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Tender Option Bond Ratings 2022 Recap: New Issuance At Record Levels

S&P Global Ratings is providing a recap of rated tender option bond (TOB) trust activity in 2022 as well as a review of its total rated portfolio.

2022 New Issuance Trends: High Interest Rates Drive New Issuance

TOB new issuance soared as interest rates rose during 2022. S&P Global Ratings rated 639 new TOB trusts in 2022 compared with 171 in 2021, a year-over-year increase of approximately 274%. Total TOB new issuance reached a par value of nearly $12 billion, which represents a 71% increase from 2021 (see chart 1). Since 2021, most sectors saw a significant increase in activity within the securities underlying TOB transactions, with local government, education, and transportation experiencing the largest growth in 2022 (see chart 2).

Most liquidity banks saw a substantial uptick in activity as issuance volume increased, with the top three (JPMorgan Chase, Barclays Bank PLC, and Morgan Stanley Bank) providing liquidity for approximately two-thirds of the total issuance in 2022 (see chart 3). While the total number of trusts backed by credit enhancement increased since 2021, approximately 87% of trusts have no credit enhancement (see chart 4). S&P Global Ratings did not rate any new TOB programs in 2022.

Chart 1

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Chart 2

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Chart 3

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Chart 4

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The sharp increase in TOB volume was largely due to rising interest rates. (We used the Federal Funds target rate as an indicator for the general interest rate environment.) As interest rates rose, some issuers took advantage of the underlying municipal bonds' higher rates by collapsing existing low-yield TOB trusts and creating new ones. In 2022, S&P Global Ratings rated 57 new trusts that were unwound in the same year, representing 8.9% of new issuance volume.

As the short-term interest rate increased (as indicated by the SIFMA Municipal Swap Index Yield rate), investors poured more capital into money market funds, driving demand for floaters and variable-rate demand obligations (VRDOs). Add-on activity also grew as issuers added underlying bonds and TOB certificates to their existing trusts (see chart 5).

Chart 5

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Chart 6

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We took 308 rating actions in 2022, which was in line with 2021. Upgrade rating actions outpaced downgrades in 2022. Of the rating actions in 2022, 68.8% were upgrades, compared to 61.5% in 2021, reflecting improved credit conditions of the underlying securities. While all of the upgrades were related to the upgrades of the underlying securities of the various public finance sectors, the downgrades were primarily focused in the health care and utilities sectors (see chart 8).

Credit quality upgrades exceeded downgrades by a ratio of 3.4 to 1.0 (see chart 7).

Chart 7

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In May 2022, S&P Global Ratings lowered its issuer credit rating on Credit Suisse to 'A' from 'A+'. The downgrade did not result in any TOB rating actions, as none of the TOBs in our rated portfolio are supported by Credit Suisse.

Chart 8

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Total Portfolio Details

The total TOB portfolio currently rated by S&P Global Ratings contains 3,166 unique ratings within 1,619 trusts and a combined $36.17 billion in par (not including custodial receipts). Of this portfolio, JPMorgan Chase Bank supports the most transactions at 25.2%, followed by Barclays Bank PLC and Morgan Stanley Bank at 20.3% and 15.5%, respectively (see chart 9). Within the credit enhancement space (currently 16.5% of the total portfolio), Barclays Bank PLC supports 49.4%, followed by Bank of America and Mizuho Bank, both at 15.4% each of the credit enhanced TOB portfolio (see chart 10).

Chart 9

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Chart 10

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The largest public finance sector currently supporting TOB transactions is local government at 24.0%, followed by health care, education, and transportation at 17.4%, 17.3%, and 16.2%, respectively (see chart 11).

Chart 11

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2023 Outlook: Issuance Volume To Remain Steady Or Increase Slightly

We expect TOB issuance volume to remain steady or increase slightly in 2023, given the near-term relatively stable credit conditions of the related public finance sectors and the liquidity banks, along with the rising interest rate environment. However, given persistently high inflation and rising interest rates, the public finance sector may face some challenges that could lead to operating weaknesses for some of the municipal entities that we rate (for more information, see "U.S. Public Finance Year-In-Review: Credit Stability. Will It Last?," published Dec. 6, 2022).

This report does not constitute a rating action.

Primary Credit Analysts:James Ho, New York + 1 (212) 438 1306;
james.ho@spglobal.com
Mindy Xu, New York + 1 (212) 438 2879;
mindy.xu@spglobal.com
Research Assistant:Ryan Dorgan, Chicago
Research Contributors:Pankaj Tari, CRISIL Global Analytical Center, an S&P affiliate, Mumbai
Manash Mazumdar, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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