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Refundings Are Main Factor In 63% Increase in Issuance

Refunding debt stands as the primary reason behind the 63% increase in long-term municipal bond issuance through the first six months of 2012 over the same period in 2011.

Issuance totaled $190.5 billion on 6,826 deals through the first half of 2012, versus $117 billion on 4,859 deals through the first six months of 2011.

In June 2012, issuance climbed 27% from the same month a year ago, to $40.72 billion on 1,164 deals, Thomson Reuters numbers show. That compares with $31.97 billion on 1,194 issues over the same period last year.

Refundings are up an incredible 137% through the first six months of 2012, against the same period one year earlier. For June 2012, refundings have increased by 69% from the same month in 2011.

Rock-bottom yields and the deluge of refundings remain the story so far for 2012. Triple-A yields have fallen from 2012 highs to historically low levels across the curve, according to Municipal Market Data numbers.

Through Friday, the benchmark 10-year muni yield, at 1.86%, sits 47 basis points below its high for the year. The two-year, at 0.32%, and the 30-year, at 3.16%, sit 10 and 41 basis points, respectively, beneath their highs for 2012.

Issuers have regarded these levels as conducive for refundings to save on borrowing costs.

Subsequently, refundings outweigh new-money issuance year-to-date, compared with one year earlier.

The re-fi numbers make sense when one considers the noticeable jump in issuance in the market in 2001 and 2002, relative to previous years, and the 10-year calls that have followed, according to Natalie Cohen, a managing director at Wells Fargo Securities.

“It’s logical that a financial advisor would say to an issuer today: there are a lot of needs out there, there’s also a lot of cash out there looking to be deployed, and interest rates are low, and we don’t know what the third or fourth quarters are going to look like politically or economically,” she said. “There are a lot of reasons to enter the market right now. Strike while the market’s hot.”

Refunding deals weighed in at almost $83 billion for the year to date on 3,401 issues. That compares with $35.1 billion on 1,495 issues over the same period in 2011. In June, they represented $17.13 billion on 449 deals, versus $10.15 billion on 379 issues a year earlier.

New-money deals totaled $70.81 billion on 2,867 issues for the first six months of 2012. That compares with $62.37 billion on 2,924 issues through June 2011. For last month, there were $16.88 billion in new-money deals on 630 issues, against $14.34 billion on 706 issues in June 2011.

General purpose, health care and utilities led the large-issuance sectors for June 2012, against the same month in 2011. General purpose issues were up 115%, with $14.27 billion on 350 deals, compared with $6.64 billion on 319 issues.

The second largest issuing sector, education, fell last month against June 2011. It saw $8.68 billion on 459 deals, versus $9.91 billion on 497 issues.

For the first half of 2012, large sectors, general purpose, education, utilities and transportation each saw more in issuance than they did over the same period in 2011. General purpose deals jumped 85%, to $56.33 billion on 1,913 deals. That compares with $30.46 billion on 1,251 billion issues in the first six months of 2011.

Utilities deals leapt 112% over the first six months of 2012, to $24.73 billion on 973 issues. That compares with $11.66 billion on 568 issues in 2011 through June.

Tax-exempt issuance increased 34% last month compared with the same period a year earlier. The number of taxable deals, in turn, fell 9% over the same period.

Negotiated deals rose 40% in June from the same month in 2011, to $33.67 billion on 715 issues. Competitive deals rose just 4% month-over-month from 2011 to 2012, to just under $7 billion on 439 deals.

Issuance trends between 2012 and 2011 should start to converge during the second half of 2012, said John Dillon, chief municipal bond strategist at Morgan Stanley Smith Barney.

Despite the fact that issuance was up year-over-year through two quarters in 2012, the pace of increasing volume is starting to fall. That’s due to the fact that issuers pushed up their deals at the end of 2010 to take advantage of the expiring Build America Bond program to such a degree that they had far less to issue during the first half of 2011, Dillon said. Subsequently, issuance during the second half of 2011 returned to more normal levels.

“For today, we should see the year-over-year percentage gains start to diminish as we move later into this year,” he said. “And I think June’s percentage comparison of plus-27% is a down payment on that trend.”

The rankings for the five states with the heaviest amount of municipal issuance in the first six months of 2012 did not change year over year. And each saw increases in volume over the period.

New York set the pace once again, issuing $23.6 billion on 506 issues on the year through June, a 62% increase. That compares with $14.57 billion on 292 deals over the same period in 2011.

California followed with $22.03 billion on 364 deals in the first six months of the year. That’s a 91% rise from the same period in 2011, when the Golden State sold $11.55 billion on 408 issues.

Texas saw its borrowers issue $16.12 billion on 644 deals on the year through June, a 64% jump. That compares with $9.81 billion on 450 issues over the same period in 2011.

Illinois and Florida rounded out the top five through the first six months of 2012, as they did over the same period one year earlier. Illinois issued $8.67 billion in 2012 through June on 315 issues. That’s an increase of 18% over the first six months of 2011, when it floated $7.36 billion on 237 issues. The Sunshine State issued $7.66 billion on 110 issues in 2012 through June. That’s a 30% jump from the same period one year earlier, when it issued $5.88 billion on 100 deals.

Michigan, which jumped to 7th from 18th through the first six months of 2012 compared to the first six months of 2011, saw the largest increase among states with heavy issuance. It issued $7.27 billion in 2012 through June, versus $1.97 billion over the same period in 2011.

The Michigan Finance Authority may have issued the biggest deal in June. But three of the top five largest issues last month hailed from issuers in New York.

The month also boasted five deals that arrived worth at least $1 billion. The MFA’s miscellaneous-purpose, $2.92 billion refunding deal arrived on June 13.

From the Empire State, the New York State Dormitory Authority issued $1.81 billion of miscellaneous purpose refunding bonds. The New York State Thruway Authority floated a $1.12 billion deal; the New York City Transitional Finance Authority had a $1 billion deal.

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