Trend in the Region

Southwest Slippage

DALLAS — Volume of issuance in the Southwest fell 4.9% in the first half of the year, despite support from the Build America Bond program and the return of the Permanent School Fund bond guarantee in Texas.

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While the dollar value of issues declined by $1.4 billion to $27.2 billion, the number of issues rose nearly 22% to 1,362. The Southwest retreat bucked the national trend in which issuance overall rose 3.9% to $204 billion. Issuers in the eight states of the region accounted for about 13% of the national volume.

With the Build America Bond program gaining momentum since it was introduced in April 2009 as part of the federal stimulus effort, taxable muni sales have spiked higher. Taxable bonds sales in the Southwest soared nearly 118% to $6 billion, while tax-exempt sales fell nearly 19% to $20.9 billion. BAB sales rose 103% to $5.3 billion on 109 issues. BAB issuance in the Southwest got off to a good start in the first half of last year with $2.6 billion sold in 22 issues.

Increasing sales of qualified school construction bonds and the return of the Texas PSF’s triple-A rated bond guarantee failed to boost education issuance overall in the region. Education issues of $9.8 billion were slightly negative, down 0.1%. With 23 issues in the region, QSCB volume was $191.2 million compared to none in the first half of 2009. Twelve issues representing other stimulus programs produced $115.6 million of bond volume.

With state and local governments focused on recovering from the recession, development issues soared 271% to $140.6 million, representing the strongest growth on a percentage basis. Housing took the biggest hit, falling 58% to $222 million. Insured volume fell to just over $3 billion.

Only three of the eight states saw an increase in volume, led by Oklahoma with a 70% gain to $1.57 billion, followed by Arkansas with a 32% increase to $1.1 billion and Colorado with a 22% rise to $2.88 billion.

Utah declined by the largest percentage, 35% to $1.16 billion, followed by Arizona at 28% to $3.3 billion and New Mexico at 27% to $1 billion. Kansas fell by 14% to $1.7 billion.

Volume from Texas — at $14.6 billion — surpassed all the other seven states in the region combined. Nevertheless it was off 2% compared to the first half of 2009.

Jim MacMurray, vice president for finance at Kansas Development Finance Authority, said the current economic environment is making local governments cautious about issuing additional debt.

“I am not surprised by the drop-off in bond sales,” he said. “There is a much different view from a few years ago of what is possible to finance 10 or 20 years down the road. People now are taking a hard look at large capital projects and how they can be accomplished.”

Hill Feinberg, chairman and chief executive of First Southwest Co., said that two factors appear to have slowed issuance in 2010.

“One, there’s been a little bit of challenge in communication of how the BAB market is pricing,” Feinberg said. “And, two, municipalities have been very tentative on issuance until they get their arms around the revenues from their tax bases or appraisals.”

But Arizona, the most financially troubled state in the region, turned to the bond market for financial help in the first half. As a result it was the largest issuer by volume, with $1.4 billion in debt sales in the first half.

The Grand Canyon State had the largest single issue in the first half of the year, $709 million of certificates of participation on Jan. 13 in a negotiated deal with Morgan Stanley and Citi. The COPs were issued to mortgage the state’s buildings to provide cash for the general fund.

Overall, Arizona issued more than $1 billion in COPs to raise money for state outlays. Four months later, it issued the fifth largest transaction in the region for the first half — $425 million of lottery revenue bonds through JPMorgan and Citi to further ease the budget shortfall.

Texas notched the second biggest of the year with $615 million of private-activity bonds through Bank of America Merrill Lynch and JPMorgan to finance a major expansion of a highway project near Dallas-Fort Worth International Airport.

The Colorado Health Facilities Authority issued the third largest deal at $590 million through JPMorgan.

The University of Texas System’s $516 million BAB issue through Morgan Stanley ranked fourth. The system was the region’s second largest issuer with $1.2 billion of bonds.

JPMorgan retained the rank of top senior manager in the Southwest with 14% of the regional market in 28 issues valued at $3.8 billion. That represented an 8.5% increase from the firm’s regional volume of $3.5 billion in the first half of 2009.

Barclays Capital, which absorbed Lehman Brother’s muni business after the latter’s bankruptcy in 2008, jumped from the 11th spot to second place this year with a 9.2% market share on 19 issues worth $2.5 billion.

RBC Capital Markets moved down a notch to third place with an 8.5% share on 107 issues valued at $2.3 billion. RBC’s volume fell 20% from $2.9 billion in the first half of 2009.

Bank of America Merrill moved up a notch to fourth with 21 deals valued at $1.8 billion, while Morgan Stanley fell two notches to fifth place with 16 issues valued at $1.7 billion.

First Southwest Co. remained the regions’s top financial adviser with a nearly 20% market share, even though its volume fell almost 26% to $4 billion. RBC retained the second spot with 15% share on 70 deals worth nearly $3 billion, while Estrada Hinojosa & Co. moved up one notch to third place with 5.4% of the market on 37 deals worth $1.1 billion. Southwest Securities moved from sixth to fourth place, while Piper Jaffray & Co. rose from eighth to fifth place in the rankings.

The top three bond counsel firms were unchanged from 2009, led by McCall Parkhurst & Horton, Vinson & Elkins and Fulbright & Jaworski. Squire Sanders & Dempsey moved up to fourth from seventh, while Kutak Rock climbed from 10th to fifth place.

In Texas, JPMorgan was the dominant underwriter with $2 billion of deals. First Southwest again dominated financial advisers with $3.9 billion of deals for a third of the market.

Texas issuance got off to a good start in 2010, rising 6% in the first quarter, but fell 7.5% in the second, compared to the same periods in 2009. The Permanent School Fund, sidelined by capacity limits in 2009, came back on line this year to provide triple-A credit backing to local school districts.

Texas saw housing issues rise by nearly 108%. But environmental facilities was the big gainer on a percentage basis, with 435% growth to $449.8 million.

Much of Arkansas’ increase came from the state government, with $323 million in four sales, up from a meager $15.3 million in the first half of 2009. State agencies added another $28.3 million in three issues, down more than 60% from $72.9 million of bonds issued by state agencies over six sales in the first half of last year. The largest sale in Arkansas occurred in early June, a $253.2 million issue by the state to refund outstanding highway bonds.

Stephens Inc., senior manager on the highway deal, was the lead underwriter in the state with $397.2 million of bonds in 18 issues. Morgan Keegan & Co. was second, overseeing $228.5 million of debt in 22 issues.

Dennis Hunt, senior vice president at Stephens, said refundings should account for much of the debt activity in Arkansas through the end of 2010.

“We’ve had several large refunding issues in the state in the last six months, and there are still additional opportunities for economic refundings due to the favorable market,” he said. “I don’t see anything on the horizon of the scope of the highway bond refunding, but some additional issues are being explored for refunding.”

In Colorado, Denver’s $521 million general obligation bond sale placed second behind the Health Facilities Authority’s $590 million deal. Lead underwriter in the state was JPMorgan with $650 million in transactions. Financial adviser Piper Jaffray claimed 27% of the market with seven issues valued at $507 million.

In Kansas, first-quarter sales rose almost 64% to $743.2 million from $454 million last year. However sales fell in the second quarter, to $933.7 million, down from $1.49 billion in the same period of 2009’s. The Kansas Development Finance Authority sold 15 issues totaling $472.5 million.

New Mexico’s first half saw declines in both quarters for total volume of a little over $1 billion. Oklahoma’s hot streak was set by educational issuers, which accounted for more than $1 billion, in 234 sales, of the state’s total $1.6 billion. With Utah tightening its belt, first-quarter issuance plunged 53% and second-quarter volume fell 16%. Total volume was down to $1.16 billion.



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