Since September 15, 2008, the date of Lehman Brother’s historic bankruptcy filing, the tax-exempt bond market has experienced a virtual standstill in the issuance of non-rated and low investment grade tax-exempt bonds. In the nearly eight months that followed, only a handful of fixed-rate tax-exempt bond offerings for senior living and long-term care providers has closed, providing the market with precious little new issue pricing by which to evaluate the move in market yields for senior living bonds. Other information, however, has been available, and the signs today are the most positive they have been since last summer.

Throughout the fourth quarter of 2008 and into the start of 2009, tax-exempt bond fund managers responded to dramatic cash withdrawals from their funds. The result was a sustained period in which the market place was awash with “bid ask lists”, or lists of bonds that the funds wished to sell and for which they were seeking buyers. This wealth of supply in the secondary market had two effects: it drove market yields substantially higher, which moves have been reflected in this weekly Newsletter, and it brought substantial retail investor interest back into the tax-exempt bond market place. The market dynamic was relatively simple: institutional investors had bonds and needed cash, while retail investors had cash and wanted yield. Sims, as a leader in the secondary market for senior living and long-term care bonds, was in regular communication with these institutional investors, buying bonds from them at substantial discounts and selling them to Sims’ retail investors who were attracted by the higher yields and our banking clients, many of whom were able to repurchase their own bonds at a discount.

Beginning in February 2009, the market began to change. Tax-exempt bond funds began to realize substantial, and sustained, cash in-flows helping to stabilize the funds and reducing their needs to raise cash by selling bonds. So far in 2009, more than 85% of the funds that flowed out of tax-exempt bond funds in the second half of 2008 have been recovered. As a result, a number of institutional funds have become net buyers of bonds, taking advantage of the attractive yields still available in the market place by snapping up the bonds of stabilized senior living and long-term care providers at substantial discounts. At the time, there was still very little appetite for new bond issues, as those investors who were actively buying bonds were able to satisfy their needs in the secondary market – there were still enough sellers to fill the buyers’ appetite, without the need to buy new issues that involved construction and fill-up risk.

In late April and into May, we have seen a further shift in the market dynamic. The list of sellers among institutional investors has thinned substantially. Those funds that are willing to sell are now demanding notably higher prices (lower yields) for their bonds than they were just two months ago. This is at least partially the result of a decrease in the supply of new issue general market tax-exempt bonds; much of this supply decrease is due to the increasing popularity of Build America Bonds, which are issued by state and local governments and their agencies as taxable debt and are therefore not eligible investments for tax-exempt mutual funds. The popularity of Build America Bonds has allowed governments to raise tens of billions of dollars in debt without adding to the tax-exempt bond market, helping to keep tax-exempt bond yields in check.

As evidence of continuing market stability and improvement, we have seen long-term bonds of stabilized, non-rated CCRCs pricing and trading below 9.00% in some cases. In addition, the long-term bonds of start-up CCRCs, in the construction or fill-up stages, are trading below 10.00% in some cases. While this recent secondary market activity does not guarantee that a new issue can be sold at similar rates, it is an indication that demand for non-rated senior living bonds is beginning to improve.