New-issue volume tumbled nearly 26% in December, capping off what has been a roller-coaster year for the financial markets.
New-issue volume for the entire year fell more than 9% short of last year's record total, reverting back to levels seen in 2006. A total of 10,635 new issues came to market in 2008, with a combined par value of the $390.6 billion.
The municipal market was hit especially hard by the broader credit crisis, with new-issues plummeting over the last four months, including a more than 50% drop in October. Fourth-quarter volume fell 33.4% to $69.8 billion, the lowest for any quarter since the first three months of 2002.
"This was a twisting, turning, and turbulent year," Merrill Lynch & Co. municipal strategist Philip Fischer said. "Earlier in the year we were thinking that we might surpass last year's total volume, and we were clearly on a trend to do that. Then we got hit with a huge level of credit concerns and problems around munis changed the entire structure of the muni market itself."
New-issue data shows many signs of distress in the municipal market, consistent with the events over the past year. The broader credit crisis and many of its associated problems - such as the downgrades of insurers, the collapse of the auction-rate securities market, and the reduction of large broker-dealers in the municipal space - have all taken a toll.
Competitive sales, for instance, have plummeted as issuers turned to negotiation to ensure they could get deals done in the face of the difficult market conditions. Competitive deals fell 64.2% in December and 26.9% on the year. In one extreme case earlier this month, the Port Authority of New York and New Jersey received not one bid on a $300 million taxable note sale.
In addition, although yearly volume fell by just 9.1% overall, a portion of it was driven by refundings, which were up 19.8% in December and 42.9% on the year. This reflected the fact that issuers had to restructure certain types of debt, such as their ARS, which had failed and left issuers paying higher penalty rates.
"You kind of had to put out the fires first and then worry about getting out the new projects later," said Jeffery Timlin, a vice president at Sage Advisory Services.
Accordingly, with interest rates at times spiking to their highest levels in years, new-money issues fell to their lowest levels in years. The $211.8 billion of new money that came to market in 2008 represented the lowest total volume total since 2001, and the number of deals - 7,404 - is the fewest since 1993, noted Richard Ciccarone, managing director and chief research officer of McDonnell Investment Management LLC.
The current environment has made it difficult for all but the highest-quality credits to come to market. The spreads between triple-A rated and lower-rated credits have widened substantially.
The spread between a triple-A rated general obligation bond and a single-A rated GO hit 126 basis points on Dec. 22, the highest level ever recorded by Municipal Market Data, with data going back to 1991. The spread was as low as 28 basis points earlier in the year.
Fischer noted that the average size of a deal grew to $34.61 million in December from $29.44 million in the month a year prior.
"It again reinforces the general theme that only the largest and best quality issuers can come to market," he said.
One of the largest deals that came to market in December was $1 billion of revenue bonds from the Massachusetts Health and Educational Facilities Authority on behalf of Harvard University. The deal attracted investors because of the high credit quality and rarity of the issue, said Chris Mier, a managing director at Loop Capital Markets LLC.
"It did well because it was Harvard, because it was triple-A, because the market was thirsting for that kind of great quality," Mier said.
Moving into this year, the market will continue to grapple with diminished demand from buyers such as property and casualty insurers, mutual funds, and hedge funds. The market dynamic has changed the price setter from institutions - often funding purchases in the short-term market - to retail buyers, Fischer said.
"The structure of the new issues changed, as did the number of new issues and the types of new issues," he said. "And that's kind of where we are now looking forward through foggy glass."
The declining economy could contribute to political pressures that could make it more difficult for some issuers to come to market next year. New GOs in particular are sensitive to the economic conditions, because they would place an increasing burden on existing taxpayers without new construction to expand the real estate base, Ciccarone said.
The volume of GOs was down 14.3% on the year and 30.1% in December. Until more details are released about President-elect Barack Obama's plans for a stimulus package, it's unclear what the market will hold for next year, Ciccarone said.
"The combination of real estate reassessments and unemployment will make it more politically difficult to finance the infrastructure and other needed programs for municipal entities in 2009," Ciccarone said. "There's an expectation of federal support for infrastructure, especially for the schools and transportation, but projections as to what the impact will be on volume will be difficult to assess until the details of the new administration's plans are unveiled."
