Background

Michigan public school districts have the option to utilize the state’s Qualified School Bond Loan Fund (Q-SBLF) when issuing debt. The Q-SBLF program helps lower interest expense for the school district by authorizing the use of the State’s credit rating (Aa1/AA/AA+) on the bonds they issue while also providing additional protections to bondholders in the event that the school district becomes distressed or insolvent.

Michigan school district debt has been considered an attractive option for our tax-exempt strategies given the Q-SBLF program and the generally strong credit characteristics of the underlying unlimited tax general obligation guarantee.

Market conditions

There has been a substantial pick-up in Michigan school district debt issuance in 2023, with YTD Q-SBLF related issuance more than 40% above the 5-year average* (primarily driven by higher voter approval rates of new debt issuance at the ballot box). This elevated issuance has caused spreads on many deals to price at attractive levels relative to other similarly rated bonds.

Comparative spreads to MMD curves (4/17/23)

Byron Center Public Schools new issue (AA Q-SBLF, AA- underlying)

Source: Municipal Market Monitor (TM3), 4/17/23.

Our viewpoint

Consider the recently issued Byron Center Public Schools deal that priced on 4/17/23. These bonds carry an underlying rating of AA from S&P, and a top line rating of AA from the Q-SBLF guarantee. Yet this deal priced at levels that would imply a weak-A or strong-BBB type credit based on published spread data from Municipal Market Data (MMD) on that day. While the uptick in supply and the commensurate yield premium that we are seeing in today’s market may subside over time, we currently view Michigan School District debt as a strong absolute and relative value opportunity within the municipal bond market.