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The widespread economic fallout from the COVID-19 crisis dealt a formidable challenge to many municipal bond issuers’ ability to maintain and improve their credit quality. Given the need for state-level lockdowns and the subsequent realization that a return to pre-pandemic activity would take much longer than anticipated, the outlook as of mid-2020 pointed to an extremely trying period for the municipal bond market.

However, a combination of factors came together over the course of the year that led to more benign conditions than initially feared and set the stage for many better-than-expected credit outcomes. While some municipal credits have been downgraded since the pandemic began, most have…

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Conor McEachern
Conor McEachern
Fixed Income Credit Analyst
Boston

Broadly speaking, as of this writing, we believe municipal bond (muni) valuations may offer an attractive entry point for discerning investors. As of December 2020, municipal credit spreads had yet to make up for ground lost to the COVID-19 sell-off earlier in the year (Figure 1). Lower expected 2021 tax-exempt supply and strong retail demand suggest there is room for further spread tightening.

Having said that, challenges remain. Fundamentals in some areas of the muni market continue to be tested by the COVID-induced economic slowdown. Accordingly, deep credit research remains critical in this space. Let’s take a closer look on a sector-by-sector basis.

Figure 1

BBB muni spreads have tightened but remain elevated

1. Not-for-profit health care: Jenn Soule (Sector Analyst)

2020: Lessons learned

  • Market tends to overcompensate after…
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Timothy Haney
Tim Haney
CFA
Fixed Income Portfolio Manager
Boston
Brad Libby
Brad Libby
Fixed Income Credit Analyst
Boston

Remote learning, social distancing, and student safety aren’t the only challenges facing the higher education sector amid the protracted global health crisis. Colleges and universities worldwide are also currently grappling with declining enrollment rates, relatively flat tuition, and steep discounting to entice prospective students. In response, to make up for lost revenue, many institutions are cutting salaries, delaying retirement contributions, and slashing non-essential capital expenditures. Some are even eliminating academic programs and increasing endowment spending.

Despite these headwinds, we continue to like the higher ed municipal bond sector for many of the same reasons laid out in our June blog post and see attractive opportunities in select areas of the market. Of course, deep credit research will be critical to…

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Paul Ko
Paul Ko
Fixed Income Credit Analyst
Boston

The US hospital sector saw a substantial direct impact from COVID-19, primarily via the sharp decline in elective medical procedures, but also received significant aid from the Coronavirus Aid, Relief, and Economic Security (CARES) Act. So what now?

Ultimately, the performance of hospitals — and the municipal bonds (munis) they issue — will depend on the severity and duration of the current health crisis. We expect diminished revenues for the remainder of 2020, although many hospitals are cutting costs and deferring capital spending to help offset this. We believe hospitals with strong balance streets and fundamentally viable operations are best positioned to weather the crisis; for weaker hospitals, ratings downgrades are likely.

The current condition of hospitals

Coming into the pandemic, financial performance across the US hospital sector was largely stable. Most health care providers were managing through various sector headwinds, thanks to…

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Jennifer Soule
Jennifer Soule
Fixed Income Credit Analyst
Boston

COVID-19-related disruptions have impacted operating performance in the higher education sector of the US municipal market. However, we remain constructive on the sector overall, supported by balance-sheet strength across select issuers. 

Sector themes we are watching

Campus reopenings and student decisions will vary.
Campus reopenings will differ by state and the size of the institution. For example, California State University already decided to close all 23 campuses this fall, while smaller institutions such as Notre Dame and Boston College announced plans to reopen campuses.

Meanwhile, freshmen and returning students may weigh different options, such as taking online classes the first semester or staying closer to home — a benefit for public universities. Transferring to lower-cost or even “reach” schools could also be possible due to enrollment dislocations. Management teams say they are on track to meet…

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Paul Ko
Paul Ko
Fixed Income Credit Analyst
Boston

Fundamentals in some segments of the municipal bond (muni) market will likely be put to the test by the COVID-19-induced economic slowdown. However, we believe this challenging market environment creates opportunities for fundamental research to select strong credits that can weather a downturn. For investors with a long-term horizon and the ability to withstand some short-term volatility, current muni valuations may offer an attractive entry point.

How will COVID-19 impact muni fundamentals across sectors?

Some credits and sectors, such as transportation, health care, and special tax bonds, should feel a more immediate impact from the decline in revenues and the halt in consumer activity. Meanwhile, sectors such as property-tax-backed local general-obligation bonds, water & sewer bonds, and public-power credits will likely see minimal credit deterioration. The pace of ratings downgrades may accelerate in…

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Timothy Haney
Tim Haney
CFA
Fixed Income Portfolio Manager
Boston
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