In a tumultuous year for the financial markets that saw municipal bond issuance decline nationally, refinancing of auction-rate debt helped push volume higher by 5% in the Northeast in 2008.
While the number of transactions decreased to 2,053 from 2,242 in 2007, the region's total volume rose to $113.2 billion from $107.8 billion, according to Thomson Reuters.
Bond and note sales were up 49.7% in the second quarter of last year compared to 2007's second quarter, while issuance during the first, third, and fourth quarters of 2008 fell. Volume in October through December dropped 18% over 2007's fourth-quarter issuance as the bankruptcy of Lehman Brothers shook financial markets.
Refunding issuance rose as did sales of new-money debt, 17% and 9% respectively. There were no auction-rate securities sold in 2008 as the market for such debt collapsed with the credit crunch. The year before, issuers sold $9.8 billion of ARS. Issuance of variable-rate debt with a short put shot up 130% as issuers converted auction-rate bonds to VRDBs.
With the major monoline insurers suffering rating downgrades, issuers shunned bond insurance. The par amount of deals that used a letter of credit jumped to $19.5 billion last year, compared to $5.3 billion in 2007, a 268% increase. Standby purchase agreements also became more frequent, with $7.7 billion of debt carrying SPAs, a 73% increase from the $4.4 billion of debt in 2007.
As issuers turned to alternative credit enhancers, the par amount of debt wrapped with traditional bond insurance dropped to $16.7 billion from $50 billion in 2007, a 66% decrease.
Two pension deals sold earlier in the year topped the list of largest bond issues for the region in 2008. Connecticut and Puerto Rico had taxable pension sales of $2.27 billion and $1.58 billion, respectively. Merrill Lynch & Co. and Bear, Stearns & Co. priced the Connecticut deal on April 16 while UBS Securities LLC priced the Puerto Rico pension sale on Jan. 29.
A $1.5 billion taxable deal for Harvard University sold on Dec. 5 with Goldman, Sachs & Co. as senior manager, the third largest transaction in the region. That was followed by a $1.31 billion Puerto Rico Aqueduct and Sewer Authority bond sale priced by Citi on March 7. New York City came in with the fifth-largest deal, $1.3 billion of general obligation debt that priced on March 31.
The New York State Dormitory Authority came in as the biggest issuer for the Northeast in 2008, where it also topped the list in 2007. DASNY sold $6.44 billion of bonds and notes last year in 45 issues, a $1.8 billion increase over its 2007 issuance, taking 5.8% of the region's market share.
"We realized a significant increase in volume in 2008 compared to 2007, much of which reflected the work we undertook on behalf of the state and many of our private not-for-profit clients in auction rate restructurings," DASNY spokesman Marc Violette said.
New York City once again came in second place as it did the year before, selling $6.1 billion of debt in 28 issues, accounting for 5.5% of market share.
The Massachusetts Health and Educational Facilities Authority jumped from 11th place in 2007 to third place in 2008, issuing $4.4 billion of bonds and notes last year in 33 deals compared to $2.1 billion of debt among 29 sales the year before, with the conduit issuer helping many of its borrowers exit the auction-rate market. Nearly all of the authority's health care deals priced in the first half of the year while higher education borrowing occurred throughout 2009, according to Benson Caswell, MassHEFA's executive director.
Connecticut, due in part to its large taxable pension deal, rose to fourth place from 19th on the list in 2007. The state sold $4.2 of bonds and notes in 11 issues last year, up from the $1.3 billion of debt Connecticut issued in 2007 in 22 transactions.
Coming in fifth place was the New Jersey Economic Development Authority, up from its 25th place-seat last year as it refinanced numerous state-backed school construction and transportation auction-rate securities. The NJEDA sold $3.1 billion of debt in 27 issues last year compared to $1.1 billion of bonds and notes issued in 2007 in 16 different transactions.
"Because of the auction-rate issues that occurred last year, the remarketings and refundings that we did increased the amount of bonds that we issued in terms of looking at the number of times the various New Jersey authorities that had state contract bonds were in the market - from the [NJEDA] having to issue a combination of refunding and remarketed bonds for the schools program, and our South Jersey Light Rail program, and our business economic incentive program," said Nancy Feldman, the state's public finance director. "Those programs were bonds that other than a new issue for schools, were not supposed to be in the market last year for new money."
Amid all the turmoil on Wall Street in 2008, Citi topped the list of senior managers in the nation and the Northeast, where it was up from its second-place seat in 2007 even through the bank worked on less debt last year compared to the year before. Citi priced $15.5 billion of debt last year in 138 issues, accounting for 14% of the market, down from $17.2 billion of bonds and notes it managed in 2007 in 162 deals, 16% of that year's market.
Merrill, which has been absorbed by Bank of America, increased its volume in 2008, pricing $14.5 billion of debt last year in 115 issues and boosting the bank to second place from third place the year before. Merrill worked on $12.2 billion of debt in 2007 in 139 deals. JPMorgan dropped to third place from its first-place seat in 2007, pricing $12.7 billion of bonds and notes in 105 issues last year compared to $17.9 billion of debt in 128 deals the year before.
Morgan Stanley's volume more than doubled, with the bank rising to fourth place with $11.2 billion of debt managed in 2008 from seventh place the year before when it worked on $5.1 billion of bonds and notes. Morgan Stanley managed 85 transactions in 2008 and gained 10% of market share. That's up from 48 issues the year before where the bank had 4.8% of the market. Maintaining its staff and expanding into other sectors and states allowed the bank to increase its presence in the municipal bond market, according to Charlie Visconci, executive director and head of the eastern infrastructure group at Morgan Stanley.
"Morgan Stanley has had consistent coverage from a personnel standpoint and we have a diverse business," Visconci said. "We are now in the housing business and we have always been strong in transportation, higher education, and health care. We have done deals for the Massachusetts Housing Finance Agency and Rhode Island Housing. So we have been able to expand our mix and also expand the states where we've been doing a lot of business - such as New Jersey, Massachusetts, and New York - but we did a lot of business also in Rhode Island and Connecticut."
Among financial advisers, Public Financial Management Inc. kept first place, working on $15.3 billion of bonds and notes last year with 225 deals compared to $11.8 billion of debt the year before in 214 transactions.
Public Resources Advisory Group moved to second place in 2008 from third place in the year before as it worked on $7.9 billion of debt. In 2007, the firm advised on $6.4 billion of bonds and notes.
The Government Development Bank for Puerto Rico followed Public Resources Advisory as it advised the commonwealth on more than $6 billion of debt.
A C Advisory Inc. kept its fourth-place seat with more than $5 billion of debt while Goldman Sachs jumped to fifth place from 11th as it served as advisor on $4.4 billion of bond and notes in 2008, up from $1.5 billion of debt the year before.
In looking at bond counsel firms, Hawkins Delafield & Wood LLP retained first place from 2007 even though the amount of debt it worked on decreased to $13.9 billion last year compared to $16 billion of bonds and notes the year before.
Conversely, Sidley Austin LLP rose to second place in 2008 from third place in 2007 as it increased its municipal debt presence, working on $13.2 billion of bonds and notes last year compared to $7.8 billion of debt in 2007. The increased issuance by New York City and DASNY contributed to Sidley increasing its volume by almost 70%.
"A fair amount of [the increase] is attributable to clients issuing refunding bonds to deal with problems that hit the auction rate securities market and the VRDB market," said Sidley Austin partner Michael Burke.
Issuance in New York State, the largest issuer in the Northeast, increased 25.2% to $40.06 billion in 2008 from $32 billion the previous year.
Issuance in Pennsylvania dropped by 13%, with a total of $15.6 billion of debt sold in the state in 2008. That's $2.23 billion less than the $17.9 billion of bonds and notes issued the year before. Volume decreased across most sectors, with health care and transportation debt dropping by nearly $1 billion in each area.
Conversely, total debt rose in Massachusetts by more than $2 billion last year. Bay State issuers sold $14.3 billion of debt in 2008 compared to $12 billion in 2007, an 18.7% increase. The education sector was the driving force behind the increase with more than $4 billion of additional debt sold in 2008 compared to 2007.
New Jersey's total borrowing declined to $11.7 billion last year compared to $13.3 billion of bond and note issuance the year before. While the state saw an increase in borrowing for education and health care needs year over year, debt for general purpose and public facility projects dropped.
Puerto Rico's debt volume decreased as well, with $2.8 billion fewer bonds and notes sold in 2008 for a par amount of $9.46 billion in 2008 over 2007's debt total of $12.2 billion. In 2007, the Puerto Rico Sales Tax Financing Corp. sold more than $4 billion of sales tax bonds, adding to that year's higher debt volume. In 2008, housing, utility, and general purpose borrowing increase while all other sectors dropped.
Connecticut borrowing totaled $4.21 billion of bonds in 2008 compared to $1.39 billion sold the year before. The increase was primarily due to the sale of $2.27 billion taxable pension bonds in April.
Maryland's issuance was up 5.6% in 2008 with $6.73 billion in 201 deals. The bulk of the debt was sold as fixed rate, though variable-rate debt issuance was up 91.4% over 2007.
The District of Columbia came to market with $2.73 billion of bonds in 26 issues, which is 21.2% less than 2007's $3.46 billion in 33 deals. New-money deals were down nearly 29%, while refunding deals jumped 10.2%. The district also used bond insurance 65.1% less than in 2007, while the use of letters of credit skyrocketed by 620.9% in 2008.
Issuance in Rhode Island fell 4.9% to $1.3 billion. More than half of the bonds sold in the state were issued by the Rhode Island Health and Educational Building Corp. and the Rhode Island Student Loan Authority, which sold $441.1 million and $264 million of bonds, respectively.
Bond and note transactions in Maine totaled $1.27 billion last year, up from $1.1 billion in 2007. New Hampshire's issuance dropped to $977.5 million in 2008 from $1.23 billion the year before, a 21% decrease. Vermont saw $927 million of debt issuance last year, up from $863.7 million of bonds and notes sold in the state in 2007.
Delaware came to market with 25.1% less volume in 2008, with $846 million in 15 deals compared to $1.2 billion in 19 deals in 2007. The state and its agencies issued about $698.5 million of fixed-rate bonds and $145.8 million of variable-rate deals. Delaware and its agencies, cities, and towns used 85.8% less bond insurance and 51.6% fewer letters of credit on its deals.
Ted Phillips and Lynne Funk contributed to this story.