Hefty pension bond deals and the ongoing refinancing of troubled auction-rate debt helped boost volume in the Northeast region in the first half of 2008 by nearly 17%.
The region saw more than $65 billion of bond and note transactions in 1,157 issues in the first half compared to about $56 billion in 1,145 sales in the first half of 2007, according to Thomson-Reuters.
Issuers turned to letters of credit and standby purchase agreements to help convert auction-rate securities into variable-rate demand bonds. Nearly $13 billion of debt was enhanced with LOCs in the first half of 2008, a staggering 776% increase from only about $1.5 billion in the first six months of 2007. Demand for standby purchase agreements grew as well, with $6.34 billion of debt carrying such enhancement during the first six months of 2008 compared to $1.1 billion of debt the year before, a 474% increase.
The use of bond insurance plunged as rating downgrades slammed several major bond insurers as a result of the credit crunch. Only $10.98 billion of debt was insured, a 55.8% drop from the same period in 2007.
"It's a world of difference. There was no credit crisis going on as that started in August, so the first half of 2007 was smooth sailing," said Jorge Irizarry, president of the Government Development Bank for Puerto Rico, the island's financing arm.
Connecticut issued the largest bond deal in the region, a $2.27 billion taxable pension-bond sale on April 16 with Merrill Lynch & Co. and Bear, Stearns & Co. as underwriters.
The Puerto Rico Employees Retirement System issueda $1.58 billion taxable pension deal on Jan. 29 with UBS Securities LLC as senior manager. In total, Puerto Rico issued nearly $3 billion of taxable pension bonds on the island from January through June of this year with UBS as underwriter. The commonwealth also sold the region's third-largest bond sale, a $1.31 billion tax-exempt Puerto Rico Aqueduct and Sewer Authority transaction priced by Citi on March 7.
New York City sold $1.3 billion of taxable and tax-exempt general obligation bonds on March 31 and the New Jersey Economic Development Authority did a $1.13 billion refunding on April 29 to help refinance auction-rate securities into variable-rate mode.
New York City was the largest issuer of debt in the region, with $3.31 billion of general obligation bonds sold in 19 issues. The city also sold $700 million through the New York City Transitional Finance Authority and $1.18 billion through the New York City Municipal Water Finance Authority. The city refinanced ARS and issued refunding bonds for savings, increasing its overall borrowing during the first half of year through these three credits to $5.19 billion, up from $3.22 billion.
"We did a lot of refinancings even beyond the auction rate," New York City deputy budget director Alan Anders said.
The city also shifted the majority of its borrowing away from the TFA to its GO credit because it reached its statutory cap on TFA debt. In the first half of 2007, New York City sold just $100 million of GOs while selling $2.14 billion of debt through the TFA.
UBS closed its municipal banking department in June but still placed first among underwriters by volume in the Northeast during the first half of 2008, accounting for nearly 13% of the municipal market. UBS priced $8.22 billion of debt compared to the $4.94 billion of bonds and notes the bank priced in the first half of 2007, when UBS placed fifth on the list. Puerto Rico's $3 billion of pension debt along with a $737 million commonwealth GO deal and a $909 million Puerto Rico sales-tax deal helped boost UBS.
Merrill Lynch placed second to UBS with $7.65 billion of debt and more than 11% of market share. In 2007, Merrill placed third on the list with $5.38 billion of bonds and notes.
Citi's volume dropped to $7.56 billion from $10.56 billion priced in 2007, moving the bank to third place for the first half of 2008 from last year's second-place.
JPMorgan dropped to fourth from its first-place seating the year before, pricing $7.23 billion of debt in 2008 compared to $11.48 billion the year before. Goldman, Sachs & Co. follows JPMorgan with $5.58 billion of debt and moved into the top-five list for 2008 after placing seventh last year with $2.6 billion of debt.
Among financial advisers, Public Financial Management Inc. remained in the top spot, working on $8.41 billion of bonds and notes during the first half of this year, an increase of $1.61 billion for the first six months of 2007.
The Government Development Bank for Puerto Rico follows PFM, advising the commonwealth on $5.2 billion of bonds and notes.
Jumping from 10th place to third on the FA list was P.G. Corbin & Co. The company worked on more than $4 billion of debt during the first half of 2008 compared to $827 million of bonds and notes the year before.
P.G. Corbin's president, Patricia Garrison-Corbin, said the increase was due in part to the company joining New Jersey's FA pool.
"Our volume in the first half was greatly influenced by municipal issuers seeking greater pricing efficiency," she said. "The volume came largely from three issuers in our portfolio: New Jersey's ARS restructuring, a new client, Connecticut's pension-bond deal, and the Metropolitan Washington Airports Authority bonds. It appears that this volume may not return in the second half."
Following P.G. Corbin was Public Resources Advisory Group, which worked on $3.7 billion of debt in the first half of 2008, up from $2.9 billion.
Goldman Sachs worked on $2.42 billion of debt compared to $649 million the year before, moving to fifth place from fourteenth. Goldman serves as FA to New York's Metropolitan Transportation Authority, which sold $1 billion of new-money and refunding debt on Feb. 13, the region's eighth-largest deal for the first half of 2008.
Bond counsel also saw some movement. Sidley Austin LLP topped this year's list as it more than doubled its volume of debt for the first half of 2008, with $6.76 billion of debt compared to $3.07 billion in 2007, due in part to Sidley serving as bond counsel to New York City.
"We're bond counsel for the city of New York so when their rank goes up we kind of follow suit," said partner Michael Burke.
Sidley's rise bumped Hawkins, Delafield & Wood LLP out of the top slot it had occupied in 2007 and into second place.
New York issuers in total sold the most debt of any state in the region. Issuance in the state shot up by 44.8%, with $21.03 billion of bonds sold in the first half of the year compared to $14.53 billion in the same period last year.
Following New York was Pennsylvania, where issuers sold $10.39 billion of debt during the first six months of 2008, up slightly from $9.46 billion. An increase of debt sold in the general purpose, transportation, and development sectors helped offset decreased issuance of education, health care, and utility bonds.
Puerto Rico's volume increased as the commonwealth sold $7.2 billion of debt during the first half of 2008, a 22% increase over the $5.88 billion of bonds and notes the island sold during the same period last year. Puerto Rico's pension deals helped boost that total amount of volume, along with roughly $600 million of debt that officials removed from the auction-rate market by converting into variable-rate mode or restructuring as fixed-rate bonds.
"The auction-rate restructuring was an intense effort and we were just constantly on top of it until we were able to bring it out," Irizarry said.
Debt sold in Massachusetts dipped to $7.21 billion during the first half of this year, a decline of nearly 5%. That was due in part to a 70% drop in general purpose bonding, along with decreases in the housing and transportation sectors.
New Jersey's overall debt issuance decreased by 20% to $5.88 billion of bonds and notes sold in 2008 compared to $7.36 billion of debt issued the year before. A $3.62 billion tobacco bond refunding in January 2007 boosted debt issuance for that time period. This year, the state focused on restructuring more than $3 billion of ARS through its various bonding agencies and also priced $450 million of new money school construction bonds.
Connecticut's debt issuance during the first half of 2008 boomed to more than $5 billion of bonds and notes, a 166% increase compared to the $1.87 billion of debt issued the year before. The jump in bonding stemmed not only from the $2.27 billion pension bond deal, but also additional bond sales in the health care, housing, and utility sectors.
Maryland's bond issuance grew 9.7% in the first half of 2008 compared with the same period last year, with $3.81 billion of debt issued through 57 deals. Last year, Maryland had 52 transactions totaling $3.47 billion for the first half. Maryland had one of the Northeast's top 25 deals this year, a $573.3 million highway bond deal sold by the Maryland Transportation Authority on March 12. The state held on to its coveted triple-A ratings for a $400 million Maryland GO issue, sold competitively on Feb. 27.
District of Columbia issuance dropped in the first half of 2008 to about $1.8 billion, about 20% less than the first half 2007. The district and its agencies were confronted by the beleaguered auction-rate market and much of its issuance involved ridding itself of ARS that had skyrocketing interest rates.
In May the district converted $524.7 million of ARS to variable-rate demand obligations backed by letters of credit. It was the 21st largest deal in the region in the first half.
The District of Columbia Water and Sewer Authority in April also exited the auction-rate market when it sold $310 million of fixed-rate subordinated-lien revenue refunding bonds to refund its Series 2004 subordinate-lien bonds and a portion of the authority's Series 2007B outstanding subordinated-lien taxable auction-rate debt.
Rhode Island and Maine sold $707 million and $705 million of debt during the first half of this year, compared to the $695 million and $822 million, respectively, of bonds and notes issued the year before. Issuance in New Hampshire and Vermont dropped by more than 28% and 35% in the first half of 2008, respectively.
New Hampshire sold $549 million of debt in 2008 compared to $769 million the year before while Vermont issued $345 million of debt this year compared to $533 million of issuance during the first half of 2007. Delaware showed $469 million of new debt sold in the first six months of 2008 compared to $647 million, a more than 27% drop.