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Municipal Bonds: In-Depth Credit Research Is Critical

Parking garages, as it turns out, are complex businesses, and Trish Deford has become steeped in their nuances.

Ms. Deford is a municipal bond analyst at T. Rowe Price, one of 43 credit analysts in the rm’s Fixed Income Division, eight of whom specialize in researching municipal bonds— collectively aiming to know every- thing they can about hundreds of bond issuers’ nances, operations, management, construction projects, and prospects.

Such independent credit research recently has become even more important to nding good values in the municipal bond market. While remaining a high-quality market, municipal bonds saw a sharp sell-off starting last fall and through the winter, with bond prices falling as a result of a glut of new issuance, credit concerns, and an overall rising interest rate environment.

Moreover, the municipal bond market has recently gone from mostly insured securities to 90% uninsured. And many investors don’t realize that the market is not just general obligation bonds based on state and local taxes but is mostly made up of bonds based on revenue generated by the tax-exempt projects they nance, such as parking garages, hospitals, and water and sewer systems.

No two municipal bond securities are alike, and so T. Rowe Price credit analysts examine every investment that the rm is considering and assign each security a rating. Managers make their investment decisions based on these internal ratings.

Analysts are assigned to and develop various specialties. Ms. Deford, a municipal credit ana- lyst since 1979 and at T. Rowe Price for 12 years, often focuses on bonds involving very complex matters, such as highly structured transactions— securitization of state tobacco settle- ment revenues, for example.

But even something seemingly as simple as parking garages has its complexities and often requires on-site visits as an essential part of the research. “I never thought I’d be spending so much time in parking garages, but to invest in that area, you have to,” Ms. Deford says.

says. “But only by going out and getting in-depth understanding of the bonds and of the projects that secure them can we make good investment decisions.”

On the Road

Marcy Lash, a municipal bond credit analyst since 1992, including 13 years with T. Rowe Price, agrees. She stud- ies hospital bond issues across the


“…only by going out and getting in-depth understanding of the bonds…can we make good investment decisions.”


In such visits, her goal is to assess the bond’s risk versus return. “My job is to really home in on that risk element and help the portfolio manager make a decision,” she says. “If we provide the funds to build the new garage by buying this bond, will customers switch to that garage and provide the revenue to pay the bond interest?”

She likes to drive into each garage as if she were a customer, examining its ease of access, rates, payment options, ticket machines’ functioning, and competition from other garages and mass transit. She talks with man- agement face to face, follows up with phone calls and more visits as needed, and les update notes and ratings.

“It’s hard for individual investors to do all that because it’s so specic and it requires so much attention to legwork and detail,” Ms. Deford

country and is on the road about once a month for site visits “to get a more complete picture.”

Sometimes, these trips are adven- tures. “I’ve traveled to some very out-of-the-way places, and some- times I nd myself in the middle of cornelds, down some gravel road,” she says.

“It could be an hour between towns. You really gain an under- standing of different areas and cultures of this country. And some- times you nd great investments where you least expect.”

In 2010, for example, T. Rowe Price bought additional bonds issued by a hospital system in Kentucky that is replacing its main facility, after a visit by Ms. Lash that began with a predawn ight from Baltimore and an hour drive through farmland.

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