It may be a crucial week for the municipal market’s federal priorities as Congressional Democrats try to reach a deal on President Joe Biden's spending plan.
Biden has said he wants a vote this week. House Speaker Nancy Pelosi, who has set an Oct. 31 deadline, said a deal is expected to come as soon as Monday or Tuesday.
The House may vote Wednesday on a $1.1 trillion bipartisan infrastructure bill that would mean more tax-exempt bond supply and private activity bonds as well as a boost to the public-private partnership sector.
The timing of the infrastructure vote depends on reaching a deal on cutting the reconciliation bill down to under $2 trillion from $3.5 trillion. The question is whether the municipal market priorities in the bill — restoration of tax-exempt advance refundings, a direct-pay bond program, and the expansion of bank-qualified debt — will survive.
The speed of the negotiations may end up working in the muni market’s favor, said Vikram Rai, head of Citi’s Municipal Strategy Group. Democrats may end up imposing sunsets on programs to cut costs as opposed to a more laborious line-item veto, Rai said.
“Given the…time constraints facing the negotiations, we think the muni provisions will become reality, even if it's for a shorter period,” Rai said Monday during a client call. Rai predicted a "high probability" that tax-exempt advance refundings and direct-pay program provisions survive.
The market understands that sunsets are often extended, he added.
“Even if the provisions such as direct-pay bonds were in effect for a shorter period than 10 years, the impact on the market will be the same as if the provisions were permanent," Rai said.
Muni lobbyists continue to push their goals and are urging issuers to make calls to Congressional staff, said Brett Bolton, vice president of Federal Legislative and Regulatory Policy at the Bond Dealers of America.
“We continue to impress to our friends in Capitol Hill the importance of these key muni priorities and continue to work for them,” Bolton said. “The word from the Hill is we’re expecting a vote on the bipartisan infrastructure bill Wednesday and expect to see a slimmed-down draft on reconciliation at the same time.”
"At this point, it is hard to say whether we will get through intact, take a haircut or lose everything," said Charles Samuels of Mintz Levin in Washington, counsel to the National Association of Health & Educational Facilities Finance Authorities. "There are literally thousands of other interests who are fighting to keep their revisions intact. We do have the tremendous advantage of the support and leadership of Chairman Neal.”
If the muni wishlist survives and is enacted, its impact on credit spreads may be muted, Rai said.
A direct pay bond program could boost issuance by $100 billion in 2022, but could cannibalize tax-exempt new money and crossover buyers would bring plenty of demand, Rai predicted.
Restoring tax-exempt advance refundings may boost issuance by up to $15 billion a month, prompting tax-exempt spreads to widen slightly at first, but they would likely stabilize soon, he said.
“There’s enough appetite for issuance,” Rai said. “So overall, I don’t see any real impact on either tax-exempt or taxable spreads.”
