Recent trades in Florida Development Finance Corporation (FDFC) bonds issued for the Virgin Trains USA Passenger Rail Project are “worrisome,” bond market veteran JR Rieger told Debtwire Municipals in an interview yesterday [21 April].
“From my perspective, the trades we’re looking at for Florida Development 6.5s of 49 are worrisome for the municipal bond market in [regard] to its reputational risk,” said Rieger, owner of the Rieger Report LLC. “It appears that they are pre-arranged trades to support a certain price level.”
Seeing consecutive multi-million-dollar blocks of bonds trade customer to customer at such tight spreads indicates to him that those bonds weren’t out for the bid but instead could be part of pre-arranged trades, Rieger said.
FDFC Executive Director Bill Spivey said he was “not aware of pre-arranged trades.”
Rieger, who prior to starting the Rieger Report served as global head of fixed income indices at S&P Dow Jones Indices, isn’t alone in his concern.
Other market sources have also told Debtwire that those FDFC bonds issued for the rail line, currently called Brightline, as well as bonds related to the American Dream entertainment and retail project in New Jersey, have traded at surprisingly resilient levels despite the coronavirus pandemic.
“There’s very limited price discovery at this point in high yield,” a credit expert said recently, adding that the lack of clarity in price goes well beyond just those two names and “brings up the potential for a lot of the high-yield fund [net asset values] to be inflated.”
With the municipal market more focused now on headline risk tied to COVID-19’s impact on state and local budgets, the high-yield market has yet to really adjust, he said. In addition, both the credit expert and a market participant cited an issue that has sparked concern for a while in the municipal market – the concentration of muni mutual fund inflows among a handful of big firms. Concentration is particularly problematic in the high yield market, they said.
Nuveen, for one example, owns nearly 70% of the USD 500m of 7% coupon Public Finance Authority of Wisconsin Series 2017 limited obligation PILOT [payment in lieu of taxes] revenue bonds due in 2050 that were issued for the American Dream project, with the Nuveen High Yield Municipal Bond Fund holding most of that, the market participant said, citing the most recent data he’s seen.
The FDFC’s Series 2019A 6.5% surface transportation facility revenue bonds for the Virgin Trains rail project ranked as the Nuveen High Yield fund’s top holding as of 31 March, while the America Dream-related PILOT bonds occupied the No. 3 spot, according to Nuveen’s website. The fund is managed by John V. Miller, head of municipals at Nuveen.
The Nuveen High Yield fund’s net assets totaled USD 19.3bn as of 31 March, according to Nuveen’s website, a nearly 23% decline from USD 25bn as of 28 February.
Both the Virgin Trains and American Dream-related bonds are unrated, according to Electronic Municipal Market Access (EMMA).
Until a vaccine emerges, people are likely to avoid large gatherings, which isn’t good news for American Dream, the market participant said.
The PILOT bonds last traded on 6 April at 95/94.875, according to EMMA.
“The price doesn’t look representative of the underlying credit fundamentals,” said the market participant, who declined to speculate on what the proper levels might be.
A spokesperson for American Dream did not respond to a request for comment at the time of publication.
The FDFC bonds for Virgin Trains traded at 103.625/103.5 on 5 March and at 80/79.75 on 23 March, according to EMMA.
The three most recent trades – whose total trade amounts ranged from USD 6m to USD 10m—each took place in April and involved one customer selling and one customer buying, according to EMMA.
The last trade occurred on 7 April at 87/86.8.
The FDFC bonds appeared to be holding up well given the project’s dependence on meeting traffic targets, the credit expert said.
“That one’s completely suspect,” he said.
Brightline looks ahead
In a 25 March press release, Brightline said it was temporarily suspending service as of that date given the pandemic’s impact on South Florida.
“As we look ahead toward the economic recovery of Florida, projects like Brightline will help create jobs and a transportation network that will be more important than ever,” Brightline President Patrick Goddard said in the release.
Nuveen did not provide a response to Debtwire’s requests for comment regarding trading in the Virgin Trains and American Dream-related bonds. Nuveen’s website, however, featured a 2 April report addressing muni bond myths and realities. One of those myths is that non-rated bonds are illiquid and cannot be priced, the report said.
“This is simply not true,” the report said, adding that while such bonds aren’t covered by ratings agencies, asset managers who include them in portfolios typically have them priced daily via outside pricing services.
“And they are traded the same way as any other bonds—by having buyers and sellers agree on a price,” the report said, adding that non-rated bonds have seen price declines similar to rated bonds, but haven’t been experiencing significant defaults.
“Our experience suggests owning these bonds through a strategy overseen by a manager who performs careful and ongoing research and due diligence may provide meaningful opportunities beyond those offered by rated securities,” Nuveen’s report said.
The US Securities and Exchange Commission declined to comment when asked about the trading activity Rieger and others cited.