2008 Private-Activity Bond Issuance Fell 52% to $13.7 Billion

WASHINGTON - Private-activity bond issuance plummeted by more than 51% last year from 2007, as market turmoil hit the sector hard and prevented issuers from being able to put together affordable deals, according to survey results and market participants.

The Council of Development Finance Agencies tomorrow is expected to release the results of an annual survey that shows overall private-activity bond issuance by the 50 states and the District of Columbia dropped by $14.6 billion, or 51.9%, to $13.7 billion in 2008, and fell in six of eight PAB categories.

Although Congress approved omnibus housing relief legislation in September providing states with an additional $10.5 billion of housing bond volume cap through 2010, only 16 states issued less than a fifth of that amount before the end of the year. Thirty-four states carried forward into 2009 the entirety of their portion of the cap.

Market participants said they are not surprised at the decline because PABs carry more credit risk than governmental bonds and had to be hurt when banks stopped providing credit enhancement.

"I think that was driven by all the fallout from the crisis," said Michael Decker, co-chief executive officer of the Regional Bond Dealers Association. "[PABs are] generally conduit financing, not always but usually, and so the credit obligor is often a private entity, not a public entity, and that creates a level of credit risk that doesn't exist in the mainstream municipal market."

Decker said that PABs subject to the alternative minimum tax such as industrial development bonds and exempt facility bonds were particularly hard hit by the financial crisis.

"Although the entire market came close to shutting down for a while there towards the end of the year, the AMT bond market was particularly affected, and I think that continued into 2009," he added.

Six states - Alaska, Colorado, Illinois, New York, Nevada and Virginia - either were unable to, or would not, provide volume-cap data to the CDFA for 2008. But even if those states had used their entire PAB capacity, issuance still would have totaled just $20.5 billion, or 72.6% of the previous year's total. In addition, the PAB issuance data provided by three other states - California, Maine and Tennessee - contained discrepancies that could not be resolved by press time, according to the CDFA.

The survey showed that the housing sector accounted for most of the PAB issuance, as has been the case historically. A total of $7.8 billion of housing bonds and mortgage credit certificates were issued, accounting for 57.6% of the PABs sold during the year. Single-family mortgage revenue bonds were the largest single type of PAB issued, totaling $3.7 billion or 27.2% of all PABs. But housing issuance as a whole was less than half what it was in 2007.

The exempt facilities sector was a rare bright spot for PABs in 2008, as it increased, whereas industrial development bonds, student loan bonds, and other uncategorized bonds dropped.

The aggregate volume cap for all the states was $28.6 billion in 2008, a 1.4% increase from $28.2 billion the previous year.

Not surprisingly, since bond issuance dropped, carryforward of unused PAB volume cap grew in 2008 to a total of $24.3 billion. That amount marks a 47% increase from 2007, when $16.5 billion was carried forward by the states. The figure is the sum of any unused cap from the previous three calendar years - 2006, 2007 and 2008 - which federal tax law permits states to carry forward.

In addition, states carried forward $8.5 billion of the additional housing volume cap, creating a total carry forward amount of $32.2 billion into 2009 for all PABs.

Although states carried forward more volume cap in 2008, low levels of issuance meant that they had to abandon far more expiring volume cap than in recent years. All told, 25 states abandoned $3.6 billion of volume cap in 2008, a 262% increase from 2007, when 15 states abandoned a total of $1 billion of cap. Kansas was the only state in 2008 to issue all of its PAB allocation, except for the additional housing bonds. It also used its entire capacity in 2007.


The federal tax rules permit most states and the District of Columbia to issue of a fixed amount of tax-exempt private-activity bonds based on their population figures. Currently states receive $85 per capita of PAB authority. However, if a state's population is low, it can issue a predetermined minimum amount of PABs, which is currently set at $262.1 million.

Congress created the aggregate bond volume cap in 1986 to limit the amount of private-activity bonds sold every year. At first, states were given a $75 per capita annual limit or a minimum of $225 million annually in the years 1986 and 1987. But when the 1986 tax act was passed, the law reduced the limit to $50 per resident, or a minimum of $150 million per state. Those new levels were used from 1988 to 2001.

In late 2000, Congress enacted a two-year increase, which returned the levels back to their original limits of $75 per capita or $225 million annually by 2002. Beginning in 2003, increases to the two levels were tied to inflation, but the per-capita figure was restricted to $5 incremental gains.

In 2008, the 20 states plus the District of Columbia with populations small enough that they qualified for the minimum level instead of the per-capita level received an increase of 2.3% in capacity to $262.1 million, from $256.2 million in 2007. Kansas has been included in the small state category in 2007, but its population gains allowed it to receive a per-capita based cap of $358.6 million in 2008.


The housing sector received a big boost last summer when the housing relief bill added $10.5 billion of private-activity bond volume cap specifically for housing bonds and exempted those bonds from the alternative minimum tax. However, the survey data shows the housing sector, like other PAB areas, lagged in 2008 bond issuance.

Roughly $7.835 billion of mortgage revenue or single-family housing bonds, multifamily housing bonds, and mortgage credit certificates were issued in 2008, compared to $17.6 billion in 2007 - a 55.4% decrease.

Housing still accounted for 57.6% of all PABs issued during 2008, making it the largest category, but that was also a drop from 2007, when housing accounted for 62.6% of all PABs issued.

Similarly, mortgage revenue bonds proved to be the single largest category of PAB issuance. The bonds, which typically are used to provide low-interest loans to first-time home buyers, totaled $3.7 billion or 27.2% of all PABs issued in 2008. However, single-family bond issuance shrank 61.2% from the prior year, when $9.5 billion of them were sold.

The issuance of multifamily housing bonds, which mainly are used to finance large rental complexes, shrank drastically in 2008 from the previous year. The category experienced a drop of 76.6% or $4.1 billion to $1.26 billion.

Bonds issued to finance mortgage credit certificates, which provide a tax credit to first-time home buyers, also shrank. Eight states issued a total of $377 million of the bonds in 2008, a 41.4% decline from 2007.

John Murphy, the executive director of the National Association of Local Housing Finance Agencies, said that while the demand for housing bonds remained high, market conditions in 2008 made it difficult for issuers to get deals done that would be affordable.

"It's just a function of where interest rates are," he said. "[It's] very slow for housing."

However, housing groups like NALHFA and the National Council on State Housing Agencies are hoping that the federal government will open the doors for Fannie Mae and Freddie Mac to return as major purchasers of housing debt. If those government-sponsored enterprises are allowed to begin buying housing bonds again, the whole sector could see more deals occurring, according to Murphy.

"We're trying so hard to get the GSEs back in the game," he said. "If we can get Fannie and Freddie back in the market, I think things will improve substantially."

Even if housing lobbyists succeed in getting Fannie and Freddie to buy housing bonds directly, they also would likely need to turn to Congress to pass an extension of the special housing volume cap, which is slated to expire at the end of 2010, Murphy said

"Assuming we have a bond market, we're going to ask to get that extended," he said.


The only category of PABs that increased in issuance in 2008 was exempt facilities - which include airports, solid-waste disposal facilities, sewage facilities, district heating and cooling systems, docks, wharves, and mass commuting facilities. Issuance in that category was up $119 million, or 4.7%, in 2008. A total $2.7 billion of the bonds were issued.

But issuance of student loan bonds dropped dramatically in 2008 to $1.5 billion, a 65% decrease from the previous year. Market participants in the sector had said they anticipated 2008 would be a rough one for student loan bonds, since many of them are sold as auction-rate securities, a market that virtually froze in 2008. The dismal figures for last year compare to a 10.1% increase in issuance in 2007.

Industrial development bond issuance was down 57.4% in 2008, just a year after that sector experienced a 158% gain. Just $1.3 billion of IDBs were sold in 2008, a $1.7 billion drop from 2007.

However, Toby Rittner, president and chief executive officer of the CDFA, pointed out that the figure for 2008 - which was a result of the market turmoil - still marks the second highest for the decade, behind 2007, which he said was an anomaly for that sector.

Last year "was coming back to reality, and probably a little too much back to reality," he said. "The big issue is that access to capital in general was down for the second half of last year, so the banks tightened up ... they weren't lending to anyone."

Market participants said 2007's high level of IDB issuance was due in part to legislation enacted in 2006 that doubled the capital limit - to $20 million from $10 million - for projects financed with IDBs. Rittner and others are hoping that a provision in the American Recovery and Reinvestment Act will boost the IDB sector once again in 2009. That provision permits IDBs to be issued through 2010 to build facilities that produce "intangible" products, such as copyrights, patents or software. Previously, IDBs could only be used to finance facilities producing tangible products.

Rittner said he does not expect an uptick in IDB issuance in the first half of 2009 due to the expanded definition, but the second half of this year and 2010 should see healthy issuance numbers.

"We're not going to get up to $3.1 billion again in 2009 or 2010 probably, but we should be able to maintain," he said. "I feel safe to say that in 2010 we'll be passed where we are in 2008."

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