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Southeast Issuance Plummets

BRADENTON, Fla. - Municipal bond issuance in the Southeast tumbled during the first half of 2008.

Debt sales in the Southeast were down 19.4% on sales volume of $36.4 billion compared to $45.2 billion of debt sold during the first half of 2007, according to Thomson Reuters. The only other region of the country to experience a drop in sales during the first half was the Far West, with a decline of 13.9%, according to Thomson Reuters.

Total sales dropped in all but three of the 11 states in the Southeast, including Florida, though it still remained the top issuer in the first half with $10.8 billion in sales volume. Virginia had the next highest sales volume with $4.69 billion.

Volume in the Southeast, as in other regions of the country, was boosted by debt refinancings prompted by the meltdown of the auction-rate securities market and bond insurer downgrades. But that was not enough to offset sluggish new-money sales and a sharp drop in housing-related debt issuance.

Variable-rate transactions were up 136%, totaling $13.36 billion. The use of letters of credit soared by 212.7% on volume of $7.57 billion and standby bond purchase agreements were up 53.3% on volume of $4 billion. The use of bond insurance plummeted 57.8% to $9.14 billion compared to $21.64 billion last year. New-money deals, although still strong, were down 28.1% with sales of $20.8 billion.

Issuance for housing in nearly every Southeast state took a big hit in the first six months, down 69.4% collectively, to just over $1 billion compared to $3.5 billion last year. Debt issued for general purposes was down by 56% on $5.8 billion of sales. Electric power and transportation saw the biggest percentage increases in issuance, rising 71.9% and 67.5%, respectively, in the first half.

Issuers still preferred fixed-rate debt, although sales were down 37.6% to $21.96 billion, compared to $35.2 billion issued in the first half in 2007.

Revenue bonds won out over general obligation bonds with issuance of $30 billion and $6.5 billion, respectively. Negotiated deals were down 18.9% on sales of $28.8 billion, while competitive deals were down 22% with sales of $7.3 billion.

While still the leader by volume, issuance in Florida slid by more than 29% in the first half. One factor: several billion dollar-plus deals for hurricane insurance that helped propel the state's sales volumes in the previous two years. Note issuance more than doubled in the first half of the year, however, boosted by hurricane fund issuance.

Some market experts believe issuance in Florida has been dampened by tax reform measures and plummeting property values that have had a negative influence on local governments and their budgets.

The Jacksonville Electric Authority sold $1.8 billion of debt to be the Southeast's largest issuer in the first half, while Miami-Dade County was the third-largest, selling $974.2 million.

Although most Alabama issuers do not enter the bond market frequently, they saw a 75% drop in issuance during the first six months - the largest of any state in the region - with volume plummeting to $914.8 million compared to $3.66 billion in the same period last year. The largest transaction in the state in the first half was a $109.9 million deal by the Board of Trustees of the University of Alabama, while the Southeast Alabama Gas District sold nearly $1 billion in the first six months of last year.

A dealer in central Alabama said he believed some offerings were on hold because of trouble obtaining bond insurance and he suggested some of the difficulty may be related to the uncertainty over whether Jefferson County will be successful in resolving its $3.2 billion sewer debt crisis. Most of the county's debt is insured by companies once rated triple-A but whose ratings now are at junk levels by most rating agencies. Some market observers believe the few healthy insurers in business today can be selective about the deals they insure and for some issuers the price can be prohibitive.

"We have a backlog of deals," the Alabama dealer said. "The market doesn't know how to price uninsured paper from Alabama."

A northern Alabama financial adviser discussing the decline in issuance said: "It's not rocket science to figure out that tax revenues are under some level of stress." The adviser also said there are concerns about how Jefferson County's plight may ultimately impact other issuers and the state itself.

Only three Southeast states showed increases in issuance in the first half. Tennessee led the way with issuance up 58.7%, totaling about $4.7 billion, despite the fact that no debt was issued by the state itself. Cities, counties, special districts, and local authorities in the state were active issuers in the first half with an average 71.6% increase in debt, including a $308 million deal by the Nashville-Davidson County Metropolitan Government.

Tennessee managed an increase in issuance even though it experienced a large drop in the housing sector with a decline of 74%.

Trent Ridley, the chief financial officer for the Tennessee Housing Development Agency, said there had been an overall slowing in the sector because of the tightening of credit requirements and issuers were also waiting for the market to normalize. While the agency sold $60 million during the first half, Ridley said that demand in the state is still strong and issuance could continue to grow as the agency seeks to avoid running out of funds to originate loans.

Issuance in South Carolina was up 36.1%, totaling $2.33 billion. Most of that increase came in the second quarter of this year when issuance soared 431%. The South Carolina Student Loan Corp. carved out a fourth of the total issuance from the state with its sale of $600 million of debt.

North Carolina issued 10.3% more debt during the first half than it did during the same period last year with volume just over $4 billion. That's partly due to almost $1 billion of issuances from the North Carolina East Municipal Power Agency and the North Carolina Municipal Power Agency No. 1.

In Georgia, debt sales were down 5.3% to $4.67 billion from $4.94 billion last year. Main Street Natural Gas Inc. sold $709 million of debt, the second-largest single sale in the Southeast during the first half, while the Georgia State Road & Tollway Authority sold $600 million, the third-largest single deal.

Activity was down 22.4% in Louisiana for the first six months of 2008 with $2.26 billion in 77 sales compared to $2.92 billion in 96 sales over the same period in 2007. However, the state did post the largest single sale during the period with the Lake Charles Harbor and Terminal District pricing $1 billion of Gulf Opportunity Zone bonds in April to finance a $1.6 billion synthetic natural gas production facility.

Mississippi, with infrequent issuers and typical deals on the small side, saw its issuance plunge by 60% to $636.5 million in the first half of this year, compared to $1.58 billion in the same period last year.

In Kentucky, issuance was down about 18% to roughly $1.7 billion. Of the $860 million of debt sold for education, the sector that saw the largest increase by dollar amount in the first six months, one of the largest deals of the first half was a $300 million transaction brought to the market by the Kentucky Higher Education Student LoanCorp.

Virginia sold about $4.7 billion in 66 issues in the first half of the year, about $852 million, or 15.4%, less than the first half of 2007. The Capital Beltway Funding Corp. sold $589 million of toll revenue bonds. Proceeds are being used to build express lanes on Interstate 495 with two private companies, Transurban and Fluor Enterprises, financing, operating, and maintaining the lanes using facility revenues to repay $589 million of private-activity bonds as well as a $589 million U.S. Department of Transportation direct loan.

In West Virginia debt sales were down 56.2% to $678.7 million compared to $1.5 billion last year, which was influenced by a $911 million tobacco securitization sold by the West Virginia Tobacco Settlement Finance Authority.

Citi maintained its position as the top senior manager in the Southeast, senior managing 53 transactions worth $6.26 billion compared to 85 deals worth $8.825 billion last year. Goldman, Sachs & Co. jumped up into second place from ninth last year, managing a sales volume of $4.17 billion compared to $1.65 billion last year. Morgan Keegan & Co. slid into the third slot, up from fifth place last year, which pushed Merrill Lynch & Co. into fourth place form second, with the firms managing $3.82 billion and $3.37 billion, respectively.

Public Financial Management Inc. maintained the number one slot as financial adviser on $5.51 billion of transactions. Public Resources Advisory Group was in second place, up from third last year, advising on $2.67 billion of transactions, while First Southwest Co. was in third place, down from second last year, advising on $2.56 billion of deals.

Bond attorneys shook things up a bit with Hawkins Delafield & Wood LLP rising to the top spot on $2.4 billion of transactions, up from eighth place last year. King & Spalding LLProse from 13th place last year to the second spot with $2.37 billion of transactions. Squire Sanders & Dempsey LLP slipped to third place, from the number one spot last year, counseling on $1.75 billion of deals.

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