The Early Years

The first institutional high yield municipal issue, according to James Erickson (former chief investment officer of the Putnam Funds), dates back to the year 1960. This was the year a relatively innocuous muni boutique named B. J. Van Ingen underwrote a $13 million construction deal for the Marina Del Rey area in metropolitan Los Angeles. The issue had all the attributes of a typical high yield issue, including construction risk, real estate development risk, and so on. Although the project had its share of delays and contingencies, it ultimately opened in 1965 and has become a major attraction on the Los Angeles metropolitan area waterfront.

The early 1960s also saw the very first financings in sectors that have now become core components of any high yield tax-exempt strategy. Herbert J. Sims, for instance, claims to have issued the first municipal bond to finance a long-term care community in 1965. The growth of tax-free health care debt financing was kickstarted by Congress’s 1966 decision to allow the Medicare program to reimburse nonprofit hospitals for their capital improvement costs. Tax-free hospital revenue bonds went on to become the fastest growing tax-exempt sector during the 1980s and have remained a significant component of the high yield supply to this day.

The Rise of the High Yield Mutual Funds

While the supply of higher-yielding, more speculative financings has always been there, it took a few more years before that supply was met with consistent, ...

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