In the high-yield space, liquidity and equity are top concerns

The majority of municipal market participants say liquidity and equity are a major concern in a high yield transaction.

Almost 69% of those polled in a survey of HilltopSecurities’ high yield team ranked liquidity and equity as their first or second level of concern for 2022.

“Our main takeaway from the survey is that there is a great appetite for well-structured high yield trading,” said Yaffa Rattner, municipal credit manager and senior managing director of HilltopSecurities and lead author of the report. “However, market participants believe that liquidity, management and an appropriate set of covenants are essential.”

Management and all of the restrictive covenants rank second and third, respectively, as the first or second level of concern respondents have about a high yield transaction.

Most respondents were somewhat concerned that COVID-19 would disrupt operations at the project level in 2022.

“Over 90% of respondents believe labor shortages will affect cost containment in 2022 and 80% of respondents indicate they are at least somewhat concerned that COVID-19 will disrupt project operations in the year next, ”Rattner said.

In the area of ​​project finance, significant increases in revenue to offset funding cuts, supply disruptions or increases in spending are generally not an option. Therefore, she said, based on their assessment, projects with higher liquidity levels and seasoned management will be in a better position to be successful.

However, the investigation ended on December 17 and the report notes that those questioned may be more concerned about the impact of COVID-19 now, as the proliferation of cases increased during the second half of December, mainly due to the rise of the Omicron variant. .

For respondents, they ranked skilled nursing and senior residences as the areas of greatest concern to them for the next year. They also ranked liquidity in the senior housing industry as the biggest challenge in the high yield industry in 2021.

Rattner said COVID-19 has dramatically altered the income and expense paradigm in senior living and skilled nursing projects. This is because the number of occupations has decreased, thus decreasing operating revenues while expenses, including labor, personal protective equipment and operating supplies, have increased.

As a result, credits with lower liquidity levels have had and continue to have a harder time weathering these difficult times, she said.

Charter schools and the healthcare industry were the two areas investors were most keen to contribute.

“This finding corroborated the third quarter in which investors characterized these two sectors as areas in which they were least concerned,” the report said. Other respondents added dirt and ‘right level’ deals, tax credit deals, non-traditional health care, tobacco, index-eligible deals and housing deals for the workforce in California.

Survey respondents also believe that investment in energy infrastructure will predominate in the high-efficiency utility / power sector in 2022.

“However, investment opportunities in water, sewage and electricity will also abound,” the report said. “Interestingly, reducing flooding and converting oils into new products are expected to have quieter emissions in 2022.”

The report was produced at the end of 2021 with 88 market players.


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