Sell Side

October is Biggest Month So Far

Municipal issuance for October weighed in as the heaviest month for 2011 thus far, but it still sat 23.4% below the amount of new deals issued the same period in 2010.

Monthly Tables

Industry analysts, though, are quick to assert that October was a strong month. They ascribe much of the difference to the number of deals and dollar volume in 2010 with the popularity of Build America Bonds and the mad scramble to issue them as 2010 drew to a close.

“October was a healthy month for issuance; it’s like what used to be a normal month,” said Chris Mier, a managing director and municipal strategist at Loop Capital Markets. “The fact that the year-over-year comparisons are very negative doesn’t mean very much, because we all recall that BABs were being sold in October-November-December. And there were a lot of issuers who pulled their BABs into 2010 so they could issue them.”

Overall, October volume aligned with historical numbers for the month, according to Peter Hayes, head of municipal bond trading at BlackRock. Even so, he added, general demand was strong and several deals were upsized to meet it. Low rates across other fixed-income assets played a strong role in driving demand from different investor classes. Refundings boosted volume as well.

“A couple of weeks ago we saw a backup in the intermediate part of curve,” Hayes said. “Prior to that, buyers had been on the sidelines, probably in protest of the very low rates. The backup did bring buyers back into the market, not only the typical tax-exempt buyers, but also crossover buyers, because we’ve been very cheap to investment-grade corporates and Treasuries.”

October had four deals worth at least $1 billion, which all arrived in the latter half of the month. New York boasted two of the top three deals.

The New York Liberty Development Corp. led the way with a $2.59 billion deal, while the Hudson Yards Infrastructure Corp. tied for third with a deal valued at $1 billion. California placed second when it issued general obligation bonds worth $1.98 billion.

The top four states for issuance — California, New York, Texas and Illinois — maintained their respective positions atop the list of rankings for the year through October. But while borrowers in California and Texas issued around 31% less than they did in 2010, roughly in line with aggregate numbers, those in New York and Illinois diverged sharply.

New issuance year-to-date for borrowers in New York State fell just 7.8% below what they did in 2010. For those in Illinois, the total volume was 49.8% less year-to-date than it was in 2010.

“[New York] has done surprisingly well, in terms of its economy,” Loop’s Mier said. “And the budget picture is fairly good, compared to other states. Things are working quite well right now for New York.”

Municipal government deals from 2011 year-to-date have fallen compared to those 2010, mostly between 20% and 40%, Thomson Reuters figures show. Only borrowers in counties and parishes and the direct issuers categories fell outside that range. Counties and parishes saw a 47.4% decline in volume over that period, while direct issuers saw a 6.4% increase.

State government deals for the year through October, at 145 new issues totaling $29.2 billion, fell almost 33% from 2010. Last year through October, they totaled 235 deals at about $43.5 billion.

The largest sectors year-to-date saw less total volume. Education, at $64.2 billion for the first 10 months of 2011, was down 22.6% from the same period in 2010. Health care, at $20.2 billion, had fallen 28.4%. Transportation, at $24.1 billion, slid a precipitous 53%. And general purpose bonds, at $63 billion, had dropped 35.2%.

There was 26.2% less in general obligation bonds through the first 10 months of 2011 than through the same period in last year. Revenue bond issuance, by comparison, fell almost 38%.

Tax-exempt bond issuance overall for the period dropped just 13.7% year-over-year. As expected, the absence of taxable BAB issuance led to a 77% plunge in taxable product reaching the muni market.

Mier was surprised that negotiated deals still represented around four-fifths of the total in October, at about 82%. Their number fell 23.3% over the period, which compared to a 22.9% slide in competitive issuance over the period.

“That tells me that, given the uncertainty and volatility in the marketplace, issuers like the benefit of the package of things negotiated sales bring, relative to competitive,” he said.

Recent estimates for total 2011 volume vary. Mier said it should come in at just under $300 billion. Loop Capital, his firm, projects $350 billion for 2012.

“That’s a half-step back to normalcy,” he said.

Michael Pietronico, chief executive officer at Miller Tabak Asset Management, predicted supply would probably remain in the $5-$7-billion range on a weekly basis until December. It would then move lower from there.

Citi muni bond analyst George Friedlander, writing in a recent research note, expects 2011 issues to total roughly $260 billion. Last year, $433 billion came to market, though a significant portion was taxable, mostly thanks to the flood of BABs.

Of this year’s number, tax-exempt issuance should total about $230 billion, with $30 billion in taxable bonds. Citi tentatively predicts roughly $310 billion.


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