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Refinancing Surge Gives Volume a Boost in 2012

Long-term municipal bond issuance for 2012 continues to outpace that of the previous year, but the once-yawning gap year-over-year has narrowed.

Issuers floated just 7% more in total volume last month than they did in July 2011. That amounted to $26.6 billion in 836 issues in July 2012, against $24.9 billion in 757 deals over the same period last year.

The market still has seen 55% more of total long-term issuance for the year to date than it did at this point in 2011, according to Thomson Reuters numbers. Borrowers have issued $219.4 billion in 2012 in 7,727 deals through July, compared with $141.9 billion in 5,616 deals over the same period one year earlier.

The difference in 2012 remains the disparity between the volume of deals issued as refundings against those floated as new money. For the year, refundings are up 135% over the same period in 2011, while new-money deals are just 8% higher. That breaks down to $95.7 billion in refundings so far in 2012, in 3,792 deals, against $40.7 billion such issues in 2011 to this point, in 1,744 deals.

The refinancing trend is whetting demand for primary issuance, particularly in the belly of the curve, said Sean Carney, muni strategist for BlackRock. It is also pushing the average maturity of issuance in 2012 down to 15 years.

"Thematically, the municipal market continues to present itself in a rather predictable manner," Carney said, "meaning refunding issues continue to dominate the primary market, issuance is reverting back to 10-year averages, demand remains strong and focused on yield."

The refunding numbers didn't surprise Paul Montaquila, vice president of fixed income for San Francisco-based Bank of the West.

With Treasury rates at extreme lows, agencies trading at one to three basis point spreads to Treasuries and high-grade corporate bonds trading at one-to-10 basis point spreads, he said, muni bonds are the next option.

"We've watched corporations refinance at historically low interest rates since 2009," Montaquila said. "Why wouldn't states?"

All told, issuance appears to be returning to more typical levels, compared to the wild rides that the Build America Bond program induced in 2010 and 2011. This year's monthly volume has been conforming closely to the average of the last eight years, wrote Christopher Mier, a managing director in the analytical services division at Loop Capital Markets.

The largest sectors by volume have seen more issuance for the year through July than they did over the same period in 2011. They include general purpose, up 71% to $62.6 billion; education, up 32% to $58.5 billion; utilities, up 93% to $28.7 billion; and transportation, up 66% to $26.3 billion.

For July, the same sectors, except transportation, saw far more modest gains, year over year. Education even issued 9% less of bonds than it did in July 2011.

Both negotiated and competitive deals saw small gains in July from the same period in 2011. The number of negotiated deals rose 15%, to $20.5 billion in 535 issues, against $17.8 billion in 476 deals in July 2011.

The number of competitive deals increased by 18%, month over month. That broke down to $6.03 billion in 291 issues last month, against $5.11 billion in 253 deals in July 2011.

Revenue bond issuance climbed 27% in July from one year earlier, to $18.3 billion from $14.4 million in July 2011. General obligation debt totaled $8.2 billion last month, against $10.5 billion one year earlier, a 22% decline.

Local authorities saw a 57% jump in issuance last month, to $5.3 billion in 112 deals, against $3.3 billion in 81 issues one year earlier. State agencies, however, floated 26% fewer of debt in July, compared to the same period last year — their volume dropped to $6.2 billion from $8.4 billion in July 2012.

Through July, the top four state rankings did not change. Issuers within New York led the market over the period once again.

The Empire State saw $28.7 billion in 562 deals through July. That compared with $17.4 billion over the same period in 2011, a 65% increase.

California-based issuers placed second once again, issuing $25.4 billion in 437 deals through the first seven months of 2012. That compares to $16.1 billion issued through July 2011 in 461 deals, a 58% increase.

Texas and Illinois through July placed third and fourth, respectively, just as they had over the same period in 2011. The Lone Star State saw a 59% increase in volume over the first seven months of the year from one year earlier. Issuance over the period jumped to $20.2 billion in 755 deals, compared with $12.8 billion in 547 issues.

For Illinois, issuance jumped 31% year to date through July from one year earlier. That amounts to $10.5 billion in 349 deals, against almost $8 billion on 262 issues.

Florida rounded out the top five through the first seven months of 2012, switching positions with Pennsylvania, which placed sixth over the period. Issuers in the Sunshine State floated $9.1 billion in 122 deals. That compares with $6.8 billion it issued in 117 deals through the first seven months of 2011.

Issuers in Puerto Rico pushed the borrower to eighth place through the first seven months of 2012, compared with 14th place during the same period in 2011. Volume climbed 182% in the territory, to $7.6 billion in 11 deals, against $2.7 billion in 10 deals through July 2011.

Two deals weighed in at more than $1 billion in July, with a third falling short by a shade. On July 18, Illinois issued $1.47 billion of general-purpose bonds.

One day earlier, The Dormitory Authority of the State of New York auctioned $1.13 billion of tax-exempt and taxable bonds. The University of California Regents issued $999.7 million of tax-exempt and taxable new-money and refunding bonds.



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