PHILADELPHIA – Navigating the regulatory minefield is one of the biggest challenges facing the Mid-Atlantic municipal bond market, officials from underwriting firms said Tuesday.
"If you dropped in now, you'd see that it's a big jungle," Dan Heimowitz, managing director at RBC Capital Markets, said during the The Bond Buyer's Mid-Atlantic Municipal Market Conference at the Union League of Philadelphia. "There is a fair amount of regulatory fatigue trying to straighten all this out."
Coping with new guidelines on issuer compliance and disclosure from the likes of the Securities and Exchange Commission and the self-regulatory Municipal Securities Rulemaking Board confounds underwriters as the muni market continues to face such headwinds as a slow economic recovery, low investment rates, pension funding challenges, enhanced regulation and proposed tax overhaul.
Christopher McNichol, a managing director at Citigroup Global Markets Inc., spoke with his right arm in a sling.
"This is what happens after a year of regulation," he said jokingly. "We still have a ways to go to be on the same page. Has it changed the way we do this? Absolutely."
The conference is focusing on issuer challenges including pension and other post-employment benefit liabilities, and crumbling infrastructure.
"There have been a lot of changes in the market since the last recession," said William Rhodes, partner and chairman of the public finance department at law firm Ballard Spahr LLP. "We've had some high-profile defaults and some bankruptcies, some of them notable. Beyond that, we've had some attitudinal changes."
Rhodes is co-chairing the conference with Katherine Clupper, a managing director at PFM Group.
Bond lawyers and analysts discussed how the landscape has changed for general obligation bonds, notably regarding distressed credits. The Chapter 9 filings of Detroit and a wave of other municipalities filed under Chapter 9 bankruptcy, and the ongoing distress of Puerto Rico, Atlantic City, N.J., and Hartford, Conn., have triggered a closer examination of the GO pledge.
"I used to be a bond lawyer, and now I'm a bond lawyer that has the bankruptcy code on his desk," said Jeff Fried, deputy general counsel for bond insurer Build America Mutual. "There's no case law, but a lot of lessons learned over the past two years."
Jennifer Johnston, vice president and research analyst for Franklin Templeton, cited heightened scrutiny of GO bonds.
"The telltale sign is not bankruptcy, it's distress," she said. "There will probably be another recession and it probably will be soonish. We want to know a lot more about a security."
