Within the context of the country, payment is uncertain to some degree and capacity for timely repayment remains more vulnerable to adverse economic change over time. Rating: B Type: General Obligation - Unlimited Tax Sector: City Fitch's definition of credit rating: 'B' National Ratings denote a significantly elevated default risk relative to other issuers or obligations in the same country.
Financial commitments are currently being met but a limited margin of safety remains and capacity for continued timely payments is contingent upon a sustained, favorable business and economic environment. For individual obligations, this rating may indicate distressed or defaulted obligations with potential for extremely high recoveries.
Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic conditions. Headline risk can affect liquidity and may be triggered by events that have nothing to do with actual credit factors. Health care.
These projects range from hospitals or hospital systems to nursing homes and congregate care facilities. Although size is not the determinate factor, some larger, diversified health care projects fall into the mid-investment grade space, while smaller, less financially flexible stand-alone facilities tend to be higher yielding credits.
Health care is being impacted by many factors, including an aging population, the Affordable Care Act and changes in business and delivery models. As a result, these bonds require intense credit analysis and consequently may offer higher yields. Many health care credits can be evaluated like corporate credits, with balance sheets, income statements, real estate and other assets.
Education and charter schools. Similar to health care, credits in the education sector span the ratings spectrum from AAA-rated Harvard University to high yield credits such as small, private colleges or charter schools. Evaluating these credits requires knowledge of enrollment trends and intense focus on operating and balance sheet metrics debt service coverage, operating leverage and liquidity cushion. Bondholder security is another key part of the analysis, with attention to legal protections, such as a mortgage or revenue pledge, and financial covenants.
Transportation and tollroads. These revenue bonds are repaid by tolls or facility rental fees from a public transportation system e. Debt service repayment ability depends on facility usage and project management. Tobacco settlement bonds are repaid by revenues from the Master Settlement Agreement between various states and participating tobacco manufacturers. The payments by the tobacco companies to the states are determined by a multi-variable formula heavily based on cigarette consumption.
Therefore, one risk is that domestic sales of cigarettes may decline further than declines assumed in the various bond documents. Some of these bonds carry investment grade ratings, but the market generally trades these as high yield bonds. Industrial development and pollution control. This sector is very similar in credit profile to the taxable high yield space, and sometimes a company will have bonds issued in both marketplaces.
Other sectors. High yield municipal bonds can also include financings for convention centers, Native American Tribal gaming facilities, utilities including water and sewer facilities , multifamily housing and other smaller credit sectors. Liquidity is a risk in the high yield municipal marketplace.
For example, high yield municipal prices fell dramatically in even though the vast majority of high yield municipal bonds continued to pay interest and principal when due. In late , an analyst forecasted a rapid increase in municipal bond defaults within cities and counties causing a selloff in high yield municipals. In reality, defaults had actually begun declining from their post-crisis peak.
Because these credit issues can be misunderstood and the bonds are often thinly traded, headlines and other factors can impact liquidity — an inherent risk in the high yield municipal bond market.
GO credits are typically not core to the high yield market, and those credit concerns are less relevant to high yield municipals. In times of elevated market volatility or negative press, investors may decide to sell and wait for conditions or valuations to improve before reallocating funds.
But most cannot time the market perfectly, which can mean lost opportunity. There are five recent periods where municipal yields increased by at least basis points in less than one year. In holding periods of 12 months or longer, staying the course benefited investors. The overall positive trend in municipal credit was disrupted by the coronavirus pandemic and subsequent recession in However, municipalities have historically balanced their budgets despite previous revenue disruptions.
The media focus on high profile credit situations leaves many investors concerned about the overall state of municipal GO credit quality. However, these GO credits are typically not core to the high yield municipal market, and consequently those important concerns are less relevant to high yield municipals.
This misunderstanding may create pricing opportunities. Furthermore, high yield municipals have a low historical correlation to other asset classes, making them an appropriate complement to an overall portfolio. Evaluating high yield municipal bonds typically requires understanding issues relating to land or infrastructure development, potential impact on balance sheets and income statements and issues specific to healthcare policy and education.
We believe that in-depth fundamental research can help an investor understand risks, identify opportunities and capitalize on the inefficiencies in this misunderstood asset class. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example.
Past performance is no guarantee of future results. Investing involves risk; principal loss is possible. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
For term definitions and index descriptions, please access the glossary on nuveen. Credit ratings are available for many bonds. Credit ratings seek to estimate the relative credit risk of a bond as compared with other bonds, although a high rating does not reflect a prediction that the bond has no chance of defaulting. Interest rate risk. If bonds are held to maturity, the investor will receive the face value amount back, plus interest that may be set at a fixed or floating rate.
If they move higher, investors who hold a low fixed-rate municipal bond and try to sell it before it matures could lose money because of the lower market value of the bond. Inflation risk. Inflation is a general upward movement in prices. Inflation reduces purchasing power, which is a risk for investors receiving a fixed rate of interest.
It also can lead to higher interest rates and, in turn, lower market value for existing bonds. Liquidity risk. Many investors buy municipal bonds to hold them rather than to trade them, so the market for a particular bond may not be especially liquid and quoted prices for the same bond may differ.
Tax implications. Consider consulting a tax professional to discuss the bond's tax implications, including the possibility that your bond may be subject to the federal alternative minimum tax or eligible for state income tax benefits.
Broker compensation. Most brokers are compensated through a markup over the cost of the bond to the firm. This markup might be disclosed on your confirmation statement. If a commission is charged, it will be reported on your confirmation statement.
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