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November Solid, But Trailed '10

November saw a solid month of new municipal bond issuance for 2011, but it paled in comparison with the same period in 2010, when Build America Bond issuance was particularly strong.

For the month in 2011, $34.4 billion reached the primary market, according to Thomson Reuters.

That stood at 25.3% less volume than during the same period in 2010, when new issuance measured $46.1 billion.

For the year to date, new supply is down 32.3%, at $264.7 billion, compared with $391.2 billion in 2010.

Within the numbers, different sectors showed strength, such as development and health care bonds.

Most other sectors, though, dragged the data further downward, such as electric power, education, transportation, and utility bonds.

Among the states, New York borrowers issued two of the four deals this month of more than $1 billion, as well as three of the top-five largest deals. And the paucity of new issuance in California gave New York the top spot for issuance in 2011. California's volume fell 40% in November from the same period last year, at about $35 billion, against $58.3 billion in November 2010.

Of the top four states in total issuance for November, only New York saw an uptick in volume over the same period in 2010 — albeit at a meager 1.0%. The others were down between roughly 38% and 49%.

"The lack of California paper has certainly made an impact on issuance this year," said Philip Villaluz, head of municipal research and strategy at Sterne Agee. "In the typical year, California comprises a big portion of the primary market; that presence was certainly missed this year."

California postponed its spring offering until the fall, said Natalie Cohen, head of municipal research at Wells Fargo Securities. That was a key factor persuading the firm to raise its volume expectations for the later part of the year.

But a few factors go some ways to explaining the decrease in overall volume year to date, Cohen added.

For one, and most obvious, the BAB program ended on Dec. 31, 2010. Subsequently, the flurry of BAB issuances, which skewed the amount of taxable supply for the year, stopped as well.

The program's absence accounts for about $100 million less in volume so far in 2011 and most of the 83% fall in taxable volume last month over the same period in 2010.

Second, Cohen said, a two-year program that tripled the small-issuer limit for bank-qualified debt expired at the end of 2010.

For 2011, bank-qualified debt stands at just under half what it was at the same point in 2010. In November, 30% less bank-qualified debt was issued than during the same period one year earlier.

Finally, a large amount of airport bonds were sold last year to take advantage of the federal alternative-minimum tax holiday, which expired at the end of 2010.

The program's expiration contributed to a 50% drop in the transportation sector this year to date, compared with that in 2010. The sector also showed a 36.4% drop for November, compared with the same period in 2010.

Other sectors that saw increases on the month, compared with November 2010, included development, which was up almost 53%, health care, which climbed 39%, and public facilities, which saw gains of 15%.

Most sectors, though, decreased last month compared with November 2010. Among the largest were environmental facilities, which plunged 83.5%, electric power, which plummeted 69%, utilities, which dropped almost 47%, and education, which fell 40%. General purpose debt also fell 12.4%, year over year.

Of the month's deals, $19 billion was new money, or 46% less than was issued in 2010.

At the same time, $10.2 billion was refunded in November 2011, up 35% over the same period in 2010.

Villaluz saw in the year-to-date issuance numbers an evening of the scale between new money and refunding.

"If you look at the borrowing rates, at where we are now," he said, "it presents a good opportunity for issuers who are able to refund debt and take advantage of that economic savings to do so, as opposed to new money, which has been slow all year."

The numbers for both negotiated and competitive deals are down for November 2011. Negotiated issuance fell 27%, while competitive volume slipped 15.6%.

Revenue and general obligation issuance also stumbled for the month, compared with November 2010. Revenue volume fell about 25% and GO supply dropped almost 27%.

In the variable-rate issuance sector, debt volume involving letters of credit jumped 101% in November 2011 compared with the same period a year earlier, to roughly $1.98 billion from $990 million. Simultaneously, standby purchase agreements plunged 100% over the same period to zero issues from three issues at $938 million.

And volume fell across all the various municipal issuers, numbers showed. Comparing November 2011 with the same month one year earlier, numbers showed that states issued 34.5% less debt, from $5.9 billion to almost $3.9 billion.

Districts and local authorities also issued far less last month, compared with November 2010. District issuance fell 44% over the period, to $4 billion from about $7 billion. Local authorities issued 34% less in volume, to $7.4 billion last month from $11.2 billion in November 2010.

Colleges and universities and direct issuers also saw large drops in debt for November against the same period in 2010.

Issuance for colleges and universities fell 66% over the period, to $706 million from $2.07 billion. Direct issuers saw their numbers fall over the period to $57.2 million from $231 million, or 75% less.

All told, the new issuance over the past couple of months — the two heaviest in 2011 — pressured yields higher, according to Brian Lehky, a portfolio manager in tax exempts with Dana Investment Advisors. And while new issuance has generally been met with decent appetite — most issues throughout the year have been oversubscribed — that tone changed in October and November, he said.

Triple-A and double-A yields backed up roughly between 15 and 25 basis points over the period, depending on the maturity.

Still, as some of that supply has dropped off, he added, the tone this week has been very strong for municipal securities.

"We're seeing the secondary market firm up," Lehky said, "as well as some of the primary issues that are coming to market."

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