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Financial Markets Update March 2014
RBC Capital Markets, LLC Paul M. Clancy, Director Higher Education Finance Group March 21, 2014
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Section 1 Interest Rates Update - US Treasury Market
- Municipal Market
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Interest Rates Update US Treasury Market
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US Treasury Market Update
The Treasury Yield curve has similarly increased, as economic data has generally improved U.S. Treasury Yield Curve Changes February 2014 February 2013 Source: Bloomberg as of February 20, 2014
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US Treasury Market Update
US Treasury Yields reflect a gradual increase since lows in 2012 5, 10 and 30 year UST Rates: 2007 to Present Source: Bloomberg as of February 20, 2014
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Interest Rates Update Municipal Market
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Municipal Market Update
The tax-exempt variable rate demand note market has seen increased demand and lower yields; bank letters of credit required. LOC charges ranging from 50 – 300 bps depending on borrower credit quality. LOC may be replaced with SBPA for top rated universities; SBPA charges ranging below 75 bps. SIFMA vs. LIBOR Current SIFMA: % (4 bps) Current 1M LIBOR: % (15.5 bps) Average SIFMA: % (54.6 bps) Average 1M LIBOR: % (64.5 bps) Source: Bloomberg as of February 20, 2014
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Municipal Market Update
The “AAA” MMD has increased relative to 2013 yields, due to a variety of technical factors, including the discussion of quantitative easing by the Federal Reserve and bond fund flows Municipal GO “AAA” MMD Yield Curve Changes February 2014 February 2013 Year of Maturity Source: Muni DSS
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Municipal Market Update
53 Year Historical Perspective % of Time in Each Range Since 1961 Bond Buyer 20 GO Index since January 1961 Today’s 4.44% level is lower than 76.20% of historical rates since January 1961 Source: Bloomberg as of February 20, 2014 Weekly yields and indexes released by the Bond Buyer. Updated every Thursday at approximately 6:00pm EST. 20 Bond General Obligation Yield with 20 year maturity, rated AA2 by Moody's Arithmetic Average of 20 bonds' yield to maturity.
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Municipal Market Update
35 Year Historical Perspective % of Time in Each Range Since 1979 Bond Buyer Revenue Index since September 1979 Today’s 5.27% level is lower than 72.22% of historical rates since September 1979 Source: Bloomberg as of February 20, 2014 Weekly yields and indexes released by the Bond Buyer. Updated every Thursday at approximately 6:00pm EST. 25 Revenue Bond Yield with 30 year maturity, rated A1 by Moody's and A+ by S&P Arithmetic Average of 25 bonds' yield to maturity.
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Municipal Market Update
While long-term interest rates have risen, floating rates remain extremely low SIFMA vs. Revenue Bond Index 524 bps Currently, SIFMA is trading at 4 basis points – 524 basis points difference between long term debt Source: Bloomberg as of February 20, 2014
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Municipal Market Update
The recent decline of current “AAA” MMD reflects a decline in supply and recent bond fund inflows “AAA” MMD January 1, 2007 to Present Shift in “AAA” MMD Since Feb 2013 Maximum Minimum Current 2007 2008 2009 2010 2011 2012 2013 0.250% 0.790% -0.900% 0.520% -1.130% -0.740% +1.330% January 1, 2007 to Present Shift in 30-year "AAA" MMD 10 Year 20 Year 30 Year 4.860% 5.740% 5.940% 1.470% 2.100% 2.470% 2.500% 3.520% 3.840% 3.730% 3.407% 2.381% Average 2.790% 2.490% 1.660% Minimum 4.510% 4.270% 3.040% Maximum 30 Year 20 Year 10 Year Feb 1, 2013 to Present Source: TM3, Thomson Reuters 10, 20, and 30 year “AAA” MMD shown to represent different average lives of municipal transactions Rates as of February 21, 2014
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Municipal Market Trends Update
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Municipal Market Trends Update
The diminished supply has resulted in tightening credit spreads between highly rated issuers and lower rated issuers Credit Spreads for Municipal Issuers Source: Bloomberg as of February 20, 2014
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Municipal Market Trends Update
RBCCM’s forecast for 2014 reflects diminished municipal supply relative to previous years Muni Bonds: 2014 Issuance versus Redemptions Source: US Municipal Notes dated December 2, 2013 Available at:
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Municipal Market Trends Update
Municipal issuance in 2014 has lagged the historical average Municipal Weekly Issuance: 2013 to Present Average: $6.1 billion Source: Thomson SDC
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Municipal Market Trends Update
RBCCM anticipates 2014 issuance to decline by 12% relative to 2013 Proportion of Higher Education Issuance to Total Municipal Issuance by Par Amount Source: US Municipal Notes dated December 2, 2013; Thomson SDC Available at:
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Municipal Market Trends Update
Municipal bond funds reflect modest inflows, further increasing demand for the limited supply Muni Bonds: 2014 Issuance versus Redemptions Source: Lipper Fund Flow Data
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Higher Education Financing Trends
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Higher Education Financing Trends
Public Capital Markets
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Public Capital Markets
Traditional Fixed Rate Bonds Tax-Exempt Rates Taxable Rates Bond Insurance Build America Mutual (NR / AA / NR) Assured Guaranty Municipal (A3 / AA- / NR) Municipal Assurance Corporation (NR / AA- / NR) Variable Rate Demand Bonds Bank Letter-of-Credit or Standby Bond Purchase Agreement Self Liquidity Commercial Paper Programs Floating Rate Notes Longer terms; fewer moving parts; less market risk
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Higher Education Financing Trends
Private Financial Arrangements
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Public Capital Markets
Becoming more popular as commercial banks and investment banks are utilizing their own balance sheets to provide “credit” to clients Direct Purchases (Commercial Banks and Investment Banks) Floating Rate Notes Flexible Drawdown Bonds Lines of Credit Traditional Commercial Bank Loans Construction Loans Permanent Project Funding Fixed Rate Loan, Long Term, Short Term Derivative Arrangements Interest Rate Swaps Rate Caps Rate Collars
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Higher Education Finance Group
Contact Information Paul M. Clancy Higher Education Finance Group (215)
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Disclaimer RBC Capital Markets, LLC (“RBC CM”) is providing the information contained in this document for discussion purposes only and not in connection with RBC CM serving as Underwriter, Investment Banker, municipal advisor, financial advisor or fiduciary to a financial transaction participant or any other person or entity. RBC CM will not have any duties or liability to any person or entity in connection with the information being provided herein. The information provided is not intended to be and should not be construed as “advice” within the meaning of Section 15B of the Securities Exchange Act of The financial transaction participants should consult with its own legal, accounting, tax, financial and other advisors, as applicable, to the extent it deems appropriate. This presentation was prepared exclusively for the benefit of and internal use by the recipient for the purpose of considering the transaction or transactions contemplated herein. This presentation is confidential and proprietary to RBC Capital Markets, LLC (“RBC CM”) and may not be disclosed, reproduced, distributed or used for any other purpose by the recipient without RBCCM’s express written consent. By acceptance of these materials, and notwithstanding any other express or implied agreement, arrangement, or understanding to the contrary, RBC CM, its affiliates and the recipient agree that the recipient (and its employees, representatives, and other agents) may disclose to any and all persons, without limitation of any kind from the commencement of discussions, the tax treatment, structure or strategy of the transaction and any fact that may be relevant to understanding such treatment, structure or strategy, and all materials of any kind (including opinions or other tax analyses) that are provided to the recipient relating to such tax treatment, structure, or strategy. The information and any analyses contained in this presentation are taken from, or based upon, information obtained from the recipient or from publicly available sources, the completeness and accuracy of which has not been independently verified, and cannot be assured by RBC CM. The information and any analyses in these materials reflect prevailing conditions and RBC CM’s views as of this date, all of which are subject to change. To the extent projections and financial analyses are set forth herein, they may be based on estimated financial performance prepared by or in consultation with the recipient and are intended only to suggest reasonable ranges of results. The printed presentation is incomplete without reference to the oral presentation or other written materials that supplement it. IRS Circular 230 Disclosure: RBC CM and its affiliates do not provide tax advice and nothing contained herein should be construed as tax advice. Any discussion of U.S. tax matters contained herein (including any attachments) (i) was not intended or written to be used, and cannot be used, by you for the purpose of avoiding tax penalties; and (ii) was written in connection with the promotion or marketing of the matters addressed herein. Accordingly, you should seek advice based upon your particular circumstances from an independent tax advisor.
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