Issuers in the Northeast sold $36.1 billion of municipal bonds in the first six months of 2011, down 38.8% from the same period a year earlier, according to Thomson Reuters. The issuance dropoff in the region of 11 states, the District of Columbia, and Puerto Rico broadly parallels the 42.9% decline nationwide during the first half.
“Obviously issuance is down as BAB has expired,” said Jim McKinney, the head of debt capital markets research at investment bank William Blair & Co., citing the demise of the Build America Bond program, which provided municipal issuers subsidies for taxable interest, as opposed to allowing their bond interest to be tax-exempt. Many BABs were issued in late 2010 to beat the program’s expiration date.
“The caution light’s definitely on. It’s going to be mediocre at best,” said McKinney, who spoke amid market turmoil, right after Standard & Poor’s downgraded the United States’ general obligation credit rating to AA-plus from AAA.
“The recent events have brought up the possibility of another recession, and people aren’t going to borrow if receipts aren’t coming in,” he said. “Things are going to get slower.”
The Northeast region had five new governors — three in New England states plus New York and Pennsylvania. Many had campaigned on a theme of fiscal conservatism.
“I don’t know if this is a new normal or a trend, but you had a number of states with new governors and new administrations. During the early parts of new administrations you often see a slowdown of the bond-issuing process,” said Howard Zucker, a managing partner with Hawkins Delafield & Wood LLP.
Hawkins Delafield ranked first in the region among bond counsel, advising on 87 issues in the first six months with a combined par-amount value of $3.8 billion.
“Financial restraint seems like it might be the new movement and adding debt might be harder for issuers to rationalize politically in the short [term] than what it might be worth financially,” said Thomas Kozlik, a vice president and municipal credit analyst at Janney Capital Markets.
“We know that spreads over treasuries have widened out for all sorts of entities, from the government of Greece to cities and towns. We do know that bond buyers are very concerned about a second dip into recession,” said Walter Dolde, an associate professor of finance at the University of Connecticut in Stamford and a former vice president at Lehman Brothers Inc. “Also, many states postponed capital improvement spending projects that were likely to be funded with bonds.”
Connecticut cut its first-half issuance by half, to $1.7 billion from $3.4 billion. Pennsylvania dropped 53%, to $4.6 billion from $9.8 billion.
In New Jersey, the Treasury Department adjusted its plans for a $1.1 billion New Jersey Economic Development Authority school construction bond refinancing — a swaps retirement — into two separate transactions, but sold its desired amount.
The sale for the full amount was originally scheduled for the week of Jan. 13, but New Jersey readjusted amid muni turmoil including predictions by analyst Meredith Whitney of widespread defaults and Vanguard Group’s scuttling of plans to launch three muni funds. “That was one of the worst weeks for bond sales in a long, long time,” said department spokesman Andy Pratt.
But instead of pulling out completely, New Jersey sold $712.3 million that day and a further $498 million on Feb. 11. “We were still able to find buyers. We came back and got what we wanted,” Pratt said.
“There’s been a net withdrawal from the municipal markets, but I think our experience with the EDA transactions should stand as an example of how we can step up and manage our way through these challenges,” Treasurer Andrew Sidamon-Eristoff told The Bond Buyer earlier this year.
“We restructured that deal and succeeded in concluding it and met all of our business objectives.”
The EDA held 11 sales in the first six months, with a combined par amount of $2.1 billion. All New Jersey issuers sold $4.6 billion in the first half, down more than 31% from a year earlier.
Only Maine experienced an uptick among Northeast states, though it also had a new governor, Republican Paul LePage. That state, front-loading its activity in the first quarter, issued $512.6 million through 27 transactions, up 6.3% from the first half of 2010.
“The state had a somewhat larger-than-usual 10-year GO sale this year and the bond bank did some qualified school construction bonds as part of its spring sale that we would not normally have done,” said Robert Lenna, executive director of the Maine Municipal Bond Bank, though he believes the volume increase was incidental rather than a trend.
The $14.7 billion sold during the first half by issuers in New York, though down more than 20% year over year, was the most of any state in the nation.
Timeliness is important, according to New York City Comptroller John Liu. The city’s Transitional Finance Authority, which issues debt to support capital needs, was the region’s the top issuer in the first half, according to Thomson Reuters, with a par amount of $2.7 billion through six issues.
“Market movements cut both ways,” Liu said. “At the same time equity markets were tumbling, investors sought high-quality bonds.”
Continuing its momentum into the second half of the year, the TFA sold $1.05 billion of future tax-secured conversion and refunding subordinate-lien bonds the first week in August.
It offered $390 million of bonds to retail investors and received $406 million of orders, and upsized the refunding bond sale to $450 million from $300 million, citing investor demand.
Public-private partnerships have drawn interest in the Northeast.
“We’ve seen a lot more interest in P3 possibilities. We’ve seen that one way to raise money is to sell or lease parking lots, for example,” McKinney said.
Zucker concurred, though he has seen few such deals. “There’s certainly been a lot of discussion,” he said.
On Long Island, outside New York City, Nassau County Executive Edward Mangano pursued a P3 arrangement after the state’s Metropolitan Transportation Authority voted in April to cease all bus service in the county at the end of year.
“A public-private partnership to operate Long Island Bus makes sense for taxpayers,” Mangano said after choosing Veolia Transportation Inc., which promised to operate the system at three-quarters the current annual cost of $141 million.
The MTA itself is eyeballing P3 deals. Outgoing chairman Jay Walder acknowledged last month, as the MTA introduced its latest budget, the role private investment could play as the authority looks to close a $9 million gap in its four-year capital plan.
P3s are under consideration in Puerto Rico, which has issued requests for proposal for privatizing the main airport in San Juan and announced a concession deal this year for the island’s major toll road.
