Liquidity and equity are top concerns for high-yield

Bonds

Liquidity and equity remain the top concern for municipal market participants who deal in high-yield securities.

Nearly 20% of respondents to a HilltopSecurities high-yield team survey ranked liquidity and equity as their first concern for 2023.

Management and covenant package ranked second and third, respectively.

“In today’s environment, liquidity can help protect a myriad of project risks including construction issues, which were also noted as a key issue,” said Yaffa Rattner, head of municipal credit and senior managing director at HilltopSecurities and lead author of the report. “This concept resonates given supply side disruptions and cost overruns that are challenging contractors to deliver projects on time and on budget.”

In the case of project finance, she said, “respondents want to see technology that works and equity.” This means that ample liquidity and seasoned management is needed “to pilot through our expectations of medium-term turbulence,” she said.

Many respondents don’t anticipate COVID-19 being as big of an issue in 2023, differing from last year’s survey where over 70% of respondents were somewhat concerned and almost 20% were very concerned.

“The writing for 2022 was more a function of some supply-side disruptions that may affect perhaps the construction of a building,” she said.

But for the upcoming year, 60% of respondents believe COVID will have no impact and no respondents said they are very concerned, she said.

Respondents ranked senior living, skilled nursing, project finance and healthcare/hospital as the sectors they were most concerned about for next year, “highlighting the financial vulnerability introduced by labor shortages and wage pressures,” she said.

Quite the turnaround, as “investors were least concerned about the healthcare sector last year,” Rattner said.

“In 2021, investors were feeling relatively confident in the space. Admissions and elective surgeries were increasing, and hospitals were relatively liquid and still benefitting from COVID relief funds,” she said. “Fast forward 12 months and we can see how sustained wage pressures coupled with volatility in utilization can together compress operating margins and present significant challenges.”

Respondents, though, are least concerned with the impact of work from home, hotel/leisure and charter schools.

Toll roads, airports, and ports, followed by land-secured credits and charter schools are the three top sectors for which market participants would be looking to add exposure.

“This is not a surprise as the airports and land-secured opportunities have rebounded sharply since the pandemic while charter schools have benefited from growing enrollment, increased revenues per student, and enhanced balanced sheets that also reflect the presence of COVID relief funds,” she said.

The report was conducted at the end of 2022 among 110 market participants.

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