T RIDENT

MUNICIPAL RESEARCH
Municipal Market Weekly Thursday, January 16, 2014

MUNIVERSES

verse one surveying the horizon

Welcome Back! Why Dont You Stay Awhile?

At the end of last week, coincident with the disappointing employment report and a rally in US fixed income markets, something happened that hadnt occured since the end of May. The municipal bond ETF complex traded at a premium to its underlying Net Asset Value (NAV) for two days in a row. This raises the hope that persistent selling pressure on municipals may be abating, but its too early to announce the beginning of a re-rotation into municipals in TMRs opinion. The other demand metrics we follow, mutual fund investor flows and the closed-end fund (CEF) discount to NAV have yet to turn positive. However, the investor cash flows do seem to have stabilized (see the sidebar). This is a positive development after investors withdrew approximately 12% of the assets they had invested in municipal bond-focused mutual funds during the last seven months of 2013, by TMRs estimates. The massive outflows of last year were not just a muni phenomenon. We have discussed (see MuniVerses, dated November 14, 2013) the fact that it was reflective of a broader negative turn in investor psychology towards income-driven asset classes. However, the weight of investor fears related to Puerto Rico exposure in the fund complex, and negative credit headlines from Detroit, did add to the pressure on municipals during the second half of 2013. Though we expect alarming headlines to continue to appear out of the trouble spots such as Puerto Rico, Detroit and Illinois, that news will be balanced by the improving picture in larger states such as California and New York. More broadly, the number of states that have needed to make mid-year budget cuts for FY2014 continued to decline. Only Indiana and Missouri have made corrective, mid-year cuts for the current fiscal year, totalling $268 million, according to recent estimates from the National Association of State Budget Officers (NASBO). Thats down from 11 states cutting $1.3 billion in 2013 and 41 states cutting $31 billion in FY2009 to bring budgets in line after the fiscal year had began. Improvements at the local government level are lagging the states, due to the reliance on ad valorem property taxes. New York State comptroller recently released data showing that school district revenue averaged growth of only +1.3% over the past three years. That figure reflects the lingering effects of the housing crisis and comparisons will start to benefit the stabilization in the housing market by late 2014 and early 2015, in TMRs estimation. In short, if investors do start return to the municipal market in early 2014, as it appears they might, we think theyll find plenty of reasons to get comfortable and stay awhile.
TRIDENT MUNICIPAL RESEARCH, LLC A JOINT VENTURE OF ARBOR RESEARCH & TRADING, LLC & ALPRION CAPITAL MANAGEMENT LP

The theme of this week's MuniVerses is the evolving appeal of the municipal market.

Investor cash flows started to stabilize:

have

zzThe CEF discount bottomed out on December 13th (yes, Friday) at 9.9% and has rebounded to a still significant 6% discount. zzMutual fund investor cash flows have been relatively stable so far in 2014, but still registering slight outflows.

T RIDENT
MUNICIPAL RESEARCH

MUNIVERSES

Municipal Market Weekly Thursday, January 16, 2014

verse two following the currents

Is This Anyway to Run a Railroad?

...or a bridge, or an airport, or a port? A recent article from the online news outlet Quartz featured a headline that read The Swiss are scandalized by trains that run three minutes behind schedule." The state-run rail operator missed its target for punctuality; only 87% of trains arrived within three minutes of their scheduled arrival. Its a good thing the Swiss dont have to commute over the George Washington Bridge. Bridgegate has dominated the media over the past week. Be it Governor Christies two-hour mea culpa, the trail of incriminating emails or just the general political intrigue, one should not lose sight of the role the Port Authority of New York and New Jersey plays in the economic vitality of the New York Metro region. As the first major bi-state agency, founded in 1921, the Port Authority is authorized to plan, develop and operate terminals and other facilities of transportation, economic development and world trade that contribute to protecting and promoting commerce in the Port District. How or does the current controversy impact the credit quality of the PAs $18 billion outstanding Consolidated Bonds (Aa3/AA-/AA-)? In the short run, probably very little. The Authority has strong debt service coverage, flexible (and frequently used) rate setting capability, fully- funded DSRF and the diversity of the regional economy. The Authority has a proposed 10 year Capital Improvement Program (CIP) of approximately $27 billion. Our concern regards governance issues that have become more acute recently. What has become readily apparent is the Byzantine board structure that in essence creates political fiefdoms. Each Governor makes appointments for specific positions (New York appoints the Executive Director, New Jersey appoints the Chairperson). Rather than operate in a truly bistate nature for the benefit of the region, petty differences drawn along state (and party) lines seem to dominate. The fact that the Authority's facilities can be manipulated for the purpose of political retribution is reprehensible. The safety of the regions residents and its continued economic vitality is dependent on the unimpeded, unencumbered management of the authority's many facilities. Lack of investor confidence in authority management oversight could indeed hamper needed future infrastructure projects. The current headlines will eventually fade, but the need for governance reform and accountability should be paramount going forward.
TRIDENT MUNICIPAL RESEARCH, LLC A JOINT VENTURE OF ARBOR RESEARCH & TRADING, LLC & ALPRION CAPITAL MANAGEMENT LP

New Jersey's recent political tribulations read like the plot line for a new HBO series.
zzTMR thinks investors should focus on the potentially serious impact on the Port Authority

T RIDENT
MUNICIPAL RESEARCH

MUNIVERSES

Municipal Market Weekly Thursday, January 16, 2014

verse two (continued) following the currents

The Port Authority's Reach is Vast

Port Authority trivia fact:
zzThe Port District is defined as a region within a radius of 25 miles of the Statue of Liberty zzThe District stretches north to Westchester County, NY and south to Monmouth County, NY, and ranges from the edges of Nassau County, NY on Long Island to the east and into Morris County, NJ to the west.

Governance structure:
zzThe Port Compact of 1921 established the Port Authority as a bi-state authority controlled jointly by New York and New Jersey. zzThe governor of each state appoints six of the Authorities twelve board members.

Financial Highlights:
zzGross Operating revenues of $4B in FY12, 3 yr CAGR of 4.5% zzOperating margin of 11.6% zzOutstanding debt of $18B

sources: Port Authority NY/NJ 2012 Annual Report TRIDENT MUNICIPAL RESEARCH, LLC A JOINT VENTURE OF ARBOR RESEARCH & TRADING, LLC & ALPRION CAPITAL MANAGEMENT LP

T RIDENT
MUNICIPAL RESEARCH

MUNIVERSES

Municipal Market Weekly Thursday, January 16, 2014

the end

About TMR
Trident Municipal Research, LLC ("TMR") is a joint venture of Arbor Research & Trading, Inc and Alprion Capital Management LP focused on providing high-quality, independent research for the municipal bond market. Arbor Research & Trading, LLC (Arbor) is an institutional research and brokerage firm that produces innovative research across a broad range of global fixed-income, equity, currency, and commodity markets. In addition, Arbor's trading desk provides comprehensive issue discovery and high quality execution in the fixed income and currency markets. Unencumbered by the biases of holding positions or underwriting securities, Arbor offers objective viewpoints and intelligent solutions for portfolio managers and traders world-wide through a proprietary menu of independent and innovative research products designed to work in conjunction with clients and their systems. Founded in 1988, Arbor has a long history of delivering innovative, technology-based products to many of the largest and most influential financial institutions world-wide. As the landscape of global financial markets has changed, Arbor has adhered to its mission, providing clients with timely analysis, objective opinion and first- class execution. Alprion Capital Management LP (Alprion) is a New York-based investment manager focused on the municipal sector. Alprion was founded in 2010 by a team of fixed income professionals with backgrounds in municipal credit and fundamental credit analysis.

Contributors
Bart Mosley, Co-President Rob Novembre, Co-President Jason Hannon, Capital Markets Team Ken Kollar, Capital Markets Team Steven D Schrager, Credit Consultant We, the Contributors, hereby certify that all of the views expressed in this report accurately reflect our personal views about any and all of the subject sectors, industries, securities, and issuers. No part of our compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

DISCLAIMER
This communication is for informational purposes only. This is not an offer or a solicitation of an offer to buy or sell any instrument or security. This document contains certain forward-looking statements and projections. Such statements and projections are subject to a number of assumptions, risks and uncertainties which may cause actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by these forward-looking statements and projections. Prospective investors are cautioned not to invest based on these forward-looking statements and projections. Certain information contained herein has been supplied to Arbor and Alprion by third parties. While Arbor and Alprion believe such sources are reliable, it cannot guarantee the accuracy of any such information and does not represent that such information is accurate or complete.

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Max R. Konzelman Vice President Arbor Research & Trading, LLC. max.konzelman@arborresearch.com

THIS DOCUMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY INTERESTS IN A FUND MANAGED BY ALPRION CAPITAL MANAGEMENT LP OR RELATED ENTITIES. AN OFFERING OF INTERESTS WILL BE MADE ONLY BY MEANS OF A CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM AND ONLY TO QUALIFIED INVESTORS IN JURISDICTIONS WHERE PERMITTED BY LAW. THIS MATERIAL IS FOR YOUR PRIVATE INFORMATION, AND WE ARE NOT SOLICITING ANY ACTION BASED UPON IT. THIS MATERIAL SHOULD NOT BE REDISTRIBUTED OR REPLICATED IN ANY FORM WITHOUT PRIOR CONSENT OF TRIDENT MUNICIPAL RESEARCH. THE MATERIAL IS BASED UPON INFORMATION THAT WE CONSIDER RELIABLE, BUT WE DO NOT REPRESENT THAT IT IS ACCURATE OR COMPLETE, AND IT SHOULD NOT BE RELIED UPON AS SUCH.

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TRIDENT MUNICIPAL RESEARCH, LLC A JOINT VENTURE OF ARBOR RESEARCH & TRADING, LLC & ALPRION CAPITAL MANAGEMENT LP