DALLAS — While the volume of municipal bond sales in the Southwest fell nearly 35% to $17.8 million in the first half of 2011 compared to a year earlier, industry executives haven't lacked things to do.
In a world where Utah now has a higher Standard & Poor's rating than the United States and every state and local government faces unprecedented budget pressures, financial advisors and other professionals are helping clients read the markets, look for refunding opportunities, and analyze the consequences of new debt.
"When we see such severe swings as we had last week in the market, we've got to be there as a stabilizing force, with good conservative fiscal advice," said Edmond Hurst, senior managing director at Crews & Associates Inc. in Little Rock, Ark., a broker-dealer and financial advisor.
"It's actually a great time to talk to your clients," said Jack Addams, vice chairman of First Southwest Co., the perennial leader among financial advisory firms in the Southwest region. "We redoubled our efforts. We're in this for the long run."
Addams, who has worked in public finance for 37 years, said that the changes roiling the market are reminiscent of 1986 when federal tax law was dramatically revamped, eliminating certain categories of bond deals. To get ahead of the new law, issuers rushed to market in 1985 in much the same way they did in 2010 to capture federal subsidies for the expiring Build America Bond program. After BABs expired at the end of 2010, volume fell to a record low in January.
"On the flip side, banks continued to wade back into the letter-of-credit business, recovering from the crash of 2008," noted Dwight Burns, principal at the financial consulting firm TKG & Associates in Dallas.
Indeed, letters of credit in the region soared 464% in 2011 as bond insurance firms continued to fade into the background with a 60% decline in volume.
Even though First Southwest's volume fell nearly 16% to $3.4 billion, its first half market share rose to 22% from 19.8% in the first half of 2010.
RBC Capital Markets, the region's number-two financial advisor, also saw a slight increase in market share at 15% on volume of $2.3 billion. Estrada Hinojosa and Co., the third-ranked financial advisor in the first half of 2010, dropped out of the top 10 this year, replaced in the third spot by Zions First National Bank on volume of $949 million.
The rankings of top issuers also reflect the new economic realities.
Last year, the state of Arizona uncharacteristically ranked first among issuers for the first half of 2010 as it mortgaged state buildings and borrowed against lottery revenues to provide desperately needed cash for state operations. This year, it dropped out of the top 10, and volume among all issuers in the state fell by nearly 52% to $1.6 billion.
Houston supplanted Arizona as top issuer with four issues worth a combined $1.3 billion. Second among issuers was the rapidly expanding North Texas Tollway Authority, with $1.1 billion in a two-piece April transaction.
The senior manager on the NTTA deal, Citi, soared to first place among senior managers this year from seventh in the first half of 2010, supplanting JPMorgan, which fell to third behind RBC Capital Markets. Citi's volume of $1.9 billion represented an 11.2% market share, nearly double its 2010 first-half share. However, that was still shy of JPMorgan's 14% share in the same period of 2010.
The top three bond counsel firms remained in lockstep, with McCall Parkhurst & Horton atop Vinson & Elkins and Fulbright & Jaworski. McCall Parkhurst's volume fell by more than half to $2.6 billion from $5.7 billion in 2010.
Only one state in the eight-state region increased its debt issuance, and that was Utah, usually the state most averse to long-term obligations. Issuers there raised more money on fewer issues — 44 in 2011 versus 60 in 2010. This year's volume of $1.4 billion represented a nearly 22% increase from the $1.16 billion in the first half of 2010.
While Arizona's drop in volume was dramatic, it was not the largest in the region. That fell to Kansas with a 57.5% decline, followed by New Mexico with a 52.5% decrease. Texas, the largest state in the region, saw its volume fall 33% to $9.8 billion on 447 issues compared to $14.6 billion on 600 issues in the first half of 2010.
Arkansas and Colorado recorded similar declines of 35% and 33%, respectively.
In dollar amounts, New Mexico had the smallest issuance at $478 million, followed by Arkansas at $702 million.
Oklahoma's volume declined less than the regional average, with sales of $1.17 billion only 25% below the $1.57 billion of debt issued in the first two quarters of 2010.
State bond advisor Jim Joseph said sales activity will increase this fall, at least by state agencies. Debt sales by state agencies totaled $430.5 million in the first half of 2011, up 126% from $190.3 million in 2010.
"I can't speak for the local issuers, but things seem to be picking up," Joseph said. "I think we'll be pretty close to 2010 numbers, or maybe even a little above, by the end of 2011."
Joseph said changes by the 2011 Legislature to the regents master equipment lease revenue bond program for higher education will allow more projects to be included in the double-A rated effort.
Other industry professionals echo Joseph's outlook for the second half of 2011.
"We're starting to see upticks," Addams said. "What I see that I like now is the volume is picking up."
Still, the recovery will not likely open any floodgates of new issuance, experts said.
"I think the slow activity will last through 2011 and 2012, and maybe in 2013," said Mark McBryde, executive vice president at Stephens Inc. and director of the Little Rock-based firm's public finance department.
"Last year was the best year we've ever had, but now a lot of issuers are watching and waiting as the market heaves around, and U.S. credit is downgraded," McBryde said. "Local governments, especially school districts, are sensitive about asking voters for property tax increases."
While issuers continue to deal with uncertainty, investors can look to the muni bond market with continued confidence, despite some warnings of widespread defaults, one former rating analyst said.
"We believe that while supply on new issuance has declined to historically low levels, the trend in actual payment defaults has been a decidedly positive story," said Douglas Benton, vice president and senior municipal credit manager for Cavanal Hill Investment Management in Dallas.
"We believe that 2011 will be the second consecutive year of a decrease in actual municipal bond payment defaults," he said. "Risk in the municipal bond market remains idiosyncratic such that investors should know what they own. Buy and hold is not the same as buy and forget."
