PABs have tanked along with other capital markets this year, but may be primed for a rebound
Private activity revenue bonds issued to finance US infrastructure projects have taken it on the chin this year along with wider capital markets, but are mostly performing in line with the rest of the slumping municipal bond market, according to an Infralogic analysis of trading activity and a PAB investor.
The PAB market is unlikely to recover until the Federal Reserve ends its fiscal tightening campaign, but will rally once that happens, said Roberto Roffo, a managing director and portfolio manager at SWBC Investment Co.
On average, a basket of the 16 most actively traded PAB tranches tracked by Infralogic declined by 15.48% through the end of 3Q22 — with individual price declines ranging from 0.28% to 29.72% year-to-date — while average yields have spiked to 5.13% from 3.1% in initial 2022 trades. The basket’s average price is down about 19.75% from a year earlier, when yields averaged 1.53%.
And the price declines have accelerated lately. In early September, the basket’s price average was off less than 10% year-to-date with two of the securities posting gains.
“We’ve never had a year like this,” said Roffo. “This is the worst year we’ve ever seen.”
Still, the bonds, which include both taxable and tax-exempt securities, are largely trading in line with the rest of the muni bond market — and the declines are in line with wider capital markets.
The Infralogic-tracked active PABs are slightly lagging Standard & Poor’s Municipal Bond Infrastructure Index, which was down 12% through the end of the third quarter, and the narrower S&P Municipal Bond Infrastructure Select Plus Index of bonds that are a minimum of USD 100m in size, which was down 13.89%. They also underperformed the broader S&P Muni Bond Revenue Index, which was down only 12.83% YTD on 30 September.
But the 16-bond basket bested the S&P Taxable Municipal Revenue Bond Infrastructure Index and the S&P Taxable Municipal Revenue Bond Infrastructure Select Plus Index, which were off 19.88% and 20.65%, respectively, through the end of 3Q22. The Infralogic-tracked PABs have also fared better this year than the stock market. Through the end of September, the Dow Jones Industrial Average fell 20.9%, the S&P 500 was down 24.76% and the Nasdaq composite was off 32.4%. They are also performing better than corporate bonds tracked by the S&P 500 Bond Index, which was down 17.5% through the first three quarters of the year.
Top decliner:
Project:
NTE Mobility Partners Segments 3 LLC Segment 3C
Tranche:
USD 871.1m, 3.922% bonds due Dec. 31, 2049
Last 3Q22 trade:
USD 76.054, 5.655% yield, 30 September
YTD price performance through 30 September:
-29.72%
Project synopsis:
Adding and operating managed lanes on the North Tarrant Expressway north of Fort Worth, Texas.
Performance:
NTE segment 3 generated USD 80.4m in revenue in 1H22 from 16.9m transactions, missing budgeted revenue projections by 1.8% and transaction projections by 11.1%, according to the project’s latest financial report. Much of that decline was due to highway closures in January and February due to “unprecedented” winter weather, and to the Covid-19 Omicron surge, according to the report. Indeed, revenue rebounded in 2Q22 to USD 43.654m, 0.8% above the project’s budget, even though the quarter’s 9,075 transactions lagged projections by 9.2%. On a bottom-line basis, the project earned a net profit of USD 15.705m in 2Q22, 8.9% above budget projections of USD 14.418m. 1H22 profit missed projections by 0.1%.
Ratings action and commentary:
Recent ratings actions have been positive. Fitch on 25 August upgraded project bonds to BBB from BBB-, citing the project’s “strong traffic and revenue performance and robust pandemic recovery.” Moody’s revised NTE Mobility Partners’ outlook to positive from stable in May, and reaffirmed its Baa2 rating on the bonds. “We currently expect toll revenue growth to continue owing to demonstrated pricing power and strong demand that we expect to continue owing to the asset's central location coupled with new revenues from the near-term ultimate capacity expansion project,” wrote Moody’s analysts at that time.
Best performer:
Project:
Tranche:
USD 60.2m, 4% bonds due 6/30/2051
Last 3Q22 trade:
USD 97.233, 4.165% yield, 17 August
YTD price performance through 30 September:
-0.28%
Project synopsis:
Improvements to highway I-70 in the Denver area, including removal of an elevated viaduct.
Performance:
The project is 93.73% complete, with USD 275.7m in milestone payments made so far to equity owners Kiewit Meridiam Partners, with no deductions, according to a disclosure. At substantial completion, milestone payments will total USD 319m. Cumulative cash flows are in line with expectations, according to a separate disclosure. It is due to be completed in February 2023.
Ratings action and commentary:
S&P has not commented on its A- rating on the bonds since they were issued in September 2021. At that time, S&P analysts noted that the project was 80% complete, and that they viewed the risk of further delays as minimal.
The market’s credit fundamentals are strong, according to Roffo and ratings company reports on many of the securities. PABs are a relative value play, with many investors pegging the market to Treasury bonds, Roffo said.
Treasury yields have also spiked higher this year; the 10-year yield closed Wednesday, 5 October, at 3.76%, compared to 1.63% on 3 January, according to the US Treasury Department. Roffo believes investors will jump back into the PAB market when sentiment turns — which he said is dependent mostly on what the Fed does.
So, while the market may appear dim right now, “it’s setting up for a nice rebound in the next 12-18 months,” Roffo said.
