Sell Side

New Issuance Slows to A Crawl in September

New-issue volume in September plummeted nearly 40% from last year as the primary municipal market contracted dramatically in the second half of the month amid the broader credit crisis.

New issuance in September fell to $19.9 billion in 622 issues from $32.8 billion in 941 issues this month last year, according to Thomson Reuters data.

"September volume is down because the market has essentially been closed for the past couple of weeks," said Clark Wagner, director of fixed income at First Investors Management Co. in New York. "The last two weeks, barely any deals have come to market, and that is not a function of any one particular sector of the market, just a function of the market being closed."

The monthly volume data marks the lowest for September since the Sept. 11 terrorist attacks slowed issuance to $14.31 billion in 841 issues in 2001. Total issuance through September stands at $317.8 billion compared to $325 billion in 2007, after appearing on pace for a record year.

During the first two weeks of the month the market opened with issuance with a par value of $14.15 billion, compared to $13.97 billion in the first two months of last year. But since Sept. 15 - when Lehman Brothers Holdings Inc. declared bankruptcy and Bank of America Corp. reached a deal to buy Merrill Lynch & Co. - new issuance has all but ground to a halt amid non-stop financial news. With issuers spending the rest of the month mostly pulling offerings or significantly reducing their size, just $5.7 billion in new issues came to market.

"It's been a turbulent time in the month of September not only for the stock market, but for the bond market and the muni market," said Richard Ciccarone, managing director and chief research officer of McDonnell Investment Management LLC.

The overall economic turmoil and market dislocations have created a difficult market for issuers. The turmoil at financial institutions continues to constrain underwriting capacity by limiting available capital and the willingness of dealers to take inventory on their books. The flight-to-quality to the Treasury market along with forced liquidations in the municipal market has helped lead relative yields on municipal issues to increase.

Market circumstances in recent months have prevented any normalcy and only promoted imbalance in issuance and overall market activity, noted Paul Toft, senior portfolio manager at Victory Capital Management in Cleveland.

"If normally we had a tough market and the calendar was light, that could be a blessing," he said. "But it wasn't a coincidence that we had a light calendar - the calendar got light because issuers realized if they wanted to jam their deals into the market, they would have had to price them at extremely high spreads relative to historical spread given the lack of liquidity."

Stuck in the market's quandary, market participants are biding their time, he said.

"It just seems like short of one day -last Friday, when we got a little pop in the market - it's just a grinding repeat day after day of more softness in the market," Toft said.

Not surprisingly, the largest deals of the month came during the first two weeks of the month. New York City's $950 million general obligation offering led the way, followed by a $652.8 million of GOs from Massachusetts and $621.4 million of GOs for the Los Angeles Community College District.

With the financial market holding its breath waiting for a resolution to the $700 billion economic rescue plan in Washington, Wagner says there is too much uncertainty for the municipal market to function as usual.

"If the plan in Congress gets passed, then that should help," he said. "I think that's very important in the near term and that's the real hurdle most immediately."

Other longer-term problems, such as a recession and a weak housing market, are problems that will not be resolved overnight by the rescue plan, but will also be important in addressing after the financial market gets back on its feet.

With the market closing its books on September, market participants hope the municipal market can start issuing in October, even if it no longer looks to be a record year.

"It's been a turbulent time, and I think that we're looking for October to be an opportunity to regroup, circle the wagons and try to restore more normal financing market for state and local governments," Ciccarone said.

If not, the market could continue to face bigger problems ahead, according to Matt Fabian, managing director of Municipal Market Advisors.

"A week or two with a limited calendar is one thing, but a more extended period of no issuance could have deeper implications for state and local and the national economies," he said.


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