Deutsche Insurance Asset Management.ppt
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Deutsche Insurance Asset Management.ppt Presentation Transcript

  • 1. Municipals - Attractive relative value with favorable risk characteristics
  • 2.
    • Downgrade of financial guarantors
      • Effectively increased the supply of A rated municipals since many insured bonds now trade based on their underlying credit ratings
    • Failure of auction rate securities market and decrease in available bank liquidity
      • Resulted in an increase in fixed rate supply since these issues could not be refinanced with variable rate demand bonds (VRDBs)
      • There were $102 billion of auction rate securities refinanced out of a total of $166 billion
    • Massive de leveraging of tender option bonds (TOBs)
      • Hedge funds that could not meet collateral calls
      • TOBs containing underlying bonds that were downgraded due to insurance
      • TOBs with liquidity guarantees from downgraded investment banks
      • Total amount of leverage that was unwound was as much as $150 billion
    • Municipal bond mutual funds experienced strong outflows during the fourth quarter
      • AMG Data Services reported over $9 billion in outflows during the quarter
    • Affect on municipal yields
      • Higher yield ratios to Treasuries
      • Steeper high grade yield curve
      • Wider credit spreads
    Impact of the financial crisis on the municipal market
  • 3. Municipal yield spreads: 10yr A – AAA February 28, 1999 - February 28, 2009 A decrease in municipal bond insurance has widened credit spreads Source: Thomson Financial, Deutsche Insurance Asset Management
  • 4. Municipal yield curve: 30yr AAA – 2yr AAA February 28, 1999 - February 28, 2009 Outflows by mutual funds and de leveraging by hedge funds caused longer municipal yields to increase while shorter yields were falling Source: Thomson Financial, Deutsche Insurance Asset Management
  • 5. Municipal default history
    • Between 1970 and 2006, only 1 municipal credit in the general obligation or water and sewer revenue sector that was rated by Moody’s experienced a default
        • There were 41 total defaults in the Moody’s rated universe including 17 in the not for profit healthcare sector and 16 in the state and local housing sector
    Municipals have a much lower default rate than equivalent rated corporate credits Cumulative default rates Moody’s 1970-2006 S&P 1986-2005 Municipals Corporates Municipals Corporates Aaa/AAA 0.00% 0.52% 0.00% 0.44% Aa/AA 0.06% 0.52% 0.00% 0.81% A 0.03% 1.29% 0.04% 1.83% Baa/BBB 0.13% 4.64% 0.31% 5.82% Ba/BB 2.65% 19.12% 1.35% 18.29% B 11.86% 43.34% 9.04% 32.38% Caa/CCC-C 16.58% 69.18% 34.31% 53.05%
  • 6. Why do municipals have a low default rate?
    • Ability to pay:
    • State an local governments have broad power to raise taxes, rates and fees
    • Willingness to pay:
    • Most municipalities seek to protect their ratings to maintain access to capital markets
    • Many states must legally pay bond interest before paying other expenses and require their local governments to do the same
    • States may be the beneficiaries of federal stimulus during recession to avoid the pro cyclical nature of balancing a state budget
    • It is more efficient for municipalities to preserve their market access by acting fiscally responsible and maintaining investment grade ratings
  • 7. The probability of state and municipal bankruptcy (Chapter 9) is also remote
    • It is difficult for municipalities to file for bankruptcy
      • States may not file for bankruptcy
      • Municipalities in many states must get state approval in order to file for bankruptcy and then come under state control
      • Municipalities must prove insolvency including the use of increased taxes to pay their debts
      • Creditors may not force a municipality into bankruptcy
      • Chapter 9 does not provide for a liquidation of a municipalities assets
      • In most cases, municipalities in bankruptcy do not default on debt
  • 8. U.S. State General Obligation ratings changes
    • 1974-76
    • Moody’s S&P
    • Upgrade (10) Downgrade (10) Upgrade (4) Downgrade (3)
    • AL A1 to Aa CT Aaa to Aa AK A to A+ CT AAA to AA
    • AK Baa1 to A1 CT Aa to A1 MS A to A+ MA AAA to AA
    • GA Aa to Aaa DE Aa to A1 WA AA to AA+ MI AAA to AA-
    • HI A1 TO Aa DE A1 to A WV AA to AA+
    • LA A1 to Aa ME Aaa to Aa
    • MS A1 to Aa MA Aa to A1
    • NV A to A1 NJ Aaa to Aa
    • NM Aa to Aaa NM Aaa to Aa
    • OK Aa to Aaa NY Aa to A1
    • TN Aa to Aaa NY A1 to A
    • 1982-83
    • Moody’s S&P
    • Upgrade (2) Downgrade (7) Upgrade (1) Downgrade (7)
    • DE A1 to Aa MI A to Baa1 DE AA- to AA CA AA+ to AA
    • ME Aa to Aa MN Aaa to Aa IL AAA to AA+ NH Aaa to Aa MN AA+ to AA
    • NH Aa to A1 NY AA- to A+
    • OR Aa to A1 RI AA to AA-
    • WA A1 to A WA AA to AA-
    • WI Aaa to Aa WI AA+ to AA
    In past recessions, most states have efficiently managed their finances and have avoided wide spread downgrades
  • 9. U.S. State General Obligation ratings changes
    • 2001-02
    • Moody’s S&P
    • Upgrade (1) Downgrade (6) Upgrade (1) Downgrade (7)
    • CT Aa3 to Aa2 CA Aa2 to Aa3 HI A+ to AA- CA AA to A+
    • CA Aa3 to A1 CA A+ to A
    • NJ Aa1 to Aa2 CO AA to AA-
    • NC Aaa to Aa1 KY AA to AA-
    • TN Aa1 to Aa2 NJ AA+ to AA
    • WI Aa2 to Aa3 TN AA+ to AA
    • WI AA to AA-
    • Notes: Out of 51 (including PR) states, Moody’s has no rating on 4. S&P rates 51, but not throughout the entire period. Moody’s introduced the modifiers (2 and 3) in 1997.
  • 10. Municipals vs. other asset classes: Risk vs. return From February 28, 1999 through February 28, 2009. Sectors listed in the graph above refer to Barclays indices. Standard deviation is a statistical measure of volatility. Generally, the greater the standard deviation, the greater the volatility. Standard deviation is subject to change. 1 Annualized – monthly standard deviation of return *Barclays Municipal Bond Index estimated income grossed up for 35% Federal Income tax for taxable bonds and 5.25% for municipals Return, % T-Bill Credit Barclays Aggregate ABS MBS UST BCMBI tax adjusted* High Yield Agency BCMBI Risk 1 Compared to the broad fixed income market, municipals offered attractive after-tax returns relative to risk
  • 11. Taxable Equivalent Yield Spreads: Municipals vs Industrial Corporates Taxes applied are 35% for corporates and 5.25% for municipals Source: Barclays Capital Longer municipals have historically provided higher taxable equivalent yields than similar rated industrial corporate bonds March 2, 2009 AA A Spread 5yr Average Spread 5yr Average 2 year -73 -08 10 04 5 year -28 03 29 15 10 year 89 56 121 64 15 year 156 69 145 70 30 year 266 103 171 89
  • 12. Conclusions
    • Municipal credits will experience headline risk during 2009, but defaults should only affect smaller municipalities with small amounts of debt outstanding
        • The risk of default or bankruptcy is higher for project revenue bonds vs. bonds backed by a general obligation pledge or essential service revenues
    • The municipal bond asset class allows an investor to lower idiosyncratic risk relative to corporate bonds
        • Longer maturity municipals provide higher taxable equivalent yields than some corporate bonds
    • The current dislocation in the municipal market represents the transition back to a retail dominated market
        • Leveraged buyers are no longer the marginal buyer
        • Current valuations are not representative of the credit risk in the municipal market
  • 13. Important information
    • Deutsche Insurance Asset Management is insurance asset management division of Deutsche Asset Management which is the brand name of the asset management activities of Deutsche Bank AG. In the US this relates to the asset management activities of Deutsche Bank Trust Company Americas, Deutsche Investment Management Americas Inc. and DWS Trust Company; in Canada, Deutsche Asset Management Canada Limited (Deutsche Asset Management Canada Limited is a wholly owned subsidiary of Deutsche Investment Management Americas Inc); in Germany and Luxembourg: DWS Investment GmbH, DWS Investment S.A., DWS Finanz-Service GmbH, Deutsche Asset Management Investmentgesellschaft mbH, and Deutsche Asset Management International GmbH; in Australia, Deutsche Asset Management (Australia) Limited (ABN 63 116 232 154); in Hong Kong, Deutsche Asset Management (Hong Kong) Limited; in Japan, Deutsche Asset Management Limited (Japan); in Singapore, Deutsche Asset Management (Asia) Limited (Company Reg. No. 198701485N) and in the United Kingdom, RREEF Limited, RREEF Global Advisers Limited, Deutsche Asset Management (UK) Limited; in addition to other regional entities in the Deutsche Bank Group.
    • This material is intended for informational purposes only and it is not intended that it be relied on to make any investment decision. It does not constitute investment advice or a recommendation or an offer or solicitation and is not the basis for any contract to purchase or sell any security or other instrument, or for Deutsche Bank AG and its affiliates to enter into or arrange any type of transaction as a consequence of any information contained herein. Neither Deutsche Bank AG nor any of its affiliates, gives any warranty as to the accuracy, reliability or completeness of information which is contained in this document. Except insofar as liability under any statute cannot be excluded, no member of the Deutsche Bank Group, the Issuer or any officer, employee or associate of them accepts any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage whether direct, indirect, consequential or otherwise suffered by the recipient of this document or any other person.
    • The views expressed in this document constitute Deutsche Bank AG or its affiliates’ judgment at the time of issue and are subject to change. This document is only for professional investors. This document was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. The value of shares/units and their derived income may fall as well as rise. Past performance or any prediction or forecast is not indicative of future results. No further distribution is allowed without prior written consent of the Issuer.
    • CRC I-010456-1.1