(April 30th, 2012) Sometimes the Municipal Bond Market can get a little sleepy, even for the folks here at LearnBonds. So when we read Muni Market reporter Cate Long’s recent article CNBCs Oversimplified Muniland Coverage, and the attack on Alexandra Lebenthal that it contained, we were all over it.
The Lebenthal name is synonymous with Municipal Bonds, and Alexandra Lebenthal is the third generation of her family associated with the market. After reaching out to her on twitter we were pleasantly surprised when she agreed to meet with us for an interview. While we did discuss both Cate Long and Meredith Whitney, what we found most interesting about the conversation was Lebenthal’s modified stance on individual municipal bonds.
Alexandra is no longer a big proponent of retail investors directly buying individual municipal bonds. This is a sharp departure from her family legacy which was built on helping individual investors do just that.
What changed her mind?
The financial crisis changed everything. Before the financial crisis, there were many firms which offered high quality insurance against municipal bond defaults. Because of this an individual investor did not need to be very concerned about the credit quality of the issuer, as long as the bond had insurance. However, the financial crisis either severely crippled, or completely wiped out most of the municipal bond insurers. While there have not been many municipal bond defaults during or since the crisis, the bond insurers also insured mortgage backed securities, which were at the center of the financial crisis. This is where they got into trouble.
Currently there is only one major bond insurer left, and most investment grade municipal bonds no longer carry insurance. As a result of the disappearance of high quality bond-insurance, investors now need to carefully analyze the credit quality of the bonds they are buying, and can no longer just rely on the insurance. In her opinion, this is a job that is in most cases far better suited to a professional money manager, than an individual investor. She now suggests that individual investors buy bonds through mutual funds, ETFs, or a separately managed account.
For those that are still interested in buying individual municipal bonds however, Alexandra did give me a nice tip. Many bond buyers think they are gaining diversification by buying bonds from different issuers, which is not always accurate. We discussed one example in which four different bond issuers in New York State all relied on the the same source of revenue. In other words, it is not diversification of the name of issuer, but diversification of the source of revenue that matters.
Alexandra Lebenthal on Meredith Whitney
Overall we found Alexandra very intelligent and eloquent, however she does have a bit of a temper, which came out when the discussion turned to Meredith Whitney. Her criticism goes beyond the inaccuracy of Meredith Whitney’s municipal bond default prediction. Alexandra says the facts that Meredith Whitney used to make her case were misrepresented.
She focused on two issues she had with Whitney’s presentation during our interview:
1) Meredith Whitney talked about “social defaults”.
This is the idea that a municipality closing down a firehouse or curtailing services was essentially a default on the municipality’s obligations. Using the term “default” in this context did not sit well with Alexandra. These “defaults” by municipalities were efforts to get their spending in line with revenues, not some terrible event like an actual default where bondholders don’t get paid.
2) Meredith Whitney mentioned municipal debt restructurings in a way which implied such events were out of the ordinary, or forced against the will of the bondholders.
Corporate debt restructurings often carry a stigma which goes something like, “accept these new terms or we will go into bankruptcy”. Alexandra pointed out however that the municipal debt restructurings that Whitney spoke of were normal events, and did not represent any changes in the terms of bonds. The municipalities had the legal right to convert their outstanding shorter dated bonds into longer maturities. Alexandra’s point is that by describing normal occurrences in an ominous way, Meredith Whitney made a case which scared retail investors into selling bonds when there was no actual threat.
Alexandra Lebenthal on Puerto Rico and Cate Long
While she has defended Puerto Rican municipal bonds on CNBC recently, we could not get Alexandra to comment on if Puerto Rican Muni’s currently represented a buying opportunity. As far as Cate Long goes, l changed the the topic before much could be said. Cate has been a major help to LearnBonds.