Regional News

Southwest Hangs In

DALLAS - Despite the market trauma of 2008, municipal bond volume across the eight states in the Southwest region rose 5.4% to nearly $72 billion. Only three states - Arkansas, Colorado, and Kansas - saw their volume of issuance drop. Click here to see charts. In 2007, only one deal surpassed $1 billion. In 2008, there were four, including the North Texas Tollway Authority's record $3 billion negotiated sale. With more than $5 billion in total issuance, the NTTA sold five times the amount of debt from 2007's top issuer, the Arizona Health Facilities Authority.

The NTTA's 7.3% share of the Southwest market helped propel RBC Capital Markets to the top spot among financial advisers with nearly $13 billion of deals for an 18.3% share, more than $2 billion ahead of last year's top FA, First Southwest Co.

Estrada Hinojosa & Co., ranked fourth among financial advisers in the region, had the second-best year in its history behind 2006, helped in large part by the NTTA, said chief executive Noe Hinojosa. The firm was part of the syndicate underwriting the tollway's debt.

Southwest issuers who accounted for more than $1 billion of debt in 2007 numbered only two. Last year, there were 10.

But the devastation of 2008 can be found in categories such as auction-rate issuance, which fell from $4.5 billion in 2007 to zero last year. As major issuers such as hospitals, airports, and student loan providers sought to escape the grip of a frozen auction market, refunding issues rose 57%, with variable-rate, short-put deals soaring 175%.

Across the region, issuance spiked 19% in the third quarter before falling 5.8% in the fourth. Industry experts believe the effects of collapsing investment banks, the virtual demise of the bond insurance industry, the stock-market crash, and a stampede to low-risk debt will be hard to shake off.

Bond insurers backed about $12 billion in debt sales in 2008 in the Southwest, less than half the amount insured in 2007.

"The year 2008 was kind of like a horror story, where you started out with the collapse of the auction-rate market and the sell-off of tender-option bonds," said Jeffrey Timlin, vice president and portfolio manager of Sage Financial Advisory Services Inc. "There was kind of a lull in the summer, then here comes the Lehman Brothers bankruptcy."

Hill Feinberg, chairman and chief executive officer of First Southwest Co., said he is seeing signs of increasing liquidity in 2009 as federal funds flow into the banking industry.

"I think we're starting to see the daylight," Feinberg said. "I like what we're seeing from the federal government, and it looks like [Texas] Gov. Rick Perry is following the same form."

Chris Cochran, executive vice president with Capital West Securities Inc. in Oklahoma City, said he expects a slowdown in Oklahoma debt sales in 2009.

"Generally, most of the people I deal with are expecting 2009 to be a little slower than 2008," he said. "I see a lot of issuers that are either not interested in being in the market right now, or are waiting to see what shakes out from the federal stimulus package."

In Texas, last year ended with the state's Permanent School Fund virtually frozen as it neared its limits to confer triple-A backing on local school bonds after the value of the fund fell dramatically because of investment losses. Although no school bonds were rejected by the PSF in 2008, school districts in early 2009 have been forced to rely on their own credit or delay issuing debt.

To sell its bonds for an ambitious toll project north of Dallas, the NTTA had to navigate a minefield of market issues, including the loss of Lehman as a counterparty on one of its previous swaps deals. By the end of the year, with its credit rating clinging to the single-A category, the agency was announcing a sharp decline in toll revenue for 2009 and a search for a new executive director after Jorge Figueredo abruptly announced his departure.

For Texas, whose nearly $42 billion of debt surpassed all of the other seven states in the region combined by nearly $10 billion, a new reality set in when oil prices fell from record levels in July to less than $40 a barrel by the end of the year. The collapse forced the Permanent University Fund, operated by the University of Texas Board of Regents, to call off plans to sell $1 billion of future oil production to increase liquidity. By the end of the year the PUF, like the PSF, was down sharply. Distributions from the fund were reduced.

With federal bailouts designed to thaw credit, investment banks either merged with commercial banks or adopted their business model that allows about a third as much leverage of assets. First Southwest, long the dominant player in Texas and the Southwest as financial adviser and broker-dealer, threw in its lot with one of Texas' largest privately held banks, Plains Capital.

With its annual volume up 6.9%, Texas managed to avoid the fourth-quarter slump as volume rose 16.8% to $7.3 billion. Much of that followed November bond elections for cities, schools, and counties. Colleges and universities issued 203% more debt in 2008. Short-put variable-rate debt was up 193% after the auction-rate securities collapse.

JPMorgan, the region's top senior manager, took the top spot in Texas with 37 deals valued at $5.8 billion. Merrill Lynch & Co. ranked second in the region and in Texas.

McCall Parkhurst & Horton, which worked on the NTTA deals, claimed top spot among bond counsel in Texas and the Southwest, bumping off Fulbright & Jaworski LLP, which fell to third. Vinson & Elkins moved up from third to second place in the region.

Among other states in the region, Arizona was hammered by bad news, particularly in the collapse of its housing market in 2008. But statistically, it was a good year for munis, with volume up 6.9% to $9.6 billion on 24 fewer deals than 2007's 184.

Arizona enjoyed one of the biggest third-quarter spikes, with volume up 234%, followed by a nearly 50% falloff in the fourth quarter. Environmental and public facilities were the two strongest categories for 2008.

Arkansas saw debt issuance fall more than 30% from the year before, with $1.14 billion from 152 sales. That was down from $1.67 billion raised in 2007's 178 sales.

The most active sector was education, with $605 million in proceeds from 100 sales.

Schools and other local districts sold $452.7 million of debt in 88 tranches, followed by $237.5 million for cities and towns through 25 sales.

The largest issuer in the state in 2008 was the Arkansas Development Finance Authority, with $171.2 million in nine sales.

Colorado's volume tumbled 4.4% to $7.9 billion in 2008, as the number of deals fell from 286 in 2007 to 187 last year. The state's volume fell 57% in the third quarter and bucked the trend again in the fourth quarter with a 9.7% increase.

Kansas issuers were busy in 2008, with 253 debt sales compared to 243 in 2007. However, total volume fell 22% to $2.16 billion in 2008 from $2.76 billion the previous year.

The Kansas Development Finance Authority was the most active issuer in the state last year, with $293.9 million raised through eight issues. The Kansas Department of Transportation was the second-largest issuer in 2008, with $150.9 million in two sales.

New Mexico turned in a strong 2008, with volume up 44% to $3.2 billion. Only one quarter fell, as volume dropped 34% in the third. The second quarter proved the best, with volume up 99%.

The New Mexico Finance Authority's seven deals made it the top issuer in the state with $695 millions. First Southwest was top financial adviser, with Goldman, Sachs & Co. as the top senior manager.

Oklahoma posted an increase in debt sales in 2008, with $2.61 billion raised through almost 300 issues. That's up from $2.45 billion in 2007 with 11 fewer sales.

The largest issuer in the state was the Grand River Dam Authority, which raised $575.4 million with a revenue bond issue in September. The Oklahoma Development Finance Authority generated $429.5 million through two sales during the year.

Utah, whose state debt is triple-A, turned in a brisk 2008, with volume up 29% to $3.3 billion. The Utah Transit Authority's $700 million deal to build its light-rail and commuter lines in the Salt Lake City area stole the show. George K. Baum & Co. took the top spot among senior managers with $862 million of sales.



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