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Aug. Volume On Par With '07 Numbers

August new-issue volume stood nearly on par with the same month last year, as issuers continued to refinance their auction-rate securities.

A total of $28.95 billion new issues entered the market in August, down less than 1% from last year's August total of $29.21 billion, according to preliminary Thomson Reuters data. Refundings jumped to $8.4 billion in August from $2.4 billion in August 2007.

Since auctions failed in February, refinancing of ARS have driven new-issuance volume. Refundings have grown to $85.5 billion in 2008 to date from $59.4 billion through August last year. Total volume through August was $294.7 billion, 0.8% ahead of the first eight months of last year.

The conversions also drove growth in the use of variable-rate bonds with a short put and letters of credit. The use of variable rates with a short put rose 158.4% year-over-year in August to $6.9 billion, and the use of letters of credit jumped 270.8% to $5.7 billion.

Through all of the year, $88.5 billion of variable rates with a short put and $52.1 billion of bonds enhanced by letters of credit have come to market. That compares to $27.6 billion of variable rates with a short put and $10.9 billion of letter of credits through this point last year.

Auction-rate refinancings are about 60% complete in the municipal market, said Jeffrey Timlin, a vice president at Sage Advisory Services in Austin. Many of the remaining ones will be more difficult to refinance, which could lead to a slowdown, he said.

However, recent settlements by many banks with state and federal regulators to buy back billions in auction-rate securities could help pick up the pace, he said. The new holders of the ARS will have more incentive to push issuers to refinance debt.

"Even though there's a pause now in the short term, once these issues get on the balance sheet of the broker dealers, you'll see another resurgence of refundings there, whether it's to variable-rate demand notes or fixed conversions," Timlin said.

Before restructuring, banks might create "tender-option-bond-type structures" to hold the current issues, Municipal Market Advisors managing director Matt Fabian wrote in a recent report. This could place added pressure on the rest of the market.

"Widespread dealer TOB-ing could vacuum up the remaining bank liquidity for tax-exempts, increasing the burden on ARS issuers looking for their own solutions in VRDNs as well as new issuers looking to sell LOC-enhanced, floating rate, and/or derivative instruments," Fabian wrote.

Moody's Investors Service decision in July to place Assured Guaranty Corp. and Financial Security Assurance Inc. under review for possible downgrade has also led to a decline in the amount of insured paper entering the market. Just 95 bonds with a par value of $2.2 billion came to the market with insurance wraps in August, down 85.8% year-over-year. That represents a penetration rate of just 7.6% for the month.

Through August, 20.7% of bonds have come to the market wrapped, compared to 48.5% through this point last year.

New housing issues swelled 18.3% in August to $3.1 billion as issuers took advantage of legislation signed by President Bush at the end of July. The law eliminated the alternative-minimum tax on new housing bonds and added $11 billion to the private-activity bond volume cap for housing issues.

Some issuers even delayed coming to the market to capitalize on the change. The Puerto Rico Housing Finance Authority pushed back a $384.5 million offering into August from the end of July to save financing costs. It became the sixth largest deal of the month.

The legislation should further help to drive new housing issues through the second half of the year. In a July report, Merrill Lynch & Co. municipal strategist Philip Fischer wrote housing issuance could be as high as $41 billion because of the legislation. Just $12.8 billion of new housing issues have come to the market so far this year.

"If the option is out there, and there's demand for it, obviously there's going to be increased issuance there," Timlin said.

Other large issues coming to the market in August included $965 million of New York City general obligation bonds, $917.9 million of Arizona Health Facilities bonds, $707.7 million of highway bonds for California's Bay Area Toll Authority, $658.9 million of New York State Thruway Authority bonds, and $397.9 million of Dormitory Authority of the State of New York bonds.

In addition to the housing bill and refinancings, a number of factors should drive new issuance in coming months. The weakening economy's toll on tax revenues combined with added expenses for pensions, other post-employment benefits, and infrastructure needs should put added pressure on local and state budgets.

"Definitely over the next 12 to 18 months and going into '09 you're going to see a lot more issuance," Timlin said.

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