Southwest Rebounds With BAB Boom

DALLAS — With a flood of Build America Bonds at the end of last year, the Southwest enjoyed a strong recovery from the deep slump of 2009, but the December rush to market clearly sucked the air out of January ­issuance.

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Nationally, volume fell to an 11-year low last month. In the Southwest, debt sales dropped 52% after a fourth-quarter surge of nearly 40%. For the full year, sales by state and local governments in the region’s eight states rose 8.2%, to $66.56 billion.

While that looks like a healthy rebound from the 13.8% decline of 2009, the regional volume was still the lowest since 2006, when $64.3 billion of bonds were sold.

With Republicans taking charge of the U.S. House and dominating state legislatures in the region, the sudden drop in volume with the expiration of the federally subsidized Build America Bonds has industry executives looking for new trend lines.

The GOP has promised deep cuts in spending at the national and state ­levels, and investors have moved money out of municipal funds.

“I do see a significant decrease in the first half of 2011, particularly with the Texas Legislature in session,” said Noe Hinojosa Jr., chief executive and president of Estrada Hinojosa & Co. “It’s really quiet, but I do think things will turn around in the third or fourth quarters.”

Chris Poinsatte, chief financial officer at Dallas-Fort Worth International Airport, said he expects a failing appetite for large tranches of long-term debt to lead to smaller individual issues.

DFW, which is embarking on a $2.5 billion remodeling of its four original terminals this month, priced its first $301 million of revenue bonds for the project in October, but it does not expect heavy issuance this year.

The Texas Transportation Commission, which issues debt for the Texas Department of Transportation, topped all the region’s issuers last year with a $1.5 billion deal July 27.

The Texas Public Finance Authority came in second, with a $1.1 billion issue in November, followed by Utah’s $1.04 billion of general obligation BABs in September.

Oklahoma, Texas, Arkansas and Colorado all posted big increases in volume, while Arizona, Kansas, New Mexico and Utah posted declines.

Texas issuance rose 13.5% last year, to $37 billion — more than the region’s other states combined.

Arkansas posted the largest percentage growth, 53%, to $2.45 billion on 250 ­issues.

Voters there approved a constitutional amendment last year that removed rate limitations on bonds.

However, a legal challenge to the way the question was presented to voters has delayed implementation of the ­amendment.

The Arkansas Supreme Court is currently considering the issue.

“There is a backlog of issues waiting on the end of this process,” said Edmond Hurst, senior managing director at Crews & Associates Inc. in Little Rock. “We expect it to be resolved favorably by this summer, and maybe even as early as April.”

In November, Colorado voters decisively rejected ballot measures that would have outlawed state debt and sharply curtailed debt at the local level. After the election, issuers there rushed to market to capture BAB subsidies before the program ended.

Colorado’s volume for the year rose 10%, to $7.4 billion on 240 issues. Across the region, BABs grew 44%, and taxable debt climbed 51%. Tax-exempt debt dropped nearly 4%.

New Mexico’s BAB issuance jumped 277%, to $218.5 million. Kansas had the smallest increase in BABs — less than 2% — but the bonds accounted for almost 25% of all public debt issued in the state during the year.

Kansas issuers offered $822.4 million of BABs in 27 deals.

With insurance sidelined by credit ratings, insured issues fell 21%, and letters of credit dropped 36%. Other guarantees, such as the Texas Permanent School Fund, soared 614%.

The PSF returned to the market in 2010 after being sidelined in 2009 by capacity limits. That helped boost education issues by nearly 28% in Texas, where volume grew 93% in the fourth quarter after ­rising 6.6% in the first quarter and dropping 7.2% in the second and 10.5% in the third.

The Dallas Independent School ­District was the largest issuer of school bonds, with nearly $1.2 billion.

Regionally, education issues rose more than 25%.

School debt in Oklahoma climbed a healthy 50%, to $1.94 billion. Public school bonds surged 166% in Utah, to $1.5 billion, and 49% in Arkansas, to $1.6 billion.

“School districts saw a lot of opportunities in refunding issues last year, because of where rates were,” Hurst said.

With the housing market still deeply depressed, housing issues in the region fell nearly 60% and remained at zero in Arizona for the second straight year. The state’s overall volume fell sharply in every quarter except the third, when it shot up 173%.

Arizona was also unusual in notching a 368% increase in bond insurance and a 17,331% increase in development bonds, to $226.6 million in three issues. The state government ranked fifth among Southwest issuers, with $1.4 billion of overall volume, by mortgaging its buildings to cover operating costs.

Among senior managers, JPMorgan ranked first in the region with $8.1 billion in 68 issues. Its 12.2% market share edged Bank of America Merrill Lynch’s 12.1%.

RBC Capital Markets ranked fourth in volume, with $5.9 billion, but its 251 issues were nearly twice the combined total of the top two underwriters.

First Southwest Co. remained at the top of financial adviser ranks, with $13.5 billion of deals and 26% of the market. 

RBC ranked second, with $6.5 billion and a 12.6% share, followed by Public Financial Management Inc. with $4.3 billion and Estrada Hinojosa with $3.99 billion.

Hill Feinberg, chief executive officer of First Southwest, said the firm recognizes that the market has shifted, though it is still looking for opportunities to expand.

“The media is saying that there are some firms that are going to be tightening their belts, but we haven’t seen it,” Feinberg said. “Everybody’s waiting to see what happens. We have a bit of a contrarian attitude.”

Among bond counselors, McCall Parkhurst & Horton retained the top spot, with 17.4% of the market and $11.5 billion of deals.

Fulbright & Jaworski ranked second, with a 9.7% share and $6.4 billion of deals, followed by Vinson & Elkins, with 9.6% and $6.3 billion.

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