This is the story of a very simple idea and what came of it, told with all the pride of a new father.
Those dinosaurs with some memory may recall that July 1 marked "the biggest call date in municipal bond history." We wrote as much in May, and as the time drew nigh, the popular press picked up the story, warning that investors would be stunned when they found out that their bonds were to be called.
Those dinosaurs with real institutional memory may recall that as far back as mid-1990, bankers began urging issuers to take advantage of lower rates, and many analysts and financial planners began writing that investors should prepare themselves for that flood of redemptions, and for their yield income to drop precipitously.
The phenomenon is simple to explain. Interest rates on bonds sold more than a decade ago were double-digit - in 1981, the yield on The Bond Buyer's 20-bond general obligation index reached 13.30%; in 1982, 13.44%. Yields were even higher on revenue bond issues. Today, yields hover well under 7%. Most bonds are sold with provisions allowing the issuer to call them earlier than their stated maturity; in most cases, the provisions say an issuer can call in a bond after 10 years.
Compounding the situation, most bonds sold before mid-1983 were in unregistered, bearer-bond format, meaning that bondholders, unless they were very careful in noting such things when they purchased their bonds, stood a very good chance of missing call dates, along with a significant amount of income. The doomsday scenario had bondholders going to paying agents and finding that their bonds had been called a full six months earlier.
An even worse scenario was painted for holders of zero coupon bonds, who do not visit their paying agents every six months, but who collect their imputed interest only upon the full maturity of the bond they hold. As The Wall Street Journal put it for the layman, "Investors who hold these bonds may be stunned in 10 or 20 years to discover their bonds were called long ago."
How Many? No One Knew
But the curious thing about the July 1 situation was that at the time, nobody, it seemed, knew precisely just how many bonds would be called on that date. Estimates ranged anywhere from $6 billion all the way to $13 billion. I remember my First Boston Corp. friend Brad Higgins' statement about combing back issues of The Bond Buyer for stories or sales that might yield new deals today, or in a few years. Surely, I thought, there must be some way to get a handle on all of those bond redemptions?
As good fortune would have it, The Bond Buyer never sleeps. And one otherwise sleepy Sunday, when associate publisher Nick Boyle and I were kicking a few ideas around here at the office, he mentioned, "You know, MuniView can get all of that stuff."
MuniView, I thought, our own data base? Then not only can it tell us what issues will be called, but what issues may be called, and not only a few weeks ahead, but months ahead, perhaps even years ahead?
Thus, a simple idea. But those simple ideas work. And so last week we launched into the world The Bond Buyer Redemption Report, which carries details on all of those bonds slated to be redeemed in the first quarter of 1993. We were tempted to run it on a semiannual basis, or even as a one-shot year-book, but the quarterly contains more than 11,000 separate maturities, sorted by state, issuer, amount redeemed or eligible for call, Cusip number, coupon, sale date, and maturity, and, at 607 pages, is roughly the size of a Webster's unabridged dictionary.
The Report is now available. It is, I think we can say, unique, and in knowledgeable hands, almost priceless. It is also, as the computer jocks have it, "user friendly," and as understandable as any directory. The information contained therein is available in no other single place, in so accessible and straightforward a fashion.
So what does the next big call date, Jan. 1, 1993, look like? This: More than $9 billion in municipal bonds may be redeemed or called away from investors on that date. Approximately $7.36 billion of municipal securities are slated to be called, either because they were prerefunded to first call, or because they were escrowed to final maturity. In addition, another $2.1 billion of tax-exempts are eligible to be called, for a total of $9.46 billion.
For the entire first quarter, more than $12.54 billion will be redeemed; another $5.5 billion is eligible for first call.
The Report is divided into two sections. The first contains bonds both prerefunded and escrowed to maturity. The second details those issues eligible to be called come the first quarter of 1993.
Both prerefunded bonds and escrowed bonds are backed by U.S. Treasuries, from which the interest and principal due on the bonds are paid. However, a prerefunded bond will be called or redeemed from investors on a specific date before maturity. A bond that is escrowed to maturity will not be redeemed until its final maturity date. An escrowed-to-maturity bond's redemption is no surprise; a prerefunded bond's could be. In the second section on bonds eligible to be called, there is no guarantee that such bonds will be redeemed.
The Public Securities Association estimates that $45 billion in bonds will be redeemed in 1993. In 1994, the figure rises to $50 billion, and in 1995, to $65 billion. It seems to us, then, that the bond call phenomenon, and resulting investor shock, will be with us for some time to come, as will, we hope, the quarterly Redemption Report.
More Shock Waves
Among those issues scheduled to be redeemed in the first quarter of 1993 are some of the most popular and widely held names in the market. Those eligible for first call include issues by Alabama and California, and by the Michigan Public Power Agency. The Maryland Department of Transportation has over $350 million of escrowed-to-maturity bonds. The Intermountain Power Agency in Utah and the North Carolina Eastern Municipal Power Agency have almost $1 billion in prerefunded debt.
I suspect such issues are well tracked by their buyers. What makes the Redemption Report so valuable, and so interesting to most readers, is the detail on the smaller issues sold by municipalities for a variety of nuts-and-bolts purposes. This is the real, bedrock municipal market, and these are the issues held by so many individual investors. Just a glance through the pages of the Redemption Report turns up hundreds of zero coupon bonds, and hundreds of bonds yielding 8 1/4%, 9%, 10%, all the way to 13 1/4%. Most of the bonds date from the 1980s, but there are some 1990 issues, and even some 1992 deals.
There are also some real collectibles from the 1970s, and from the 1960s. A few even date from the 1950s, with the oldest bond listed being a 1954 Wheeling, West Va., issue with a 2.9% coupon, sold for sewer construction, and escrowed to its Jan. 1, 1993, maturity. Thus another old soldier staggers in from the field. The smallest amount listed for redemption is, appropriately, just about the smallest denomination one can buy bonds in: $5,000.
Among redemptions, Texas leads the pack, with 709 on tap. It is followed by Pennsylvania, with 192; Indiana, with 164; Georgia, with 151; and Illinois, with 138. Florida, with 120, California, with 112, and Alabama, with 109, round out those states in the double digits. New York, curiously enough, only has 55. The District of Columbia, the Virgin Islands, and Vermont are last on the list, with one redemption apiece slated.
In terms of dollar amounts being redeemed, New Jersey leads the way with $2.22 billion, and is followed by Texas, with $1.17 billion, New York, with $892.39 million, Utah, with $882 million, and North Carolina, with $798 million. The District of Columbia is at the bottom of the list, with $325,000 up for redemption.
Of the $5.5 billion in bonds eligible for first call, California tops the list, with $889.68 million. New York follows, with $316.19 million, and is followed in turn by Illinois, with $300.49 million, Pennsylvania, with $290 million, and Georgia, with $287.98 million. Maine brings up the rear, with but $250,000 due for first call.
In number of issues eligible for first call, Texas leads with 94. Minnesota is second, with 84, while California is third, with 63. Pennsylvania has 34, while Illinois has 22. The District of Columbia, Maine, and Vermont have one apiece.
A Modest Claim
The Report is nothing if not the most readable guide to redemptions that ever existed. The issues are sorted by states, and then in alphabetical order, by issuer. So, for example, if you hold a 1987 Telford Boro, Pa., sewer revenue bond, you would turn to the section on Pennsylvania and go down the columns until vou reach Telford Boro. Find series 1987, and then look for the Cusip number of your bond. If you hold Cusip number 879578AQ5, which bears a 9 1/4% coupon, then you can see that your bond was prerefunded and will be called this January, rather than in January 2013.
The same principle holds for the section on eligible first calls. Say you own Rapides, La., School District 50 paper, sold in 1983. If you own Cusip number 753580BA6, your yield of 8% might well disappear now instead of in 1997, if the district decides to exercise its call.
The Report is targeted primarily at bondholders, particularly those who may manage bondholders' money, or those who know precisely what they own. Thus, its primary readership comprises brokers and financial planners, trust officers and analysts. But it would not take too much imagination for a banker or financial adviser to look at a future report and see which localities had redemptions either scheduled or unscheduled, and help them plan for it. This will be easier when we produce the Report with a lead time longer than a month or two, which we anticipate.
Redemptions are an accepted part of market practice now, but this was not always so. At the turn of the century, redeeming debt when rates dropped was considered somehow not very sporting. But with the current outlook for interest rates and inflation, it appears that the flood of redemptions will continue apace. If anything, the redemptions will serve to lower yields even further for issuers anxious to come to market, as investors search for new tax-exempt securities for their portfolios.
Thus the story of a simple idea's coming of age.
