Strong sales activity by education, electric power, and transportation issuers overcame 2010’s slump in health-care related debt to help bring total 2010 volume to a record $433.3 billion. All 10 bond sectors benefited from the availability of Build America Bonds and other stimulus debt efforts, which accounted for significant portions of the debt issued by each sector in 2010.
Transportation issues were up more than 37% from 2009 total sales, with $66.9 billion of debt issued in 603 sales last year, according to Thomson Reuters data.
Bond sales last year provided $47.8 billion of new money for transportation, $14.6 billion for refunding of earlier issues, and $4.5 billion of combined allocations. Most of the new transportation debt issued in 2010, some $57.6 billion of the total, was supported by dedicated revenue streams.
BABs and other stimulus efforts provided $25.6 billion of proceeds, almost 40% of the total transportation debt issued last year.
Eight of the sector’s largest bond sales in 2010 consisted wholly or partially of offerings of taxable BABs, including December’s $1.9 billion New Jersey Turnpike Authority offering, which was the year’s largest transportation deal.
Activity in the sector was up significantly in the first quarter of 2010, with $18.7 billion of sales compared to $8 billion in the first quarter of 2009.
The second and third quarters were comparable with 2009 issuance, down 13% in the second quarter but up 10% in the third.
However, fourth-quarter volume was spurred by the impending demise of the stimulus programs at the end of the year. Transportation debt sales in the fourth quarter zoomed to $24.2 billion over 207 issues, up from $13.7 billion in 155 issues in 2009.
The bulk of 2010’s transportation debt sales, almost $24.7 billion, were for highways, streets, and toll roads, up from $22.8 billion in 2009. Bonds for bridge projects added $4.5 billion to 2010 highway totals.
The low level of transportation funding is causing a huge imbalance between what is needed to extend and maintain American transportation infrastructure and the money that is being provided, according to Jack Basso, director of program management and finance for the American Association of State Highway and Transportation Officials.
“Overall, at all levels of government, we are funding only 40% of our transportation infrastructure needs,” Basso said. “There is a national need for at least $250 billion a year in transportation funding, and the total spending on transportation infrastructure is only about $93 billion a year.”
Basso said local and state governments face many challenges in providing financial support for transportation, ranging from a reluctance to raise gasoline taxes to diversions of dedicated tax revenue to uses other than transportation.
“We have a funding gap, and it is getting worse instead of better,” Basso said.
The end of federal stimulus funding and the demise of BABs could make it even more difficult for state and local officials to properly finance needed transportation infrastructure, Basso said.
Airport upgrades and improvement efforts benefited directly from the BAB program, which made it possible for airports to issue debt without being subject to the alternative minimum tax. Consequently. issuance rose to $18.7 billion in 2010, up more than 134% from $8 billion of debt issued in 2009. There were 156 airport issues last year, compared to 94 in 2009,
Uncertainties over the future of health care reform and its effects on hospital finances dampened the health care sector in 2010.
Sales of health care debt plummeted almost 33% in 2010 from 2009. Sales data from Thomson Reuters show $31.2 billion of health-care related bonds sold last year, down from $46.2 billion in 2009. Health care sales included $1.8 billion of BABs.
The largest health-care debt sales during 2010 included $679 million by the Michigan State Hospital Finance Authority in March and $590.2 million by Colorado Health Facilities Authority in May.
Hospital debt sales showed an across-the-board decline.
Almost $26 billion of bonds were issued for general acute-care hospitals, down from $39.2 billion in 2009.
Debt for single-specialty hospitals was off almost 70%, falling to $544 million from $1.8 billion in 2009.
Pediatric hospital bond sales totaled $1.2 billion, a 38% decline from $1.9 billion issued in 2009.
The few bright spots in the sector include continuing-care projects, which benefited from $2.3 billion of debt sold, up 41% from $1.7 billion in 2009, and retirement facilities, with $211 million of debt, an increase of 131% from $91.3 million in 2009.
A recent Standard & Poor’s report on not-for-profit health care providers expects the sector to manage its short-term problems in 2011 through cost containment and consolidation but warned of problems later.
“While managing costs is an effective near- to medium-term strategy, we believe its effectiveness is limited in the long term unless the broader business model also changes,” said lead analyst Martin D. Arrick.
He noted that Standard & Poor’s upgraded $12.8 billion of nonprofit health care debt in 2010 and downgraded $5.3 billion of debt.
Arrick’s team predicted that most hospitals will continue to opt for fixed-rate debt over variable rate, a trend that began after the credit crisis of 2009.
“We believe that the higher cost of debt service for fixed-rate bonds offsets the risks in variable-rate debt,” he said.
Health care providers issued $27 billion of fixed-rate debt in 2010 and $3.6 billion of variable-rate debt.
In 2009, the sector accounted for $32.8 billion of fixed debt and $11.2 billion of variable rate. K-12 school debt rebounded in 2010 with $101 billion of bonds sold through 5,108 issues, up more than 10% from the $91.5 billion over 4,248 issues in 2009.
Bonds issued through federal stimulus debt programs provided $34.1 billion of the total proceeds.
Stimulus bonds issued for education included $26 billion of BABs and $7.15 billion of qualified school construction bonds.
Southern California districts accounted for two of the largest education bond sales in the country during 2010. The largest sale last year was $1.8 billion issued by the Los Angeles Unified School District in February, followed by a $900 million issue in July by the Los Angeles Community College District.
Issuance for education in 2010 fell slightly below 2009 levels in the first half of the year, with $48.9 billion during the first two quarters compared to $49.2 billion in the same period of 2009.
Education debt came back strong in the remainder of 2010, posting a 24% increase in the third quarter to $23.6 billion from 2009’s $19 billion, and a 23% increase in the final quarter to $28.6 billion from the $23.3 billion sold in the last three months of 2009.
Higher education debt sales couldn’t get out of the doldrums, inching up to $35.1 billion from $34.9 billion in 2009.
However, debt issued to fund college student-loan programs posted a strong comeback, with sales of $8.7 billion in 2010 compared to $2.5 billion in 2009.
The biggest year-to-year increase was posted by the electric power sector, with sales of $29.5 billion in 290 issues. That is almost 83% more than the $16.1 billion of electric power debt sold in 2009.
Sales of Build America Bonds for electric power efforts totaled $11.7 billion in 67 issues, almost three times the $3 billion of electric power BABs sold in 2009.
