CHICAGO - Lagging the national trend, bond issuance in the Midwest last year managed just a 1% gain over 2006 as Ohio's record $5.5 billion tobacco bond sale helped offset a dip in refinancings and issuance in the health care and education sectors.
Issuers in the Midwest sold nearly $74 billion of bonds, a 1% increase over the $73.3 billion of debt issued a year earlier with the most significant levels of borrowing - $22 billion for a 4.4% increase - brought to market in the fourth quarter, according to Thomson Financial. The first quarter showed the strongest hike over a year earlier with $16.8 billion of debt sold for a 34.5% increase. Second quarter sales of $17.6 billion represented a 21.5% drop over 2006 and issuance of $17.6 billion in the third quarter was up 1.5%.
Education-related borrowers topped the sectors with $19.6 billion of bonds sold, although that figure marked an 8.7% drop over 2006. General purpose issuance of $17.2 billion, which included the Ohio tobacco bonds, followed with $17.2 billion of bonds sold, for a 40.4% increase. The third highest sector was health care, which saw $9.8 billion of bonds sold, about 11.5% less than what was offered in 2006. A series of public power deals, largely for the Prairie State project, boosted electric power issuance 54% to $4.6 billion.
The numbers offered a contrast to the national trend that saw bond issuance increase by 10.6% to a record $429 billion despite a 14.8% decline in fourth-quarter issuance. Nationally, education dropped by just 3% and health care issuance climbed by 22% while electric power grew by just 28%.
"The Midwest numbers are a reflection of our mature economy," said Richard Ciccarone, chief municipal research analyst at Illinois-based McDonnell Investment Management LLC. "Education is an area that is weakening and could face further pressure as it may be harder to win voter approval for new debt issuance as resistance grows against property tax increases on an already strained real estate base."
On the health care front, Ciccarone said the contrast between the Midwest drop and the national surge might be due in part to Midwestern demographics with population growth faltering in many states. "There is less of a need to increase capacity and more of a need to enhance existing capacity," he said.
New-money issuance rose by 8.8% to $46.9 billion while refundings fell by 25.6% to $14.6 billion with combined transactions totaling $12.4 billion for an 18.5% increase. Midwestern issuers favored negotiated transactions with $62 billion selling through that method over the competitive sale of $11.7 billion.
Revenue bonds represented $50.5 billion of overall debt offered in the Midwest compared to $23.5 billion of general obligation debt. The majority of debt sold at a fixed rate - $56.3 billion - with auction rate representing another $6.3 billion for a 19.1% increase.
That surge could reverse itself this year as the auction-rate market struggles due to eroding market liquidity. Insurance was attached to $34.5 billion of the bonds issued in the Midwest, a figure that doesn't reflect the credit fallout from the collapse of the subprime market.
Among states, issuance levels presented a mixed bag, with Ohio, Illinois, Nebraska, and South Dakota posting gains while Indiana, Iowa, Michigan, Minnesota, Missouri, North Dakota, and Wisconsin offered up fewer bonds in 2007 than they did a year earlier.
A pair of tobacco deals accounted for the Midwest's largest two sales in 2007. Ohio's $5.5 billion deal by the Buckeye Tobacco Settlement Financing Authority was easily the region's largest. Bear, Stearns & Co. and Citi were the book-running senior managers with Public Financial Management Inc. acting as financial adviser and Hawkins, Delafield & Wood LLP and Squire Sanders & Dempsey LLP as co-bond counsel.
About $2.2 billion of the bond proceeds will finance the public school construction committees of the Ohio School Facilities Commissionthat otherwise would have been financed between 2008 and 2025 with its share of the tobacco payments under the 1998 Master Settlement Agreement. Another $1.9 billion will fund other construction costs, and $920 million would finance higher education construction, all of which would otherwise have been funded with borrowing backed by general revenues over the next several years.
The Michigan Tobacco Settlement Financing Authority sold $523 million in tobacco bonds in August 15 in an effort to wipe out a looming deficit in the state budget. Bear Sterns served as the book-running senior manager. Michigan is planning this year to restructure its $490 million tobacco sale from 2006.
In a first-of-its-kind sale for a county government and the seventh largest deal in the Midwest last year, Oakland County, Mich., in late June sold a $570 million taxable certificates of participation retiree medical benefits issue to fully fund the county's unfunded liability for retiree health care benefits.
The Illinois State Toll Highway Authority ranked second among top deals with its $700 million new-money issue last October with Morgan Stanley as the senior manager. The authority will also likely have one of the largest deals of this year due to a $760 million refunding that it recently sold.
Minnesota offered the region's third largest deal with its own record-setting $670 million competitive sale won by Merrill Lynch & Co. in July. The state plans two deals in the $300 million to $350 million range this year.
Chicago, the third-largest issuer in the region with $2 billion of debt sold, issued its largest deal, a new-money and refunding GO sale for $589 million in May. The city put off its nearly $1 billion O'Hare International Airport new money and refunding with Lehman Brothers at the helm from last fall until earlier this year due to interest rates. After the Ohio tobacco authority, the Illinois Finance Authorityled the pack among top issuers with 85 deals totaling $3.6 billion.
A series of public power deals was among the top 20 deals in the Midwest. As part of the $2.9 billion Prairie State coal plant project, the Missouri Joint Municipal Electric Utility Commission sold $540 million with JPMorgan in the lead, the Indiana Municipal Power Agency sold $423 million with Citi in the lead, the Northern Illinois Municipal Power Agency sold $391 million with Citi in the lead and the Illinois Municipal Energy Agency sold $605 million with JPMorgan in the lead.
The project, located in southwestern Illinois, includes two pulverized-supercritical generating units with a combined 1,582-megawatt capacity and an adjacent mine that is under construction with 200 million tons of coal reserves. A total of eight municipal joint power agencies are participating in the project.
"To make it economic you need to build it of a certain size," Standard & Poor's analyst Peter Block said. "What we saw last year was a coalescence of years of planning. These things don't happen overnight."
Despite environmental concerns that have been raised over pollution generated by coal-fired plants - even state-of-the-art ones - power transactions are likely to continue, though somewhat abated, this year, said Fitch Ratings analyst Alan Spen.
"A lot of utilities have used up the excess generating supply in the region, so they need to be building base load generating plants, which require a lot of financing," he said.
Citi captured the lead spot among senior managers with 92 issues totaling $8.4 billion, knocking UBS Securities LLC out of the top spot from a year ago. Merrill Lynch captured the second position with $7.6 billion managed in 66 issues. UBS, struggling in the Midwest with a reduced staff of bankers due to departures and firings, was third, followed by Bear Stearns, boosted from its 15th spot a year earlier by its senior role on the Ohio tobacco sale.
PFM continued its domination of advisory work in the Midwest. It advised on 186 deals totaling $10.9 billion, including the Ohio tobacco sale, up from $5.8 billion a year earlier. SpringstedInc. followed with 182 deals totaling $2.3 billion. Squire Sanders knocked Chapman and Cutler LLP into the second spot among bond counsel because of its work on the Ohio tobacco deal. e_SRitq
