DMB - DMB: Infrastructure Focused Municipal Bond CEF

2023-06-09 10:00:00 ET

Summary

• BNY Mellon Municipal Bond Infrastructure Fund primarily invests in tax-exempt investment grade debt obligations in sectors like transportation, energy, and utilities.
• The Debt Ceiling bill maintains infrastructure and green-energy laws, benefiting states and municipalities with federal funding for projects.
• DMB is compared against three other BNY Mellon-managed municipal bond CEFs: BNY Mellon Municipal Income, BNY Mellon Strategic Municipal Bond, and BNY Mellon Strategic Municipals.
• With DMB down the most over the past three months, this might be a good time to consider this CEF.  Its premium/discount data also say the same.

(This article was co-produced with Hoya Capital Real Estate )

Introduction

Reports list 1 in 3 US bridges need repairs, including 29% of interstate bridges. The 2021 report did not paint a rosy picture of the interstate system either as it reached its 65th anniversary. The nightly news from a local major city constantly reports broken water mains and school buildings closed for repairs. There is no doubt, even when the Federal government covers a major part of the cost, the need for infrastructure municipal bonds will be great! While higher income tax rates seem to be "on hold" at the federal level, that hasn't stopped states from getting the rich to pay their "fair share". The BNY Mellon Municipal Bond Infrastructure Fund ( DMB ) focuses on this important sector of the municipal bond market.

BNY Mellon Municipal Bond Infrastructure Fund review

Seeking Alpha describes this CEF as:

The BNY Mellon Municipal Bond Infrastructure Fund primarily invests in the tax-exempt investment grade debt obligations. The fund invests its bonds issued by infrastructure sector including transportation, energy and utilities, social infrastructure, water and environment, and other similar public sectors. DMB started in 2013.

Source: seekingalpha.com DMB

DMB has $217m in AUM and currently has a 4.5% Forward Yield. While Seeking Alpha lists fees at 172bps, CEFConnect.com shows the following.

The DMB CEF website lists the interest expense as being only 55bps at the same time in 2022. The current leverage level is 36%.

BNY Mellon lists five reason investors should consider investing in the DMB CEF:

• Seeks to provide investors a monthly federal tax-exempt dividend by investing in a mix of high quality and high yielding municipal bonds.
• With an emphasis on infrastructure, investors participate in the rebuilding of America's roads, bridges and common projects. Many of these bonds are revenue bonds generating their yield from taxes or tolls.
• With yield scarce across many bond securities, investors may be drawn to municipal bonds because of their local government appeal and tax-exempt status.
• The management team is very experienced investing in municipal bonds and have managed the fund since its inception in 2013.
• May be appropriate as a more focused infrastructure municipal bond holding within diversified portfolios.

Holdings review

The Top 10 states with exposure in the portfolio are these:

That does not mean the state itself was the issuer, just the entity is within that state. The Top 10 account for 63% of the portfolio. The sector breakdown is thus:

Not sure how the Tobacco settlement bonds qualify as infrastructure bonds unless it's how the revenue is spent, and I will leave it up to each investor to decide about some of the other sector exposures.

The credit quality averages out to a "A-" rating for the portfolio, with just over 8% rated below investment-grade and 20% with no rating, which doesn't imply status and non-rated bonds are common in such CEFs.

The maturity schedule reveals a 18.05-year WAM and 8.87-year Effective Duration.

The chart shows 8.56% maturing over the next twelve months, but that must include assets held for leveraging as the actual holdings only shows three bonds maturing before 2025: total weight of .3%. That matches the maturity data found on other sites.

Top holdings

Out of 167 bonds, the Top 20 represent 31% of the portfolio. The WAC is 5.05%. For those interested, this link shows the entire portfolio as of 4/30/23.

Distribution review

Late in 2022, the payout was reduced from $.053 to $.040 monthly. DMB has a "level distribution policy", which is described in the Annual Report as follows:

The fund’s dividend policy is to distribute substantially all of its net investment income to its shareholders on a monthly basis. In order to provide shareholders with a more consistent yield to the current trading price of shares of Common Stock of the fund, the fund may at times pay out more or less than the entire amount of net investment income earned in any particular month and may at times in any month pay out any accumulated but undistributed income in addition to net investment income earned in that month. As a result, the dividends paid by the fund for any particular month may be more or less than the amount of net investment income earned by the fund during such month.

Source: im.bnymellon.com DMB Annual Report

As of February 28, 2023, the undistributed tax-exempt income was $1,422,941.

Price and NAV review

For much of its history, the NAV was holding steady. That hasn't been the case since the fear and then actual increase in rates has occurred. Unlike some CEFs, DMB has sold a 10+% premium several times in the recent past: currently DMB is at a 9.99% discount. Its 1-year Z-score of -.96 also indicates this could be a good time to establish/expand a position.

Portfolio strategy

The Debt Ceiling bill just signed into law leaves President Biden's signature infrastructure and green-energy laws largely intact. This should help states and municipalities as the Federal government funds a large percent of many infrastructure projects.

I chose to compare DMB against the other three municipal bond CEFs managed by BNY Mellon, those being:

• BNY Mellon Municipal Income ( DMF )
• BNY Mellon Strategic Municipal Bond ( DSM )
• BNY Mellon Strategic Municipals ( LEO )

The data starts with the launch of the DMB CEF.

Despite having some of the poorer risk data, DMB's CAGR was enough to give it the best Sharpe and Sortino ratios; indicating investors were "paid" for the risk taken. The difference is more pronounced if the initial six months after DMB started is ignored, which is usually negative for most leveraged CEFs.

With DMB down the most over the past three months, this might be a good time to consider this CEF. Its premium/discount data also say the same, thus my Buy rating.

For further details see: