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"When these bonds become distressed, selling them can be difficult given the lack of liquidity in the market for distressed bonds. That enables knowledgeable buyers the opportunity to strike a good deal" |
The municipal bond market is booming in the US. Municipalities and other tax-exempt borrowers sold a record $31 billion of municipal bonds in September, and the 2007 totals are expected to exceed $420 billion. The appeal of the municipal bond market is predominantly two-fold for investors. First, the Internal Revenue Service code looks favourably on bonds that fund projects to help a community grow or develop infrastructure. As a result, the returns on municipal bonds are tax-exempt. Second, it’s an inefficient market where there is inconsistent disclosure and more than 60,000 issuers with in excess of $2 trillion outstanding. So for those with expertise, the muni market can provide big opportunities.
Saybrook Capital sees the opportunities in distressed and defaulted munibonds. Institutional buyers tend to dominate the high-yield muni market. "Since they compete for yield, occasionally marginal projects are funded that don’t always capture the appropriate trade-off between risk and return," says Jon Schotz, Saybrook co-founder and CIO, and co-portfolio manager of the firm’s Tax-Exempt Opportunity Funds.
