Sell Side

April Breaks Record For New Muni Volume

April was the busiest on record for new-issue muni market volume, as issuers took advantage of improving yields to refinance their auction-rate securities.

Issuers borrowed $43.8 billion in the month of April through 946 issues, according to preliminary data through April 30 from Thomson Reuters. The total represents a 30.5% increase over the April 2007 total of $33.5 billion, making it the busiest April on record, according to the Tdata.

Deals "are getting done easier than they were a few months earlier," said Bruce Floberg, senior municipal bond analyst with RBC Capital Markets. "We are certainly not as cheap relative to Treasuries as we were a couple of months ago. It is a better environment to price new issues."

Through the first four months of the year, just under $129 billion in municipal debt was issued through 3,352 issues, a drop in volume of 8.6% from last year's four-month total of $141 billion, and some 600 fewer deals. While market turmoil kept many issuers on the sidelines for the first few months of the year, April's spike in volume helped bring the market closer to last year's record volume total.

In the month, about $15 billion in variable-rate debt - both short put and long, no put - was brought to market in 219 deals, representing 34% of the total market. That compares to last April's variable rate issuance of $4.9 billion, or 15% of the month's total issuance.

"That's what you would expect if you have auction paper being converted to VRDOs, which a lot of them are," said Phillip Fischer, municipal strategist with Merrill Lynch & Co.

Variable-rate demand bonds require credit protection and liquidity facilities to meet the demands of their put structure. As a result, the use of letters of credit increased to $7.8 billion on 133 deals, a gain of 372.1% over last year's total of $1.6 billion.

Likewise, the use of standby bond purchase agreements rose to $3.3 billion on 33 deals, an increase of 254.4% over last year. Together, the two forms of liquidity and credit enhancement outpaced bond insurance, which guaranteed just $10.2 billion on 268 deals in the month, a drop of 34.1% from the $14.89 billion in 448 deals insured in April 2007.

As a result, bond insurance penetration declined to 23% of issuance, down from 44% penetration in April of last year. In the first four months of the year, bond insurance has been used on just 26% of all deals, compared to 50% of deals in the first four months of 2007, according to Thomson Reuters data.

"We've had the primary market become highly distorted because of the difficulties this year in munis," Fischer said. "Insurance penetration has fallen as questions about credit quality have risen."

Also related to the auction-rate security crisis, refundings are up 94% in April, compared to last year. More than $14.3 billion in 273 deals have been refunding transactions this year, compared to $7.4 billion in April last year on 215 deals.

Most market sectors saw an increase in issuance this April over last, with only development issuers, electric power, and housing agencies showing declines in the year-over-year comparison. Housing was down the most, 35.1%, as housing agencies hold their deals until better spreads can be secured for their financings, Fischer said.

State governments led the way among the types of issuers borrowing money, selling a total of $6.2 billion in debt through 19 issues. This was a 243.4% increase over last year's totals of $1.8 billion on 23 deals in April, the data shows. The month's three largest deals - Connecticut's $2.3 billion general obligation pension bond sale, California's $1.8 billion GO sale, and Puerto Rico's $735 million GO refunding sale.

The large supply in the market has resulted in municipal bonds remaining relatively cheap to Treasuries. Thirty-year, high-grade municipals currently price at 102.7% of similarly dated Treasury bonds, according to Municipal Market Data. This compares to an average over the past year of 95.3%, and a minimum of 84.4%.

"Munis remain cheap principally because of this large calendar," Fischer said. "The demand side is strong and the bonds are not repricing to historical norms."

The large calendar should continue into the typically busy summer months, as issuers continue to restructure auction-rate securities and address their capital needs.

"This type of large primary market should continue into June and July," Fischer said.



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