Credit Outlook

Municipal bond issuers will continue to face several credit challenges in 2024, but MTAM expects that the vast majority of municipalities will successfully manage through most difficulties with a combination of spending cuts and revenue enhancement plans.

MTAM has always been, and will continue to be, a conservative asset manager. We are very selective in the municipal sectors and top tier bonds we decide to purchase and hold. This positioned us extremely well to weather the recent pandemic situation.

Notwithstanding the challenges facing municipal bond issuers, there are always good opportunities, even for the very conservative investor. We still expect defensive credits like water and sewer bonds, special tax bonds, and public power bonds to perform better from a fundamental perspective. These types of bonds tend to have revenue streams that are less subject to economic volatility, have strong covenants, or are tied to an “essential service”, making debt service payment more certain. In addition, there is legal precedence that bonds backed by a dedicated revenue stream may be protected in the case of a municipal bankruptcy. We prefer bonds that have a clean flow of funds, broad revenue streams, and high debt service coverage tests.

MTAM continues to recommend that investors select high-quality municipal issuers that understand the new economic and financial reality, and have made or are making budget adjustments. Essential service revenue bonds without the budgetary concerns of state and local governments and limited payrolls can be attractive, but we stress that an essential service issuer cannot flourish if the underlying governmental entity is in dire economic circumstances. A healthy outlook holds for most infrastructure issuers due to fundamental strengths reflected in the provision of essential public services, adequate balance sheets, and generally sound governance and fiscal management practices. In the case of the enterprise sectors comprised of higher education, health, and housing, credit quality will be maintained primarily as a function of their ability to increase fees, control costs, and improve overall operating margins. Sound debt and fiscal management practices, preservation of adequate liquidity, and strong governance oversight will be significant determinants of credit quality for issuers during the coming period of financial adjustment.