Trends in Municipal Bonds Liquidity Assessment & Pricing WEBINAR 18TH JANUARY AM EST

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1 Trends in Municipal Bonds Liquidity Assessment & Pricing WEBINAR 18TH JANUARY AM EST

2 Agenda Welcome Ian Blance Voltaire Advisors Introduction Ian Blance, Voltaire Advisors Current Issues in the Municipal Bond Market Stephen Winterstein, Wilmington Trust Investment Advisors Liquidity Assessment for Municipal Bond Funds Complying with SEC Rule 22-e4 Robert Kane, BondView Observable Trade Data and Structural Considerations for Pricing Muni Bonds Thomas Ryan, Thomson Reuters Audience Q&A 1100 Close of Webinar

3 3 Introduction: Liquidity Survey Ian Blance Managing Director Voltaire Advisors

4 Survey of Mutual Funds u Surveyed 220 US Mutual Fund CCO s June-September 2017 u Questioned on: o Preparedness for Rule 22e-4 4 u o o o o Expected date of implementation Preparedness for new reporting Vendor usage Data Requirements Full results available as a Special Report soon u Highlights follow

5 Survey Highlights (1) 5 u 71% said that they did not currently have a formal written Liquidity Risk Management program in place. All Done! How prepared is your firm to comply with SEC rule 22e-4? >75% u 85% of firms estimated that they were between 10% and 50% complete 50-75% 25-50% u 86% of firms expected implementing an LRM program in H % <10%

6 Survey Highlights (2) 6 u There was much better progress in complying with the new N-PORT and N-CEN reporting requirements. All Done! How prepared is your firm to comply with new reporting? u 29% of firms expected to perform a liquidity assessment daily, and a further 29% weekly. The remainder were planning to do it monthly. >75% 50-75% 25-50% u Firms generally felt that they were going to rely quite heavily on vendors to help them comply with the rules % <10%

7 Survey Highlights (3) 7 u Respondents listed the following data elements as important for the liquidity assessment and bucketing: o o o o o o o Actual bid ask spread for each security Inputs and assumptions of an evaluated price Number and volume of trades over the past week and month Number of broker quotes available Number of days to liquidate Breadth and depth of ownership by all other funds and public reported entities Vendor specified liquidity score

8 8 Current Issues in the Municipal Bond Market Stephen Winterstein Chief Municipal Strategist Wilmington Trust Investment Advisors

9 Current Issues in the Municipal Bond Market 9

10 10 Liquidity Assessment for Municipal Bond Funds Complying with SEC Rule 22-e4 Robert Kane CEO BondView

11 BondView Liquidity Assessment For Municipal Bond Funds Complying With SEC Rule 22E4 Robert Kane, CEO PH

12 About BondView: Those Who Know Muni Bonds Know BondView. 15k + Users Including The Top 10 Investment Banks, Brokers, Accountants & Fin Advisors

13 About BondView: In Business 10+ Yrs Launched BondView Pro (2012): Big Data Cloud-Based Bond Analyst Detailed Holdings Data on 3mm+ Muni Bonds, 2,400 Funds, Pension Holdings, Private Portfolios And Pre-Trade Offers. Independent 3 rd Party Evaluated Price Verification 100% Transparency Real Time & Historical Pricing Engine (Proprietary) Helps Identify Trading Opportunities BondView Uniquely Positioned To Offer Liquidity Assessment.

14 Coming Soon: Liquidity Assessment Tool (Release Date: Q1-2018) 2 Product Offerings 1) All Muni Funds: Daily Liquidity Assessment On 2400 Funds Daily Summary and Position Level Liquidity Assessment Global View To Compare Funds By Peer Group & Identify Trends, Outliers And Potential Compliance Issues 2) Single Fund View: Best Practice Methodology Customizable To Support Your Unique Defensible Liquidity Policy. Customization Features Include: -Breadth & Depth of All Fund Holders -Summary Position Level -Value Impact & Price Cuff -Confidence Intervals -Daily Reporting & Re-Classification -Normal Vs. Reasonably Stress Funds Managers Define Liquidity Differently

15 What Is Your Liquidity Funnel? SEC Rule 22e-4 Requires Fund Companies To Regularly Assess & Report Fund Liquidity. 0 Days (Cash) Days to liquidate 1-3 Days Highly Liquid 3-7 Days Moderately Liquid 7 Days (Late Settle) Less Liquid 7+ Days Illiquid Highly Liquid Min. (Self Selected) (ie) >12% Illiquid Assets Must Be Less Than 15%

16 Product: Get A Clear Answer Daily - Either Liquidity Is Sufficient Or Not

17 Product: Complete Supporting Detail For Each Bond s Assessed Liquidity

18 Product: Complete Supporting Detail For Underlying Methodology -Breadth & Depth Analysis:

19 Next Steps: If You Are Interested Beta Testing Currently Underway w/ Industry Muni Market Participants A Few Spots Left For Additional Beta Testers : Contact Sales@bondview.com Sec Rule 22E4 is Complex. Many Moving Parts & Players Partnering With With Funds, Administrators, Accountants, Lawyers & Vendors. For More Info Contact: Robert Kane, CEO Robert@bondview.com Ph

20 20 Observable Trade Data and Structural Considerations for Pricing Muni Bonds Thomas Ryan Head of Municipal Bond Evaluations Thomson Reuters

21 THOMSON REUTERS PRICING SERVICE Municipal Bond Evaluations January 18, 2018

22 Thomson Reuters Pricing Service (TRPS) for Muni Bonds Liquidity Observable Trade Data Credit and Duration Risk Supply/Demand Expectations Corporations and leveraged buyers may be better sellers Individual investors will continue to seek tax-exempt bonds Are NC5s the new norm? Considerations for Pricing Services Adjusting spreads for optionality; potential negative convexity Re-calibrating adjustments for de minimis considerations Tightening spreads for bonds subject to AMT Provide clients with Credit Reviews on less liquid, high yield bonds THOMSON REUTERS PRICING SERVICE EVALUATED FIXED INCOME AND DERIVATIVES PRICING 22

Source: MSRB and S&P Dow Jones Indices, LLC.

23 Trade data supports greater liquidity for higher ratings Most of the 471k institutional trades 1 in 2017 were rated Aa or higher (74%) (# trades) (S&P Muni Bond Index, Weights) The S&P Muni Index weightings are also reflective of trading activity Source: MSRB and S&P Dow Jones Indices, LLC., data as of 12/31/ Institutional trade is defined as greater than par amount of $750,000. All trades are fixed rate bonds only. THOMSON REUTERS PRICING SERVICE EVALUATED FIXED INCOME AND DERIVATIVES PRICING 23

buckets for 2017 Source: MSRB THOMSON REUTERS PRICING

24 yet longer duration does not mean less liquidity MSRB institutional trades by credit quality and maturity buckets for 2017 Source: MSRB THOMSON REUTERS PRICING SERVICE EVALUATED FIXED INCOME AND DERIVATIVES PRICING 24

25 Input: Use observable market data to build Issuer Curves Trade data and market color are normalized to generate 5% NC10 Issuer Curves THOMSON REUTERS PRICING SERVICE EVALUATED FIXED INCOME AND DERIVATIVES PRICING 25

26 Output: Outstanding bonds are plotted on Issuer Curve Bonds are plotted to normalized curve, then adjusted for structural considerations THOMSON REUTERS PRICING SERVICE EVALUATED FIXED INCOME AND DERIVATIVES PRICING 26

27 TRPS institutional trade database isolates credit spreads THOMSON REUTERS PRICING SERVICE EVALUATED FIXED INCOME AND DERIVATIVES PRICING 27

Structural Considerations: low coupons AND short calls Massachusetts G.O. 4.25s due 12/1/2039 callable 12/2/2021 (57582PU73) Institutional trade at 2.50% YTW ($106.41); Retail trades at 2.

28 Structural Considerations: low coupons AND short calls Massachusetts G.O. 4.25s due 12/1/2039 callable 12/2/2021 (57582PU73) Institutional trade at 2.50% YTW ($106.41); Retail trades at 2.00% YTW ($108.33) Call Date Maturity Date TRPS Model Price is $ (2.48% YTW) as of 1/16/18 Our net adjustments for optionality and coupon were 32 bps, as supported by institutional trades THOMSON REUTERS PRICING SERVICE EVALUATED FIXED INCOME AND DERIVATIVES PRICING 28

29 Structural Considerations: Negative Convexity Theoretical Bond: 3.00% due 7/1/2038 callable 7/1/2020 priced at par ( 20NC2s ) Price ($) 110 The risk (downside) / reward (upside) is asymmetrical for bonds with short calls and coupons at or close to its yield year Non-Call ( Bullet Bond ) 90 20NC2s Yield (%) THOMSON REUTERS PRICING SERVICE EVALUATED FIXED INCOME AND DERIVATIVES PRICING 29

illustrate tightening spreads * AMT Alternative Minimum Tax

30 Tax Bill has led to spread compression for AMT Bonds Institutional trade observations for California Airport Bonds illustrate tightening spreads * AMT Alternative Minimum Tax THOMSON REUTERS PRICING SERVICE EVALUATED FIXED INCOME AND DERIVATIVES PRICING 30

31 Market color (bids/offers) from contributed sources Thomson Reuters has more than 100 unique contributors of bid-side quotes Total quote volume of 9.5 million in 2017 Approximately 190,000 unique securities were quoted in 2017 Most of the bids were for longer dated securities (maturities > 20 years) Observable market data is used in our pricing models THOMSON REUTERS PRICING SERVICE EVALUATED FIXED INCOME AND DERIVATIVES PRICING 31

quickly make adjustments, or enter new Issuer Curves THOMSON

32 Enhancements: Market Color Database Bids and offers from top tier firms are fed into our database, and used by Evaluators to quickly make adjustments, or enter new Issuer Curves THOMSON REUTERS PRICING SERVICE EVALUATED FIXED INCOME AND DERIVATIVES PRICING 32

33 Trade Data is a limited source of market information Waterfall of observable trade and market color data for pricing bonds 1. Institutional trades on target security 2. Institutional trades on comparable securities Same issuer Same rating and sector category 3. Institutional market color 4. Odd lot trades Less valuable for IG bonds More valuable for HY and less liquid bonds 5. Fundamental credit research is required HY bonds Less liquid bonds THOMSON REUTERS PRICING SERVICE EVALUATED FIXED INCOME AND DERIVATIVES PRICING 33

34 TRPS approach to pricing High Yield Bonds Analysts gather information from a variety of sources to produce detailed credit reviews Financial Data Official Statements Audited Financials Continuing Disclosure Third Party Due Diligence Rating Agency Research Relevant News Articles Issuer Websites TRPS Price Market Participants Trustee Bond/Workout Counsel Bondholders Market-makers THOMSON REUTERS PRICING SERVICE EVALUATED FIXED INCOME AND DERIVATIVES PRICING 34

35 Expanding database of TRPS Credit Reviews After Credit Form is completed, Credit Review can be shared with Client(s) THOMSON REUTERS PRICING SERVICE EVALUATED FIXED INCOME AND DERIVATIVES PRICING 35

36 Sample Credit Reviews provided to clients Provide clients with selected credit reviews supporting independent Evaluated Prices THOMSON REUTERS PRICING SERVICE EVALUATED FIXED INCOME AND DERIVATIVES PRICING 36

37 Summary Capture and apply trade data and credit spreads to debt profiles Recalibrate adjustments for optionality and de minimis considerations Provide fundamental credit research for less liquid securities THOMSON REUTERS PRICING SERVICE EVALUATED FIXED INCOME AND DERIVATIVES PRICING 37

38 Audience Q&A 38

39 Thank You! 39 u Participants will receive a copy of the slide deck and a recording of the Webinar tomorrow. u Webinar is part of our Current Issues in Valuation Series looking at topical pricing challenges u This is a component of our VIVA program of fund valuation initiatives throughout 2018 more details can be found here:

40 Contact Us Voltaire Advisors LLP 14 Wall Street New York NY 10002 USA No.

40 40 Contact Us Voltaire Advisors LLP 14 Wall Street New York NY USA No.1 Poultry London EC2R 8JR UK

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