Showtime Puts Muni Bonds in Spotlight (Includes Spoilers)
Showtime Puts Muni Bonds in Spotlight
When you think of Hollywood and its glitz, glamour and sex. Municipal bonds are probably the furthest thing from your mind. However, thanks to the folks at Showtime, municipals bonds are under the same bright lights that have illuminated the likes of Marilyn Monroe, Steve McQueen and Audrey Hepburn.
For the past few weeks on the hit Showtime program “Billions”, municipal bonds have provided a tantalizing storyline. The anti-hero of the show, Bobby Axelrod, has been pursuing a municipal bond play. Bobby’s firm, Axe Capital, has purchased all of the distressed debt of a small town in upstate New York – Sandicot. He has been lead to believe that the town is the future location of a new casino and the municipal bonds will greatly appreciate in value due to this news. Axe Capital aggressively buys up the city’s debt, portrayed as approximately $500 million, in anticipation of the coming casino.
Loosely Based in Reality
While I am certainly pleased to see muniland have some time in the spotlight, the writers of this hit TV show really gloss over the nuances of municipal market to drive their narrative. A few things come to mind:
First, Sandicot is painted as a sleepy town with little to offer the world but large patches of dirt primed for rows and rows of one-armed bandits. It would surprise me greatly if a modest town like that was able to rack up half a billion dollars in debt. Atlantic City, by comparison, has only been able to rack up $240 million in bonded debt and that was after Casino development and decades of overspending as revenues declined. (ACs overall debt balloons to $500MM if you include tax appeals)
Second, once Axe Capital decides to take on the town’s debt, how do they go about buying the bonds? The story goes that Axe Capital purchased the bonds for pennies on the dollar, after being tipped off by the town’s upstanding mayor. But from whom? The majority of municipal debt is held by a large number of individual investors. How was Axe able to convince all of them sell at such a massive discount? Even if he was able to issue a tender offer, bondholder participation is usually low, and it would take months, if not longer to get all the bondholders to respond. The other possibility is to assume that a bond mutual fund or insurance company was the majority holder of Sandicots debt. When a large vulture fund came calling for Sandicot bonds out of the blue, shouldn’t that have raised a red flag? I’d like to give our fund managers more credit and believe that they would be aware of potential credit positive news for Sandicot.
If Only it Were This Easy
It is eventually revealed that the casino is not actually headed for Sandicot, leaving Axe holding the town’s distressed municipal debt. In an attempt to recoup his investment, Axe ‘forecloses on the town’ taking ownership of all possessions of value that the city has- their buildings, land, and even an original Remington Bronco Buster sculpture. The idea that bondholders could instantly take possession of a town’s assets is a far-fetched premise as well. If it were that easy and feasible ACA Financial would have taken over City Hall in Buena Vista, VA a long time ago.
For starters, Sandicot would need to stop making their debt service payments before Axe could even start recovery proceedings. There was no mention that the city was in default on its debt, but we can assume that given the “pennies on the dollar” level that the bonds were trading at, that they had. Also, most general obligation pledges are backed by the full faith and credit taxing authority of the city and there is no attempt by the city to raise taxes before allowing Axe Capital to seize the city’s property. If Sandicot was in financial trouble, the city could choose to sell possessions to pay debt service, but a bondholder, even a majority holder could not force a city to turn over its assets. At the very least they would need a court approval, which would take months of legal proceedings.
Now it turns out that the casino deal did not end up going to Sandicot. But, let’s imagine for a moment that it did. It would take years for the casino to be built and even more years of proof of tax collection to generate a significant positive pop in the value and/or credit rating of Sandicot’s bonds. To say this would be a long term play would be a significant understatement. A multi-billion dollar hedge fund whose first idea to save their quarter is a billion dollar three day currency squeeze turning to a multi-year municipal bond infrastructure play as a second option is almost laughable.
I understand that the writers are tasked with telling a compelling story. They have no doubt accomplished this as evident from their many fans, myself included. For the same reasons scientist feel the need to tell us that Jurassic Park could never happen, or Google feels the need to tell us that they are not Skynet, I feel the need to say the Sandicot story would never happen. Billions, thank you for a gripping drama and thanks for including municipal bonds in the sexy world of Hollywood in a way even Jim Lebenthal would have thought improbable but missed the mark on the muni market.