CHICAGO — Midwestern bond issuance leaped by 32.5% to $39.8 billion for the first six months of the year, due primarily to Illinois’ borrowing spree to finance its $31 billion capital program and its use of debt for budgetary relief.
Total volume rose in both quarters, with $22.3 billion sold in the first and $17.5 sold in the second, according to Thomson Reuters. Nationally, issuance rose a more modest 3.9% to $204 billion.
Illinois — which had borrowed little in recent years — accounted for $7.8 billion of the region’s overall bonding. The state sold 10 deals. Its issuers borrowed a total of $15.6 billion, up from $7.3 billion a year earlier, for a 114% increase. The Illinois Finance Authority accounted for $1.5 billion of issuance in Illinois.
“While there is a desperate need for infrastructure spending in Illinois, a good deal of the issuance in Illinois was not for infrastructure but for deficit financing,” said Richard Ciccarone, chief research officer at McDonnell Investment Management LLC.
The state’s largest sale, $3.5 billion of five-year taxable general obligation bonds, came in January. Illinois issued the deficit bonds to cover its fiscal 2010 pension payment. JPMorgan, Loop Capital Markets LLC, and Goldman, Sachs & Co. were book-runners.
Illinois later that month sold $1 billion of taxable Build America Bonds, its first use of the stimulus program, to raise new money for its capital program. Barclays Capital was senior manager. In February, the state returned to the market with a $1.5 billion new-money and refunding deal for savings. Morgan Stanley and Citi ran the books.
The state in June sold $300 million of BABs and $455 million of Build Illinois refunding bonds backed by state sales taxes with Cabrera Capital Markets in the lead spot. In April, the state sold $356 million of GOs.
Rating agencies downgraded the state due to its refusal to address a $12 billion structural budget deficit in the last legislative session and its reliance on one-shot revenues, like debt restructuring, deficit bonding, and pushing bill payments off into the next fiscal year to balance the budget.
Fitch Ratings rates Illinois’ $26 billion of GO debt A with a negative outlook, Moody’s Investors Service rates it A1 with a stable outlook and Standard & Poor’s rates it A-plus and has it on negative watch.
State issuance will taper off in the second half. Earlier this month Illinois sold $900 million of taxable BABs. It is also planning a roughly $1.4 billion tobacco bond sale for later in the year, but it has no other long-term issuance set in the coming months.
“Some investors may be relieved, as there’s been a saturation of Illinois debt and continued worries over its credit quality,” Ciccarone said.
Overall regional tax-exempt issuance fell 6.2% to $22.9 billion, while taxable issuance rose by 219% to $16.8 billion, showing Midwestern issuers’ proclivity for the BAB program. New-money issuance rose by nearly 50% to $25.4 billion, while refundings fell off by 6.4% to $8 billion.
Direct-pay BABs that offer issuers a 35% interest rate subsidy from the federal government represented about $9.6 billion of the region’s taxable issuance in 201 deals, up by 280% over last year when issuers had only just begun to tap the new program. With Congress expected to extend the program at a lower subsidy rate, Ciccarone said he expects BAB issuance to remain strong through the year as issuers seek to take advantage of the current rate.
Issuers also took advantage of other stimulus bonding programs, selling $707 million of qualified school construction bonds in 97 deals and $800 million of other stimulus debt in 116 deals.
Issuance levels varied among the region’s other states. Michigan, Missouri, North Dakota, and Ohio recorded increases. Indiana, Iowa, Minnesota, Nebraska, South Dakota, and Wisconsin showed declines.
Missouri’s issuance increased by 112 % to $4.3 billion from $2 billion as the Missouri Higher Education Loan Authority returned to the market with two deals totaling more than $1.5 billion.
Issuance in Indiana dipped 13.4% to $2.7 billion. Volume dropped in nearly every category — from education to electric power to health care and housing — and by nearly every issuer, from state agencies, to counties, cities, colleges, and local districts. The state does not issue GOs.
The decline stems from a weak economy as well as relatively new statewide borrowing laws that require voter approval on most issues, said James Merten, vice chair at City Securities Corp., which ranked second among Indiana’s senior managers in the first half of 2010.
“There’s been slower new issuance for sure,” he said. “It’s directly attributable to the economy, which has been slower, and more importantly to the referendum rules in the state, which have made issuers probably plan for longer periods and delay projects.”
Merten added that it is likely to remain slower for the next year or so. “Governments are being extremely careful, and re-looking at projects and saying, 'Maybe let’s wait an extra year,’ ” he said. “I’m thinking it will be next year before you truly have more normal issuance.”
Issuers in Michigan — which saw a 6.9% increase in its debt issuance to $4.1 billion — are facing the same concerns, said deputy state treasurer Tom Saxton.
“People in general realize that there’s no free lunch, even when you’re borrowing,” he said. “You still need the cash flow to pay the debt back. I think it’s a reflection of the economy in terms of borrowing being down.”
Borrowing by the state has dropped nearly 93% from last year, mostly due to a series of large refundings completed last year, Saxton said. Michigan agencies have shown more of an appetite for debt this year, with issuance among them rising by 67%.
State governments accounted for $9.3 billion of Midwestern volume and state agencies recorded about the same amount, while cities issued $6.3 billion, counties sold $3.1 billion, districts issued $6.3 billion, and colleges sold $1.8 billion.
Sector issuance was also mixed, with general purpose rising by 85% to $14.2 billion and transportation growing by 88% to $3.4 billion.
Education borrowing saw a 22% increase to $11.1 billion, while utility issuance rose by 117% to $2.7 billion. Health care rose by 18% to $5.9 billion. Electric power, development, environmental facilities and housing all declined.
Health care borrowings accounted for three of the year’s 10 largest sales. The nation’s largest nonprofit health care provider, St. Louis-based Ascension Health, in March sold $1.34 billion of new-money and restructuring bonds.
The transaction allowed the system to raise funds for projects, reducing its risk exposure and lowering its maximum annual debt service. Citi and Morgan Stanley were underwriters and remarketing agents. Ascension issued its bonds through five authorities based on the location of its facilities.
Allen County, Ohio, was the conduit issuer for Catholic Healthcare Partners, another of the nation’s largest nonprofit providers, which issued $486 million of bonds in mid-April. CHP used proceeds from the sale to pay off bank credit lines. JPMorgan and Morgan Stanley were the underwriters.
The Indianapolis Local Public Improvement Bond Bank — Indiana’s top issuer so far this year — in February issued $466 million as the second piece of financing for a new $754 million public safety hospital in downtown Indianapolis. Citi senior managed the sale.
Chicago’s sale of $1 billion of new-money and refunding O’Hare International Airport general airport revenue bonds in April, with Bank of America Merrill Lynch in the lead spot, was also among the region’s largest deals.
The issue wrapped up financing for the $3.3 billion first phase of a three-phase, $8 billion expansion program at O’Hare. The city is planning later this year to issue up to $1 billion of GARBs to begin financing the second phase
Midwestern issuers favored fixed-rate structures, driving issuance up by 47% to $36 billion.
Bond insurance was obtained on just $2.4 billion, a 26% drop over the same time last year.
The use of letters of credit and standby purchase agreements also declined.
Bank of America topped the rankings of senior managers, leading $5.4 billion of issuance in 41 deals. The firm was followed by Morgan Stanley, JPMorgan, Citi, Goldman, and Barclays.
Bolstered by its work advising Illinois on its pension deal, Peralta Garcia Solutions led among financial advisers, providing assistance on eight deals valued at $3.7 billion. A.C. Advisory Inc. came in second followed by Scott Balice Strategies and Public Financial Management Inc.
Chapman and Cutler LLP held on to its top ranking among bond counsel, providing legal services on 245 deals worth $2.7 billion. KMZ Rosenman followed, along with Perkins Coie, Gilmore & Bell PC, and Squire Sanders & Dempsey LLP.
