 2046 traded on March 13 at an average spread of 149 basis points, up from the 60-day average of 139 basis points, according to commercial data. And looking at large block debt deals due 2037 sold by Salt Verde Financial Corp. in Arizona, investors demanded yields 179 basis points above the benchmark on March 13, up from 169 about a week earlier.
Learn more about prepaid gas bonds from Bloomberg Intelligence
Rather weak
Since most of these bonds are guaranteed by major Wall Street institutions – Citigroup Inc. guarantees the Salt Verde bonds, while Goldman Sachs Group Inc. provides the insurance for Lower Alabama – the risks associated with the debt are quite weak.
“Prepaid gas bonds have come under some pressure due to the volatility in the financial sector over the past few days, which makes sense given that banks tend to be among the main guarantors of gas supply in transactions. ; therefore, prepaid gas bonds are highly correlated to financials,” Barclays Plc analysts led by Mikhail Foux wrote in a research note released on Tuesday. “However, we still see value in the sector.”
“We have liked this sub-sector armed in the current market turmoil and continue to see value in it, especially if prepaid gas bond credit spreads widen further in sympathy with corporates,” they said. .
There have been a slew of such deals in recent years, both traditional prepaid gas deals and a new version of debt where utilities buy decades of renewable electricity. Growth is driven in part by a spread between bank funding costs and municipal bond yields. This has increased the rebates that utilities get for purchasing energy supply in advance.
In 2022, a record $10.3 billion of this debt was sold on the muni market, even when issuances were down overall from 2021. And another $4.8 billion were issued in 2023, on track to shatter last year’s surge.
“The main participants in prepaid gas deals are the U.S. financial center banks,” which are high-quality, highly regulated, and don’t have the asset-liability mismatches seen in troubled regional banks, Jason Appleson said. , Head of Municipal Bonds at PGIM Fixed Income.
“We are seeing spreads widening in a market where the fundamentals are clearly so strong – if you liked them when spreads were tighter, you definitely should like them when spreads are wider.”
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