Making a difference in
municipal bonds

Jun 13, 2017
By BlackRock

Credit research is critical in today’s municipal bond market. BlackRock municipal credit analysts explain how they’re making a difference — one bond at a time.

This is not your grandparents’ municipal bond market.

Since the 2008 financial crisis, the market has weathered liquidity challenges, the demise of the bond insurers and headline-grabbing fiscal struggles among state and local issuers of municipal debt. Today, the market faces slower revenue growth, aging infrastructure and mounting pension pressures. And yet BlackRock finds the municipal market remains rich in opportunity. The key to success: careful credit research.

Why credit research is more important than ever

In the past, investors might have relied on bond insurance or the agencies’ ratings to assess a credit. Today, faced with an extensive list of risk factors that require careful analysis, investors need more. Specifically, they need an experienced and dedicated team that can impartially assess whether an investment is offering adequate compensation in exchange for the risks it entails.

Why credit research matters

"The market’s grown quite a bit, and it relies much more now on credit research than it ever has before."

Peter Hayes, Head of the BlackRock Municipal Bonds Group

The BlackRock difference

The importance of credit analysis at BlackRock is evident in the composition of the Municipal Credit Research Team. The team’s 17 analysts engage in top-down sector analysis and bottom-up security analysis to provide BlackRock portfolio managers with the intelligence to make informed investment decisions for client portfolios. 

BlackRock analysts are widely recognized as industry experts and maintain strategic relationships with municipal market participants across the country. In addition to leveraging internal BlackRock resources, analysts visit project sites, speak with officials and developers and, as needed, hire consultants to evaluate and assess project soundness – all to gauge investment viability. They share information so that the broader Municipal Bonds Group better understands local economic and financing trends as well as fundamental developments within the various municipal sectors.


How we do credit research

"Municipal research is a very difficult task, with over 90,000 municipal governments out there. It takes a lot to follow these names."

Jim Schwartz, Head of Municipal Credit Research

Adding value one bond at a time

In evaluating potential investments, BlackRock analysts do not rely on the ratings assigned by the big-three credit rating agencies. Our analysts speak with agency analysts and closely monitor the agencies’ ratings, but are tasked with challenging them, seeking information above and beyond the content in the rating agency reports in an effort to ensure BlackRock’s municipal portfolios are populated with the strongest, most suitable credits. 

These internal ratings are not static. Bonds are revisited frequently and, when applicable, changes are made to the internal credit assessment. Research team findings are disseminated daily, as credits are assessed, and made available to all BlackRock municipal bond portfolio managers.

Credit research in action

"We have to be forward looking. We have to discover events and even trends ahead of time."

Joe Pangallozzi, Municipal Credit Analyst

One common goal: clients

BlackRock municipal credit analysts work side by side with portfolio managers in a fully integrated process designed to manage risk and generate alpha for clients. Analysts assist not only in assessing risk, but in establishing fair pricing for a credit based on its perceived risk/reward. They are evaluated on their accuracy. This type of accountability helps to ensure conviction as well as consistency in the research process. 

Likewise, portfolio managers will turn to the research team to ensure any credit they wish to add to a portfolio is fully analyzed, rated and priced before an investment is made on clients’ behalf. The bottom line: No bond is purchased in a BlackRock municipal portfolio without thorough analysis and approval by the research team

Given the breadth and depth of our process, and the analysts’ direct access to issuers, BlackRock is able to bypass the red tape that can often exist between rating agencies and municipalities, and make informed investment decisions in a timely and opportunistic manner.

We've always felt municipals were an important asset class for our clients, and our commitment of resources is a tangible testament to that.

— Peter Hayes, Head of the BlackRock Municipal Bonds Group