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Financial Markets Update March 2014
RBC Capital Markets, LLCPaul M. Clancy, Director
Higher Education Finance GroupMarch 21, 2014
Section 1
Interest Rates Update
- US Treasury Market
- Municipal Market
Interest Rates Update
US Treasury Market
US Treasury Market Update
4
The Treasury Yield curve has similarly increased, as economic data has generally improved
U.S. Treasury Yield Curve Changes
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 15 yr 20 yr 30 yr
02/07/2014 02/07/2013
February 2014
February 2013
Source: Bloomberg as of February 20, 2014
0.000%
1.000%
2.000%
3.000%
4.000%
5.000%
6.000%
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14
5 Year UST 10 yr UST 30 yr UST
US Treasury Market Update
5
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
Interest Rates Update
Municipal Market
Municipal Market Update
7
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.
0%
50%
100%
150%
200%
250%
300%
May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13
%
SIFMA vs LIBOR Average
SIFMA vs. LIBOR
Current SIFMA: 0.040% (4 bps)
Current 1M LIBOR: 0.155% (15.5 bps)
Average SIFMA: 0.546% (54.6 bps)
Average 1M LIBOR: 0.645% (64.5 bps)
Source: Bloomberg as of February 20, 2014
Municipal Market Update
8
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
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29
Year
02/07/2014 02/07/2013
February 2014
February 2013
Year of Maturity
Source: Muni DSS
Municipal Market Update
9
53 Year Historical Perspective
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0% Bond Buyer 20 GO Bond Index
Today's Rate at 4.44%
Yield Range
Less than 3.50% 8.84%
3.50% - 4.00% 6.49%
4.01% - 4.50% 10.42%
4.51% - 5.00% 10.85%
5.01% - 5.50% 15.18%
5.51% - 6.00% 10.57%
6.01% - 6.50% 8.19%
6.51% - 7.00% 7.46%
7.01% - 7.50% 6.74%
7.51% - 8.00% 3.97%
Greater than 8.00% 11.29%
Total 100.00%
Bond Buyer 20 GO Index since January 1961 % of Time in Each Range Since 1961
Today’s 4.44% level is lower than 76.20% of historical rates since January 1961
Source: Bloomberg as of February 20, 2014Weekly 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.
Municipal Market Update
10
35 Year Historical Perspective
Bond Buyer Revenue Index since September 1979 % of Time in Each Range Since 1979
Today’s 5.27% level is lower than 72.22% of historical rates since September 1979
3.5%
5.5%
7.5%
9.5%
11.5%
13.5%
15.5% Bond Buyer Revenue Bond Index
Today's Rate at 5.27%
Yield Range
Less than 3.50% 0.00%
3.50% - 4.00% 0.00%
4.01% - 4.50% 3.23%
4.51% - 5.00% 12.64%
5.01% - 5.50% 21.94%
5.51% - 6.00% 13.92%
6.01% - 6.50% 9.41%
6.51% - 7.00% 3.95%
7.01% - 7.50% 6.96%
7.51% - 8.00% 5.57%
Greater than 8.00% 22.38%
Total 100.00%
Source: Bloomberg as of February 20, 2014Weekly 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.
Municipal Market Update
11
While long-term interest rates have risen, floating rates remain extremely low
SIFMA vs. Revenue Bond Index
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00% Revenue Bond Index
Feb 20, 2014 Rate at 5.27%
SIFMA
524bps
Currently, SIFMA is trading at 4 basis points – 524 basis points difference between long term debtSource: Bloomberg as of February 20, 2014
Municipal Market Update
12
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
Source: TM3, Thomson Reuters10, 20, and 30 year “AAA” MMD shown to represent different average lives of municipal transactionsRates as of February 21, 2014
1.500%
2.000%
2.500%
3.000%
3.500%
4.000%
4.500%
5.000%
Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb
1.000%
2.000%
3.000%
4.000%
5.000%
6.000%
01/02/2007 01/02/2008 01/02/2009 01/02/2010 01/02/2011 01/02/2012 01/02/2013 01/02/2014
10 yr 20 yr 30 yr
MaximumMinimumCurrent
2007 2008 2009 2010 2011 2012 20130.250% 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 Year20 Year10 Year
Feb 1, 2013 to Present
Municipal Market Trends Update
Municipal Market Trends Update
14
The diminished supply has resulted in tightening credit spreads between highly rated issuers and lower rated issuers
0
50
100
150
200
250
Jun
-09
Jan
-10
Au
g-10
Mar
-11
Oct
-11
May
-12
Dec
-12
Jul-1
3
Feb
-14
Bas
is P
oint
Spr
ead
to A
AA
MM
D
AA Spread
A Spread
BBB Spread
Credit Spreads for Municipal Issuers
Source: Bloomberg as of February 20, 2014
Municipal Market Trends Update
15
RBCCM’s forecast for 2014 reflects diminished municipal supply relative to previous years
0
10
20
30
40
50
60
70
Jan
Feb
Mar
Apr
May Jun
Jul
Aug
Sep Oct
Nov
Dec
$ B
illio
ns
RBC Forecast Supply
Redemptions
Muni Bonds: 2014 Issuance versus Redemptions
Source: US Municipal Notes dated December 2, 2013
Available at: https://research.rbccm.com/sellside/EmailDocViewer?encrypt=678430e4-7c36-4040-a81c-c1f32071e6f0&mime=pdf&co=rbcnew&[email protected]&source=mail
Municipal Market Trends Update
16
Municipal issuance in 2014 has lagged the historical average
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Jan-
13
Feb
-13
Mar
-13
Mar
-13
Apr
-13
May
-13
Jun-
13
Jul-1
3
Aug
-13
Sep
-13
Oct
-13
Nov
-13
Dec
-13
Jan-
14
Feb
-14
$ m
illio
ns
Competitive
Negotiated
Average
Municipal Weekly Issuance: 2013 to Present
Average: $6.1 billion
Source: Thomson SDC
Municipal Market Trends Update
17
RBCCM anticipates 2014 issuance to decline by 12% relative to 2013
21,156 18,926 28,659 25,772 26,627 32,258 32,544 30,530 18,040 22,901 27,436
281,668 268,131 301,172 287,051 324,406
300,772 316,373 326,797 200,486 269,691 242,556
6.99%6.59%
8.69%8.24%
7.59%
9.69%9.33%
8.54%8.26%
7.83%
10.16%
0%
2%
4%
6%
8%
10%
12%
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
US
$ M
M
Higher Education Issuance Other Municipal Issuance Higher Education Issuance as % of Total Municipal Issuance
Proportion of Higher Education Issuance to Total Municipal Issuance by Par Amount
Source: US Municipal Notes dated December 2, 2013; Thomson SDC
Available at: https://research.rbccm.com/sellside/EmailDocViewer?encrypt=678430e4-7c36-4040-a81c-c1f32071e6f0&mime=pdf&co=rbcnew&[email protected]&source=mail
Municipal Market Trends Update
18
Municipal bond funds reflect modest inflows, further increasing demand for the limited supply
Muni Bonds: 2014 Issuance versus Redemptions
Jan-11Jan-11Jan-11Jan-11Feb-11Feb-11Feb-11Feb-11Mar-11Mar-11Mar-11Mar-11Mar-11Apr-11Apr-11Apr-11Apr-11May-11May-11May-11May-11Jun-11Jun-11Jun-11Jun-11Jun-11Jul-11Jul-11Jul-11Jul-11Aug-11Aug-11Aug-11Aug-11Aug-11Sep-11Sep-11Sep-11Sep-11Oct-11Oct-11Oct-11Oct-11Nov-11Nov-11Nov-11Nov-11Nov-11Dec-11Dec-11Dec-11Dec-11Jan-12Jan-12Jan-12Jan-12Feb-12Feb-12Feb-12Feb-12Feb-12Mar-12Mar-12Mar-12Mar-12Apr-12Apr-12Apr-12Apr-12May-12May-12May-12May-12May-12Jun-12Jun-12Jun-12Jun-12Jul-12Jul-12Jul-12Jul-12Aug-12Aug-12Aug-12Aug-12Aug-12Sep-12Sep-12Sep-12Sep-12Oct-12Oct-12Oct-12Oct-12Oct-12Nov-12Nov-12Nov-12Nov-12Dec-12Dec-12Dec-12Dec-12Jan-13Jan-13Jan-13Jan-13Jan-13Feb-13Feb-13Feb-13Feb-13Mar-13Mar-13Mar-13Mar-13Apr-13Apr-13Apr-13Apr-13Apr-13May-13May-13May-13May-13Jun-13Jun-13Jun-13Jun-13Jul-13Jul-13Jul-13Jul-13Jul-13Aug-13Aug-13Aug-13Aug-13Sep-13Sep-13Sep-13Sep-13Oct-13Oct-13Oct-13Oct-13Nov-13Nov-13Nov-13Nov-13Nov-13Dec-13Dec-13Dec-13Dec-13Jan-14Jan-14Jan-14Jan-14Jan-14Feb-14Feb-14Feb-14
(5,000)
(4,000)
(3,000)
(2,000)
(1,000)
0
1,000
2,000
Weekly Fund Flow
4-Wk Moving Avg
Fun
d F
low
s (
$ M
illio
ns
)
1/17 1/24 1/31 2/7 2/14 2/21
(5,000)
(4,000)
(3,000)
(2,000)
(1,000)
0
1,000
2,000
Source: Lipper Fund Flow Data
Higher Education Financing Trends
Higher Education Financing TrendsPublic Capital Markets
Public Capital Markets
21
• 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
Higher Education Financing TrendsPrivate Financial Arrangements
Public Capital Markets
23
• 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
Becoming more popular as commercial banks and investment banks are utilizing their own balance sheets to provide “credit” to clients
Disclaimer
25
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 1934. 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.
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