Northeast Bond Volume Up 2.4% in 2010

Volume in the Northeast increased slightly in 2010 to $118 billion of bonds sold, a 2.4% boost from the total long-term debt that states and municipalities issued in 2009.

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The region saw 2,527 bond transactions last year compared to 2,190 bond deals totaling $115.2 billion the year before.

The now-expired Build America Bond program generated an increase in taxable issuance. Issuers used taxable BABs in order to gain the 35% federal subsidy on interest costs, which helped lower borrowing expenses for states and localities.

The market absorbed $38.5 billion of taxable debt in the Northeast in 2010. That’s $17.8 billion more than the $20.7 billion of taxables sold in 2009, an increase of 85.6%. Tax-exempt issuance dropped by 18% to $77.2 billion from $94.2 billion, according to Thomson Reuters.

Richard Ciccarone, head of research at McDonnell Investment Management, said BABs helped to broaden the investor landscape for states and cities. Going forward, those investors may continue to consider taxable municipal securities such as pension obligation bonds, he said.

“It made more investors familiar with municipal bonds and that should probably have some long-term impact for taxable municipal securities in the future,” Ciccarone said.

The BAB program ended on Dec. 31, but Rep. Gerald Connolly, D-Va., last week introduced legislation that would revive the program and extend it through 2012. Issuers would receive federal subsidies of 32% this year and 31% in 2012.

Issuers shied away from variable-rate debt. The region sold $6.39 billion of short-put variable-rate bonds in 2010, $1.39 billion less than in 2009. Variable-rate bonds with no put dropped to $884.9 million last year from $4 billion the year before, a 78% decrease.

Fixed-rate issuance increased 6.4% to $107.4 billion from $101 billion. Market participants said that states and localities in 2010 took advantage of lower interest rates by selling fixed-rate debt. At the same time, many borrowers fixed-out floating-rate bonds to avoid having to renew or replace letters of credit or other liquidity facilities.

“There was a lot of refinancing deals to take out variable-rate issues because of concerns about expiring credit facilities and so on in coming years,” said Alan Schankel, director of fixed-income research at Janney Montgomery Scott.

Refunding bond sales reached $28.8 billion in 2010 compared to $23.2 billion the year before, a 24.2% increase. New-money issuance totaled $72.3 billion last year, $4.4 billion less than the $76.7 billion that issuers borrowed in 2009, a 5.8% drop.

The amount of bonds enhanced with LOCs decreased by more than $1 billion in 2010. States and municipalities used LOCs on $4.2 billion of bonds in 67 transactions last year compared to $5.3 billion of debt in 116 sales in 2009. Standby bond purchase agreements increased slightly to $899 million of debt sold in 2010 compared to $809 million in 2009.

Long-term debt with bond insurance attached to it declined 16.4% to $7.95 billion in 2010, $1.56 billion less than the year before.

The region’s largest bond sale in 2010 was a $1.85 billion New Jersey Turnpike Authority taxable BAB deal that priced on Dec. 8, with Goldman, Sachs & Co. and Citi serving as senior managers. The Puerto Rico Sales Tax Financing Corp., called COFINA by its Spanish acronym, sold the second-biggest and third-biggest transactions, a $1.82 billion sale that priced on Jan. 28 and a $1.61 billion refunding and new-money deal that priced on June 24. Citi was the book-runner on both transactions.

The Government Development Bank for Puerto Rico sold $1.44 billion on July 23 with UBS Securities LLC as senior manager. The Dormitory Authority of the State of New York’s $1.31 billion sale on Oct. 5, which included BABs, was the region’s fifth-largest deal. M.R. Beal & Co. priced that transaction.

DASNY borrowed $5.71 billion of debt in 36 issues, the biggest issuer in 2010. The authority is New York’s main issuer of personal-income tax bonds and also sells bonds for other state programs and as a conduit issuer on behalf of medical and educational institutions.

New York City came in second with $5.22 billion of debt in 14 sales last year. The New York City Transitional Finance Authority and the New York City Municipal Water Finance Authority followed with $4.31 billion in 18 issues and $3.79 billion of debt in 10 sales, respectively, last year. COFINA came in fifth with $3.62 billion of borrowing in four transactions.

Citi retained its first-place position in the Northeast, underwriting $19.8 billion of debt in 132 sales last year, taking nearly 17% of the market. That’s down from 2009, when Citi priced $21.4 billion of bonds in 106 transactions for an 18.7% market share.

Bank of America Merrill Lynch remained in second place. It underwrote $17.2 billion of bonds in 154 deals in 2010, 14.7% of the market, compared to $15.1 billion of debt in 141 issues in 2009. JPMorgan moved up one notch to third place, pricing $12.4 billion of bonds in 124 deals last year. It underwrote $13 billion of debt in 107 transactions in 2009.

Barclays Capital more than doubled its underwriting business in the Northeast, pricing $11.9 billion of bonds in 60 issues in 2010 compared to $5.76 billion of debt in 46 sales the year before. Its market share jumped to 10.2% last year from 5% in 2009.

Morgan Stanley dropped from third-place among banking firms in 2009 to fifth place. The bank underwrote $10.6 billion of bonds in 2010 in 103 deals, down from $14.8 billion of debt in 106 transactions the year before.

Among financial advisers, Public Financial Management Inc. retained its top position in the Northeast last year, advising on $21 billion of bonds, 22.7% of the market, in 332 transactions. PFM worked on $18.6 billion of debt in 295 issues in 2009. Following in second place again is Public Resources Advisory Group with $9.7 billion, a 10.5% market share, up from $11.6 billion in 2009.

The GDB, Puerto Rico’s fiscal agent, advised on $9.5 billion of debt last year. The year before, the GDB worked on $8 billion of bonds. Lamont Financial Services Corp. moved up to fourth place among advisers, working on $6.6 billion of debt in 43 issues last year compared to $3.4 billion of debt in 30 issues the year before when it ranked seventh.

Though it worked on less debt, Hawkins Delafield & Wood LLP was again at the top of the list, working on $11.88 billion of bonds in 2010, representing 10% of the market. In 2009, Hawkins did $14.68 billion of bonds, a 12.8% market share. Nixon Peabody LLP moved up to second place in 2010 from fifth place the year before. Nixon Peabody worked on $11.15 billion of debt last year, 9.5% of the market, compared to $5.7 billion of debt in 2009 when it took a 5% market share.

Sidley Austin LLP fell to third place last year from second place among bond counsel. The firm was counsel on $11.1 billion of bonds, down from $13 billion it worked on in 2009. Edwards Angell Palmer & Dodge LLP did $9.3 billion of bond transactions last year, again taking fourth place. The firm worked on $6.8 billion of debt in 2009.

Orrick Herrington & Sutcliffe LLP dropped to fifth place last year with $7.8 billion of bonds. In 2009, the firm worked on $8.7 billion of debt and placed third among bond counsel.

New York issuers sold more bonds than any state in the region with $40.5 billion, a $3.4 billion drop from 2009. Issuers in the state were also among the biggest in the Northeast, selling 13 of the 25 largest deals in the region, including two deals from the bi-state Port Authority of New York and New Jersey.

New York City sold $5.2 billion of general obligation bonds as well as $4.3 billion of bonds through the Transitional Finance Authority and $3.8 billion through the Municipal Water Finance Authority. The majority of that debt was issued as BABs, which accounted for $8.3 billion of bonds compared to $2.4 billion of tax-exempt new-money bonds.

“Certainly 2010 was the year of the BABs — that really dominated our issuance in the new money side,” said Carol Kostik, New York City deputy comptroller for public finance. Sge said that using BABs saved the city money but also brought in new investors from Europe and other institutional investors like pension funds.

“Our market is still seeing cross-over buyers given the muni-Treasury ratios,” Kostik said. “We hope that taxable buyer base education is still benefiting us into 2011.”

BABs offered issuers the best savings in longer maturities which prompted issuers like New York City to structure deals with a mix of the taxable instruments and tax-exempt bonds.

“Because of where BABs were beneficial economically, we really sold them to the middle and long end of our deals,” Kostik said. “We were able to still have bonds available for our traditional retail customers who tend to stay in years one through 10.”

Following New York is Pennsylvania, which sold $18.9 billion of bonds in 648 deals in 2010, $550 million less than it borrowed the year before with 595 transactions. New Jersey’s issuance increased by about $4 billion last year, due in part to the $1.85 billion Turnpike Authority BAB deal that will help finance the agency’s major road-widening project. The Garden State sold $14.8 billion of debt in 365 bond deals compared to $10.7 billion of bonds in 312 transactions in 2009.

Massachusetts borrowed $13.5 billion of debt last year, $3.59 billion more than it sold the year before. The commonwealth refinanced nearly $2 billion of Massachusetts Turnpike Authority debt through the Massachusetts Department of Transportation in 2010. MassPike no longer exists.

Puerto Rico sold $9.5 billion of debt last year compared to $8.2 billion the year before. Connecticut issued $6.1 billion in 2010, down from $6.5 billion in 2009. Maryland borrowed $5.7 billion of debt last year while the District of Columbia sold $3.7 billion. Delaware took on $1.5 billion of debt. New Hampshire sold $1.1 billion. Maine’s issuance totaled $958,900, while Rhode Island sold $807,300 in 2010. Vermont borrowed $636,600 last year.

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