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New York State Helps Northeast Volume Surge in First Half

Municipal bond issuance increased in every Northeast state and commonwealth in the first half of 2012, with regional volume up 63% from the same period last year.

Issuers sold a total of $59.3 billion of debt this year through June, compared to $36.4 billion for the same period last year, according to Thomson Reuters.

As usual, New York issuers led the Northeast, accounting for about 43% of total issuance in the region. With $25 billion of debt, the Empire State not only leads the region, but its issuers have also sold more debt than any other state in the nation, including California, where they issued $22.3 billion.

Before 2011, when New York took the number one spot, California had been the nation’s leading debt issuer.

“Generally speaking, the top four states have usually been where the population is the greatest. So you’re going to see California, New York, Illinois and Texas go back in forth in terms of which one is issuing the most debt and that obviously has to do with the population and infrastructure needs,” said Michael Pietronico, who manages about $770 million of municipal bonds as chief executive officer at Miller Tabak Asset Management.

The reason for New York taking the lead could be attributed, simply, to timing, he said.

For example, New York may have greater infrastructure needs right now, compared to what’s going on in other states.

“New York’s economy is doing reasonably well and their needs have always been substantial. I would imagine that at some point, California is going to overtake them strongly,” Pietronico added.

The amount of debt issued in New York increased by 73% from the first half of 2011, outpacing the broader market, which saw a total increase of 65%.

New York Comptroller Thomas DiNapoli views the state’s top position with concern.

“The state is uncomfortably close to the statutory debt limit, partly because of excessive use of debt in past years and partly because of current economic conditions,” said Eric Sumberg, a spokesperson for the Comptroller’s Office.

Many of New York’s top issuers are state agencies, which account for almost half of the state’s debt. State agencies have sold around $12.3 billion of bonds for the first half of the year, according to Thomson — a 119% increase.

With record low interest rates, the increase in volume has been largely boosted by refundings. Nationwide, refundings have increased 145% since last year. New York issuers have outpaced that amount with a 151% increase.

This is likely because New York has some of the most advanced issuers and they are taking advantage of market conditions more so than other states, said Chris Ryon, manager of municipal bond portfolios at Thornburg Investment Management.

“New York issuers are typically some of the most sophisticated issuers in the market,” Ryon said. “We are at historic lows of interest rates, so a great deal of the issuance you’re seeing coming out of New York is termed, refunding deals.”

In the region as a whole, refundings totaled $24.6 billion, up 142% from last year.

June Matte, a Boston-based managing director at Public Financial Management Inc., said that refundings, while significant, are not the only activity.

“We’re seeing — particularly at the local level — folks layering some new money as they’re going to market. So it’s both new money and refundings that are sustaining the market,” Matte said.

New-money issuance in the Northeast totaled $24 billion, up 21.8% from last year. Combined new money and refunding totaled $10.8 billion.

PFM, credited with 184 issues that total $11.2 billion, was the top financial advisor in the Northeast in the first half.

“We’re very proud of that and happy for those results,” said James Haddon, managing director at PFM in New York. “It’s definitely a total team effort from our PFM colleagues around the country.”

The Government Development Bank for Puerto Rico, which acts as financial advisor for Puerto Rico and its issuers, was ranked second, with 10 issues totaling $7.6 billion. Lamont Financial Services Corp. was the third top financial advisor with 32 issues, totaling $5.9 billion.

In New York, specifically, PFM has worked on 16 issues, totaling $4.5 billion so far this year, ranking it second in the state behind Lamont..

“We have continued to grow as our clients in the Northeast market — particularly New York City and Nassau County — have all come to the market to take advantage of these low interest rates as well as to borrow to support their annual capital spending,” Haddon said.

In New York City, PFM is financial advisor for the Transitional Finance Authority, which has come to the market with five issues this year, totaling $1.9 billion.

PFM has also been financial advisor for the region’s top issuer, the Dormitory Authority of the State of New York, which has sold $3.9 billion in 22 issues. DASNY is also the top issuer in the nation.

“We have a lot of activity because our platform is so inclusive,” said DASNY’s president and chief executive officer, Paul Williams.

The agency is a primary vehicle for New York, its public entities and private not-for-profits in health care and higher education to access capital for major projects at the lowest possible cost.

“All of those dollars that we issue — whether they’re for the state or for private not-for-profit borrowers — are going into projects that are then employing workers to build those projects, and ultimately people to fill those buildings up,” Williams said. “We feel very much a part of New York State’s economic development platform.”

DASNY issued the second-largest individual deal in the region with $1.8 billion of personal income tax refunding bonds in June.

Proceeds from the bonds were used to refund various series of New York State-supported debt, including bonds for the Metropolitan Transportation Authority, the Empire State Development Corp. and state universities.

Even taking into account the volume of refundings this year, DASNY’s issuance has been pretty consistent with past years, Williams said.

“Generally speaking, our volume is split roughly in half — for state-related issuance and the private, not-for-profit issuance,” he said.

Since 2008, when Williams started working at DASNY, issuance has typically been between $5 billion and $7 billion a year.

Other top issuers in the region were New York City with $3.3 billion, the MTA with $2.8 billion and Puerto Rico with $2.7 billion..

Puerto Rico had the largest deal in the Northeast, a $2.3 billion general obligation refunding in March, which was the nation’s second-biggest deal of the first half.

The deal would not have earned its number-one spot if it hadn’t been upsized from the expected $1.5 billion, due to high demand. Puerto Rico’s bonds are typically attractive to investors due to their high yields and triple tax-exemption.

The commonwealth’s ratings are lower than any state with Baa1, BBB and BBB-plus ratings from Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, respectively.

The sectors that saw the most debt issuance in the region were general purpose, with $21.3 billion, and education, with $11.2 billion.

“There are more heavy repairs and rebuilding that need to be done,” said John Hallacy, head of municipal research at Bank of America Merrill Lynch. “Tearing down existing substandard infrastructure and rebuilding the new is a very great focus.”

Hallacy also noted a shift in structure that began last year.

“It’s mostly fixed-rate,” he said. “There is some experimentation going on with floating-rate notes, but the vast majority of issuance has come as fixed rate.”

About 93% of the region’s total issuance consisted of fixed-rate bonds. The issuance of long-term variable rate bonds decreased by 88% since last year to a mere $37 million.

B of A Merrill was the top underwriter for the region by volume, credited with $11.4 billion in 63 issues.

JPMorgan took second place, with just over $6 billion, and Citi took third, at a hair under $6 billion.

Hawkins Delafield & Wood LLP topped the bond counsel table, with $9 billion in 116 issues. Sidley Austin LLP worked on 20 issues totaling $5.8 billion, and Nixon Peabody LLP worked on 30, totaling $5.7 billion.

Bond volume was up throughout the Northeast.

“In New England, in some ways, the region was not hurt as much as others in the recession, so we’re starting to see communities beginning to come back to the market in a more robust way,” Matte said.

Vermont saw the greatest increase in volume in the region, as well as the nation — up a whopping 766% from last year’s $47.3 million.

Pennsylvania saw the region’s third-largest bond volume behind New York and Puerto Rico, with $6.4 billion.

New Jersey issuers sold more than $5.2 billion of debt.

Massachusetts saw the lowest volume increase in the Northeast; Its $5.2 billion first-half volume was a modest 7.9% increase from last year’s.

Its largest deal was $766 million of sales tax refunding bonds for the Massachusetts School Building Authority.

Connecticut issuers sold $3.1 billion of municipal bonds.

Matte said that the level of activity right now versus what it was last year is hugely different.

“Whether it’s being fueled by refundings or fueled by the fact that communities in this area are beginning to recover, it’s hard to say, but there is definitely a feeling that the second half of the year is going to be very busy,” she said.

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