Aerial view of the Dowagiac campus

Business students witness volatility of bond market

01/26/2017 - 11am
Brodie Killian, SMC's bond underwriter

Sixty Southwestern Michigan College business and accounting students peeked inside the volatile municipal bond market in real time on “Game Day” Jan. 25, learning from a Chicago trading desk refinancing details at the same moment as underwriter Brodie J. Killian.

Killian, Raymond James and Associates’ senior vice president, narrated action as it unfolded.

In refinancing $10.88 million of the $14.22 million bonds sold in June 2008 to construct SMC’s first residence hall, Keith H. McKenzie Hall, and add the Student Activities Center to the Charles O. Zollar Building, SMC lowered its average interest rate from 5.31 percent to 3.62 percent.

The $2 million saves about $85,000 annually over the remaining 21 years.

Killian described the elevated desk at the other end of the call where six people monitored four screens each.

“Out on the floor,” he said, “salesmen and saleswomen are putting deals together in municipal bond markets—including for the college. A college or local government enters the bond market for two reasons—to borrow money to finance a project,” as an individual would seek a bank loan to build a house or buy farm equipment; or to refinance outstanding debt.
“I also work with many local school districts,” Killian said. “Decatur is a client.”

Coupon rates ranged from 5 to 5.5 percent. “Those are what we call big, juicy coupons that should be replaced with today’s lower rates. The college had to wait to do this because of the redemption provision which states bonds maturing May 1, 2019, and thereafter shall be subject to redemption prior to maturity at the option of the college in any order on any date on or after May 1, 2018. This 31-year loan actually goes to May 1, 2039. The college wanted the option to refinance that debt should interest rates move in its favor.

“Most municipal bonds have a call date 10 years out from the original issuance. Interest rates have been low for some time, but the college couldn’t do this refunding earlier because the call date was too far away. As you get closer to the call date, bond refinancings get more efficient. Investors are guaranteed their principal back at the end of the loan plus interest up through and including the call date, May 1, 2018. Rates were pretty low in 2012, but the college would have had to bond for interest due from 2012 through 2018.”

Municipal bond interest rates tumbled during the Great Recession, reaching an historic low last July due to Brexit, the British exit from the European Union after June 23’s referendum.

“There was a flight-to-quality,” Killian said of the financial market phenomenon when skittish investors unload higher-risk investments for safer acquisitions, such as U.S. Treasuries or gold.

Slow economic growth, corporate scandals, war or high oil prices can roil markets.

“Trump’s election was a huge surprise to capital markets—Wall Street in particular,” Killian said. “Wall Street was behind Hillary Clinton because they don’t like uncertainty. She’s been around a long time and they knew what they would get with her policies.”

Buyers “come in different shapes and sizes,” from individual retirees seeking tax-exempt, fixed-income streams to local banks such as G.W. Jones Exchange Bank in Marcellus and big mutual fund companies. “Lots of farmers buy municipal bonds,” Killian said.

“At the time I was in your shoes,” Killian said, “I had no idea where I was going to end up. If you’ve got a passion, follow it. I always had interest in finance, but did not want to be an accountant. I sought out people,” suiting his sales-oriented position.

“Because I played football, I could never leave Ann Arbor. Summers we were conditioning. I sent a cover letter to every brokerage firm. No one called me back except one guy at Questar Capital,” said Killian, quoting Abraham Lincoln: “Things may come to those who wait, but only those things left behind by those who hustle.”

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