articles Ratings /ratings/en/research/articles/240514-q1-2024-tender-option-bond-update-issuance-plunges-amid-high-financing-costs-13102979 content esgSubNav
In This List
COMMENTS

Q1 2024 Tender Option Bond Update: Issuance Plunges Amid High Financing Costs

COMMENTS

SF Credit Brief: CLO Insights U.S. BSL Index: A Look Back At CLO Bond Exposures; August Downgrades Weigh On CLO Metrics

COMMENTS

U.S. Not-For-Profit Transportation Infrastructure 2023 Medians: Demand And Revenue Growth Improved Financial Medians To Post-Pandemic Highs

COMMENTS

The New "New Normal": Trends In U.S. Higher Education Post-Pandemic Versus Post-Recession

COMMENTS

U.S. Mortgage Revenue Bond Program Medians: Solid Foundations Underpin Strong Credit Quality


Q1 2024 Tender Option Bond Update: Issuance Plunges Amid High Financing Costs

New TOB Trust Issuance Declined

In first-quarter 2024, TOB issuance by par amount was down 51% compared to Q1 2023 due to higher financing costs. The SIFMA Municipal Swap Index, upon which TOB floating-rate issuance prices are based, averaged 3.31% in Q1. This is below the 3.64% in Q4 2023, but it remains elevated from quarters prior to Q3 2023. Issuance spiked to approximately $700 million in mid-March, primarily driven by a large one-off trust.

Chart 1

image

Chart 2

image

SIFMA's weekly volatile streak continued throughout much of Q1. However, this began to change in February as the volume of unremarketed bonds--also called inventory--stabilized. Much of the SIFMA volatility can be attributed to rate changes following large inventory swings since the rates hikes started in 2022.

Average leverage across fund-sponsored TOB trusts rose to 3.3x in Q1 2024 from 2.3x in Q4 2023. This was partly due to positive municipal bond returns in December 2023 in anticipation of further rate cuts this year. For fund sponsors, leverage magnifies the impact of bonds returns. As municipal bond prices rose in December 2023, fund sponsors with greater leverage in their TOB portfolios benefited more. (For more information on how TOBs contribute to portfolio leverage, see "U.S. Fund-Sponsored Tender Option Bond Leverage Remains Elevated As Short-Term Losses Rise," published Jan. 26, 2024.)

Chart 3

image

Sponsor Trends: Banks Drove Issuance

Fund-sponsored TOB issuance by par fell dramatically quarter-on-quarter, as financing costs remained elevated. For example, over that period, the issuances of Nuveen and Invesco--two of the largest TOB sponsors--fell 80% and 88%, respectively.

Bank-sponsored TOB issuance mostly reflected a large one-off trust issuance of approximately $650 million in March. This was sponsored by Barclays Bank PLC with underlying bond issuer Aztec Real Estate Parent LLC.

Chart 4

image

Chart 5

image

Municipal Sector Trends: A Shift Toward Housing

In the first quarter, securitizations of unrated housing bonds by bank sponsors dominated issuance (60% of the total) as banks pursued attractive yields. These trusts are set up with a custodial arrangement, whereby a custodial receipt--evidencing ownership in the unrated bonds--is deposited in the TOB trust. The bank sponsor credit-enhances the custodial receipt. If the unrated bonds don't make scheduled payments, the bank will cover the shortfall.

Chart 6

image

Table 1

Top 10 underlying bond issuers: Q1 2024
Underlying bond issuer Par amount (Mil. $) Number of trusts Sector

Aztec RE Parent LLC

652.593 1 Unrated housing

Arizona Industrial Development Authority

103 3 Unrated housing

Triborough Bridge & Tunnel Authority

85.165 3 Governments--tax secured

California Municipal Finance Authority

65 2 Unrated housing

Pennsylvania Housing Finance Agency

64.31 1 Housing

Commonwealth of Massachusetts

57.915 3 Governments--tax secured

Austin Housing Finance Corp.

39 1 Unrated housing

Wisconsin Health & Education Facilities Authority

35.815 3 Not-for-profit health care

Broward County

33.55 1 Governments--tax secured

San Antonio Housing Trust Public Facility Corp.

33 1 Unrated housing

Credit Quality Remained Very Strong Despite Downgrades

In Q1 2024, we took 11 rating actions on TOBs. All of these were driven by U.S. public finance rating actions. There were five upgrades and six downgrades among four sectors: transportation, higher education, public utilities, and not-for-profit health care.

Chart 7

image

The TOB trust portfolio continues to be supported by strongly performing assets in the 'A', 'AA', and 'AAA' rating categories. Only one TOB trust has a lower long-term rating, and it's just one notch lower at 'BBB+'. This is two notches from the 'BBB-' tender option termination event threshold, which--if triggered--would result in an immediate winddown of the trust and sale of the underlying bond.

Chart 8

image

Barclays, JPMorgan, and Morgan Stanley provide liquidity support to approximately 62% of the outstanding TOB trust floater receipts portfolio. For certain banks, we primarily rate fund-sponsored issuance that bank supports. For example, JPMorgan sponsors approximately $400 million in TOB trust issuance while providing liquidity support to $4.8 billion in TOB floaters. The mismatch is due to rating agencies having different ratings on these banks (see below).

Chart 9

image

The table below shows our ratings on all banks that provide support to TOB trust issuance. Our outlook on JPMorgan Bank N.A. is positive, indicating we could raise the long-term rating over the next two years (see "JPMorgan Chase Outlook Revised To Positive On Franchise Strength And Ability To Deliver Solid Results; Ratings Affirmed," April 1, 2024).

Table 2

TOB bank support provider ratings
Liquidity provider Rating as of May 10, 2024

Bank of America N.A.

A+/Stable/A-1

Barclays Bank PLC

A+/Stable/A-1

Citibank N.A.

A+/Stable/A-1

Deutsche Bank AG

A/Stable/A-1

JPMorgan Chase Bank N.A.

A+/Positive/A-1

Mizuho Bank Ltd.

A/Stable/A-1

Morgan Stanley Bank N.A.

A+/Stable/A-1

Royal Bank of Canada

AA-/Stable/A-1+

The Toronto-Dominion Bank

AA-/Stable/A-1+

UBS AG

A+/Stable/A-1

Wells Fargo Bank N.A.

A+/Stable/A-1

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Joshua C Saunders, Chicago + 1 (312) 233 7059;
joshua.saunders@spglobal.com
Secondary Contact:Liam Felter, Englewood +1 303 721 4178;
liam.felter@spglobal.com
Research Contributor:Sophia Frohna, Chicago;
sophia.frohna@spglobal.com

No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.

 

Create a free account to unlock the article.

Gain access to exclusive research, events and more.

Already have an account?    Sign in