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

A majority of municipal market participants say liquidity and equity are a top concern on a high-yield deal.

Nearly 69% of respondents to a HilltopSecurities high-yield team survey ranked liquidity and equity as their first or second level of concern for 2022.

“Our biggest takeaway from the survey is that there is ample appetite for well-structured high-yield transactions,” said Yaffa Rattner, head of municipal credit and senior managing director at HilltopSecurities and lead author of the report. “However, market participants believe that liquidity, management, and an appropriate covenant package are critical.”

Management and covenant package ranked second and third, respectively as respondents’ first or second level of concern on a high-yield deal.

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

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

In the project finance space, significant revenue increases to offset funding declines, supply interruptions, or expenditure increases is not typically an option. Therefore, she said it is their assessment that projects with higher levels of liquidity and seasoned management will be better positioned for success.

However, the survey closed Dec. 17, and the report notes respondents could be more worried about the impact of COVID-19 now, as the proliferation of cases has surged during the second half of December, mainly due to the rise of the Omicron variant.

For respondents, they ranked skilled nursing and senior living as the sectors they were most concerned about for next year. They also ranked liquidity in the senior living sector as the biggest high-yield sector challenge in 2021.

Rattner said COVID-19 significantly altered the revenue and expense paradigm in senior living and skilled nursing projects. This is because occupancies declined thereby decreasing operating revenues while expenses, including labor, personal protective equipment and operating supplies, increased.

As a result, credits with lower liquidity levels had, and continue to have, more trouble navigating these challenging times, she said.

Charter schools and the healthcare sector were the two areas that investors wanted to add most significantly.

“This finding corroborated Q3 in which investors called out these two sectors as areas in which they were least concerned,” the report said. Other respondents added dirt and deals priced at the “right level,” tax-credit deals, non-traditional healthcare, tobacco, index eligible deals, and California Work Force Housing deals.

Respondents to the survey also believe that investments in energy infrastructure will predominate the high-yield utility/power sector in 2022.

“However, investment opportunities in water, sewer and electric will also abound,” the report said. “It is interesting to note that flood abatement and conversion of oils into new products are expected to have more muted issuance in 2022.”

The report was conducted during the end of 2021 among 88 market participants.