opportunity

TOB financing is typically unavailable to individual investors, since banks usually only provide TOB funding to their proprietary programs or their largest institutional investors.  The Fund Manager’s 25+ years of TOB expertise, relationships and credibility enable Pacific Muni to provide accredited investors with access to institutional structure and pricing.

objective

Utilizing institutional structure, pricing and moderate leverage (60-70%), PacMuni Funds intend to provide enhanced yield over comparable tax exempt open and closed end bond funds.  In exchange for investors giving up liquidity and agreeing to a long term hold (6-8 years), the Funds intend to provide additional yield, with significantly lower average credit risk, than comparable bond funds.

Risk Analysis

Short Rate Risk

  • Higher short term (funding) rates may reduce realized (net) tax exempt income.

Price Risk

  • Increased price risk of leveraged underlying bonds is mitigated by initial $15-25 of downside protection before there is a need to de-leverage non-recourse financing or sell the bonds

Liquidity Risk

  • Investment in Fund should be considered long term (6-8y) & illiquid

  • Allocation to this illiquid strategy should be limited to buy & hold investment funds

Credit Risk

  • Mitigated by limiting to high quality AA3/AA- or higher rated bonds

  • Moody’s Cumulative Default Rate, 1970-2016, for AA munis over 8y hold period = 0.01%

Duration Risk

  • Mitigated by targeting 15-25y maturity premium bonds, priced to 8-10y calls

  • 3-5y target hold provides attractive rate rolldown protection to remaining 3-5y calls

  • Amortizing premiums provide partial early return of principal in distribution

Operations Risk

  • Trustor, Trustee & Fund Administrator all serve as independent legal entities creating TOB trusts, managing all trust income & distribution, and maintaining all fund books and records integrity

Short Term Funding Rates

 

SIFMA Short Term Weekly Muni Index and 4y Swap rates, AS OF 12-04-2024 CLOSE:

  • 2.15% = CURRENT  WEEKLY SIFMA (47% of 1M SOFR)

  • 2.86% = PROJECTED AVERAGE SIFMA over next 4 years (76% of 4Y SOFR swap)

    • Implies 4.27% average 1M SOFR (at 67% average historical ratio) over next 4 years, or 24 bps below current 4.51%

  • 3.30% = MAX SIFMA at which we still expect to generate a 4.00% tax free distribution yield

    • Which could absorb an implied 4.93% 1M SOFR (at 67% ratio), or 42 bps above current 4.51%