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Muni Issuance Slows Down in November

While still on pace for a record year of primary market volume, municipal bond issuers slowed way down in November, selling only 770 deals totaling $25.113 billion. That’s the least of any month this year and well below 1,287 issues totaling $42.671 billion sold last November, according to preliminary monthly volume data from Thomson Financial. The 41.1% drop in total volume in November compared to last year as issuers scaled back — or postponed — their debt sales largely in response to fears over general market volatility and widening credit spreads, and doubts over the credit strength and stability of triple-A bond insurers, market analysts said. The slow November followed a record October, which saw $43.4 billion of new issuance, and ended up beating the previous all-time high record for the month — $42.4 billion set in 2002. The year-over-year drop this month is magnified because last November had the highest volume on record over the past 10 years. November market volatility led to several high-profile deals to be put on hold. Chicago delayed its $961 million new money and refunding deal for O’Hare International Airport and Miami-Dade County postponed its $539 million refunding deal for its airport. Both deals remain on the day-to-day calendar.

“The month started reasonably well, but issuance decelerated very rapidly,” said Phil Fischer, municipal strategist at Merrill Lynch & Co. in New York City. Fischer said the large credit spread widening dramatically reduced issuance across the board in November, but especially in long-term sectors, like transportation and utilities, and likewise, slashed refunding volume by a dramatic 79.2% compared to 2006. Issuers sold only 114 refunding deals totaling $2.327 billion, versus 329 refinancings last November totaling $11.215 billion. “Refunding volume is down because Treasury yields have fallen much further than muni yields, creating negative arbitrage and making advance refundings much more difficult,” said Chris Mier, a municipal strategist at Loop Capital Markets LLC in Chicago. The uncertainty about bond insurance and the insurers exposure to the subprime mortgage market, meanwhile led issuers to sell more debt that usual unenhanced. The amount of insured debt sold in November declined 43.3% — slightly more than the overall market over the monthly period — as issuers sold 325 insured deals totaling approximately $11.354 billion, compared to $20.014 billion representing 606 new issues last November. That put insurance penetration at 45.2% for the month, down from the well below the more than 48% insured rate for November 2006 and the 48.5% insured rate for all of 2007 to date. Mier said that the continued fear over bond insurers’ credit stability curtailed insured volume last month. “This concern has caused issuers to want to avoid those insurers that the market is most concerned about,” he explained. “Not surprisingly, the insurers that the market feels more comfortable with have widened the spreads they are charging on new issues, so some issuers are finding it necessary, or desirable, to try to access the market without insurance as a consequence.” The market has seen insurance activity decline recently as the subprime mortgage crisis has caused the value of bond insurance to be called into question, noted Merrill’s Fischer. “Issuers are less willing to buy insurance because the improvement in interest rates they get from the insurance has been diminished,” he said. Fischer pointed out that he found it ironic that two short-term instruments — auction-rate securities and short-term, variable-rate put bonds — moved in different directions during the month. Auction-rate issuance rose 49.7%, while the VRDs declined 39.2%. “If one fell you would expect both to decline,” he said. However, Fischer added that the decline in variable-rate short puts is in line with the drop in overall volume, while the auction-rate increase last month versus November 2006 is likely the result of unusually low issuance in that sector last year. The month also saw declines in nearly every infrastructure and essential service sector, except for development, which grew 65.1% to $844.2 million with 32 issues compared with 32 issues representing $511.4 million last November. One of the largest declines among the major market sectors occurred in utilities, which dropped 68.8% to 87 issues representing $1.495 billion, down from 148 issues last November totaling a whopping $4.798 billion. Dakin Campbell contributed to this story.

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