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Investing in the High Yield Municipal Market: How to Profit from the Current Municipal Credit Crisis and Earn Attractive Tax-Exempt Interest Income

ISBN: 978-1-118-24011-3
288 pages
June 2012
Investing in the High Yield Municipal Market: How to Profit from the Current Municipal Credit Crisis and Earn Attractive Tax-Exempt Interest Income (1118240111) cover image
A practical guide to profiting from the high yield municipal market

This unique guide to the high yield municipal bond market sheds some much-needed light on this esoteric but profitable corner of the fixed-income world. It fills the void between the general reference handbooks on municipal bonds and the superficial treatment of do-it-yourself bond guides, with an emphasis on practical trading applications.

Having witnessed the beginning of the modern high yield tax-exempt institutional market, author Triet Nguyen documents its historical evolution, outlines a conceptual framework for high yield tax-free investing, one that takes into account both interest rate and credit cycles, and reviews the latest historical data on municipal defaults, including for the first time the non-rated sector. Current distressed opportunities are also discussed. Along the way, Nguyen takes the time to discuss in detail the pros and cons of investing in pre-packaged high yield vehicles—from mutual funds to hedge funds to exchange-traded funds—with frank and objective insider tips on how these slickly marketed products really work. For the truly committed investor who wants to do his or her own homework, Nguyen and a group of industry experts go over the key investment considerations for several major classes of high yield tax-exempt bonds.

  • Offers unique insights into the risk/return, trading, and liquidity characteristics of high yield municipal instruments
  • Includes interesting case studies to fully illustrate the high yield investing process
  • Written by an insider of both the asset management industry and the broker-dealer community

Investing in the High Yield Municipal Market will put you in a better position to profit in this arena and help you excel in today's tough financial environment.

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Foreword xi

Preface xv

Acknowledgments xix

CHAPTER 1 The Basics of High Yield Municipal Bonds 1

What Is a High Yield Municipal Bond? 1

Common Yield Measurements 2

Key Risk Factors 5

Notes 13

CHAPTER 2 A Brief History of the High Yield Muni Market 15

The Early Years 15

Historical High Yield Opportunities 20

Credit Setbacks 22

The Advent of Leverage 23

The Credit Crisis of 2008 and Its Aftermath 24

Note 25

CHAPTER 3 The Investment Case for High Yield Municipals 27

High Yield Municipals versus Other Asset Classes 28

The Impact of Bond Evaluations 34

Six Basic Tenets of High Yield Municipal Investing 38

CHAPTER 4 High Yield Credit Risk Revisited: The Default Record 51

Definitions of Default 51

Default Record for Rated Bonds 53

Default Record for Unrated Bonds 55

Recent Default and Impairment Statistics 57

Recovery Rates 60

Lessons from Historical Default Records 61

Notes 64

CHAPTER 5 Professionally Managed High Yield Municipal Products 65

Actively Managed Products 66

Passively Managed Products 82

Notes 86

References 86

CHAPTER 6 Investing in Individual Bonds 87

Richard Daskin, CFA, CFP

A Few Preliminary Considerations 87

Investing in the Primary or New Issue Market 88

Investing in the Secondary Market 89

Executing Trades in the Secondary Market 90

Monitoring Your Holdings 91

CHAPTER 7 Investing in Distressed Bonds 93

The Distressed Municipal Universe 95

The Theory and Practice of Distressed Municipal Investing 98

Notes 101

Reference 101

CHAPTER 8 Case Studies 103

Distressed Opportunity: National Benevolent Association 103

Fallen Angel: Denver International Airport 106

Notes 111

CHAPTER 9 Managing Bond Defaults and Bankruptcies 113

Kenji Mochizuki, CIRA

Nine Differences between Chapter 9 and Chapter 11 113

Bondholders’ Rights and Remedies in Workouts 119

Accounting Issues Related to Chapter 9 128

References 132

CHAPTER 10 Common Types of High Yield Municipal Bonds 135

Patrick Flanagan

James Lyman

Keith Rochelli

Ken Rogozinski

Corporate-Backed Municipal Bonds 136

Hospital Revenue Bonds 146

Toll Road Bonds 155

Housing Bonds 161

Continuing Care Retirement Communities (CCRC) Bonds 171

Notes 178

CHAPTER 11 Special Types of High Yield Municipal Bonds 179

Richard Larkin

Shannan Wilson

Tobacco Settlement Bonds 179

Land-Secured Bonds 190

Notes 199

References 199

CHAPTER 12 Up-and-Coming High Yield Sectors 201

Jon Barasch and Edward Krauss

Jeffrey Lamb, Matt Eden, and Melissa Robertson Charter School Bonds 202

Native American Gaming Bonds 207

CHAPTER 13 High Yield Investing in the Post–Bond Insurance Era 215

Learning from History 215

Prospects for Tax Reform 216

The New Compliance Landscape 218

New Credit Opportunities 219

Advances in Trading and Price Discovery Technology 222

Buy American! 223

Appendix: The Dodd-Frank Act and the Municipal Market 225

Kenji Mochizuki, CIRA

Regulation of Municipal Securities 226

Changes to the Board of the MSRB 229

Commission Office of Municipal Securities 231

Municipal Securities Studies 232

The Volcker Rule 235

References 237

Selected Resources for Investors 239

About the Author 245

About the Contributors 247

Index 255

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Triet Nguyen is a thirty-year veteran of the fixed-income markets and a high yield municipal bond expert. He has designed, marketed, and managed every type of buy-side investment product, from mutual funds (open and closed-end) to managed accounts and hedge funds. He was Senior Vice President at B.C. Ziegler in charge of tax-exempt high yield and taxable municipal bond trading (including Build America Bonds) and Managing Director of Saybrook Capital, LLC, managing municipal bond hedge funds. In addition, Mr. Nguyen was President of Axios Advisors, LLC, a Vice President/Portfolio Manager of the John Hancock Funds, and a Senior Portfolio Manager of the Putnam Funds. Triet received a BA in economics and an MBA in finance and accounting from the University of Chicago.

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