(Bloomberg) — “Trick” coupons hit the municipal bond market again this week as a Minneapolis underwriter took advantage of a 62% coupon to win $9.5 million in school bonds.
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Bankers have been using the word “trick” since at least the 1970s to describe unusually high coupons that aren’t what they seem. In this case a 62% coupon does not bring him 62%. The yield is 3.25%.
The Danish School District has 1,601 students and is located 15 miles southeast of Green Bay, Wisconsin. The district held a bid for $9.5 million in general debt bonds for construction projects Monday morning, with the bonds stipulating he will mature in 2023, 2040, 2041 and 2042.
The winning bid was submitted by Northland Securities Group LLC and executed a coupon of 62% in 2023 and 4% in 2040, 2041 and 2042, yielding a true interest cost of 4.229796%.
Again, the buyer does not get the 62% tax free yield. Due March 1, 2023, these bonds were priced at a premium of 110.1 and yielded 3.25%, approximately 90 basis points above the benchmark AAA yield.
Such unnatural and jarringly high coupons were used in the 1970s and have appeared sporadically since then. Their most recent use before Monday’s sale appears to have been in November and December of last year, when the two underwriters used a combination of 25% and 30% coupons to sell significantly in Texas. Meets customer demand for discounted maturity bonds.
Such coupons do not appear every day. They’re rare enough that I can’t look away when they pop up and think about them all the time.
I’ve seen 50% coupons used, but I’ve never seen a 62% coupon. Underwriter Northland Securities did not respond to a request for comment. The company is his 34th largest underwriter of long-term municipal bonds in the United States, having processed 186 deals so far this year totaling $870.7 million, according to Bloomberg LEAG data.
Financial advisers probably helped evaluate the bid when it opened Monday, but Milwaukee’s Robert W. Baird & Co. did not respond to many requests for comment.
The school district must have been surprised by the existence of the 62% coupon and wondered what its representatives were thinking, but did not respond to calls or emails seeking comment.
Perhaps the bondman had an opinion on this? Scott W. Bussen, senior manager of communications at Quarles & Brady LLP in Milwaukee, responded to my email but declined to comment.
So history should be used as a guide.
Bidding structures like the one used in Texas last year can be used to accommodate customer preferences so buyers want some or all of those 4% coupons in 2040, 2041 and 2042. may have been Premium, 2042 on par. Everything he can call at face value in 2031. Then a “trick” coupon is created, so you get 62 at a price of 110.109, yielding 3.25%.
No, 62% doesn’t mean that the issuer will pay an astronomical amount on March 1st maturity. On March 1, the Danish School District paid him $2,239,170, 62 in 1923 is history.
(Joe Mysak is a columnist on the local government market and writes for Bloomberg. His opinions do not necessarily reflect those of Bloomberg LP and its owners, and his views are not intended as investment advice. .)
–With help from Danielle Moran.
(Updates to add explanation of coupon yields in 2nd, 5th, and 13th paragraphs)
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