At $28.7 billion, the tax-exempt market for the region barely surpassed the $28.6 billion volume of the first half of 2009, when the muni market was hard-hit by the recession, but dramatically improved on 2011’s decade low of $17.8 billion, according to data from Thomson Reuters.
A year ago, municipal bond volume was down 35% year-over-year and would remain in the cellar for the rest of the year in the wake of the expiration of the Build America Bond program at the end of 2010.
Low volume and high demand for muni debt drove interest rates to record lows, creating opportunities for issuers to lower their borrowing costs. Refunding deals increased 151%.
Houston and Dallas-Fort Worth airports sold the fourth and fifth largest deals of the first half with nearly $1 billion of refunding bonds combined.
In the second half of the year, Dallas-Fort Worth International Airport plans nearly $1 billion more of refunding while it also raises new money for its $2 billion terminal renovation program.
“We had to take advantage of the historic low interest rates,” said Michael Phemister, vice president for treasury services at DFW. “It was also a good opportunity for new money. I think people are seeing the same things we’re seeing. If you have refundings to do, you do them. We don’t believe anyone ever sold long-term AMT as cheaply as we did this last time.”
In that July deal, early in the second half, the airport sold $475 million of bonds subject to the alternative minimum tax and drew a true interest cost of 4.75% and a yield to 9-year call of 4%. The issue was three times oversubscribed, Phemister said.
In the first half of the year, issuers and bankers had to factor the loss of the triple-A rating for the United States by Standard & Poor’s brought on by political stalemate in Washington between Republicans and President Obama. The downgrade affected some ratings of issuers that were highly dependent on the federal government, but generally the impact was muted.
In the second half of the year, the presidential and congressional elections are expected to clarify political trends. In Texas, the largest state in the Southwest, local governments are asking voters for more than $4 billion of bond authority after three years of austerity amid continuing growth.
Local leaders are hoping that the anti-tax and anti-government mood that gave Republicans control of the U.S. House in 2010 will make room for debt to build schools, roads, sewers and other infrastructure. The Houston Independent School District is seeking approval for a $1.9 billion issue, the largest in the history of Texas schools.
“You’ve got a number of factors at play — low interest rates, concern about debt and taxes, and you’ve also got tremendous growth,” said Sherri Greenberg, director of the Center for Politics and Governance at the LBJ School of Public Affairs at the University of Texas at Austin. “You’re trying to balance all of that.”
In keeping with the slogan that “all politics is local,” Greenberg believes that approval of bond proposals in November will vary from community to community.
“You may find individuals who are very anti-tax at the federal level but support projects at the local level,” she said.
Greenberg, whose specialty is public finance, said she does not expect a rush to market with new bonds approved in November. However, if the project is ready for funding and interest rates remain low, issuers will probably tap into that cheaper source of debt, she said.
Ben Brooks, head of the public finance group for bond counsel firm Bracewell & Giuliani, said he does not anticipate a rush to market based on fears of rising rates.
“There’s nothing on the horizon that indicates that rates are going to go up,” Brooks said. “But it’s also unlikely that they are going to go lower.”
Among all categories of bonds in the Southwest region, those issued for public power increased by the highest percentage in the first half, up 863%.
The city of San Antonio’s CPS Energy utility played a major role, with the first- and third-largest deals for the six-month period. On May 23, San Antonio refunded $655 million of debt, just three months after a $521 million taxable issue for new money.
The CPS Energy deals helped propel San Antonio to the status of the Southwest’s top bond issuer in the first half of 2012, credited with $1.56 billion in debt.
Arizona’s Salt River Project issued another sizeable electric-power refunding of $236 million. Among the eight states in the region, Arizona saw the largest increase in volume, up nearly 120% to $3.47 billion. Colorado’s $3.75 billion represented an 86% increase, followed by Arkansas at 83% to $1.29 billion.
Kansas issuance rose nearly 80% to $1.28 billion, followed by Texas’ 65% increase to $16.17 billion and Oklahoma’s 12.5% increase to $1.32 billion.
Unlike most states in the region, new- money issuance actually increased in Oklahoma, with $903.4 million in 238 issues, for a 2% increase from 2011. But there was also a 316% increase in Oklahoma refunding deals, to $220.9 million.
New-money volume was also up in Kansas and Colorado.
Two states in the Southwest had lower bond volume than in the nadir of 2011.
In triple-A-rated Utah volume was down 30% to $988.5 million, and New Mexico’s $463 million represented a 10.3% drop.
RBC Capital Markets, No. 2 in the 2011 mid-year stats, bumped Citi out of the top spot among senior managers in the region in this year’s first half.
RBC’s $2.57 billion of deals provided a 9% market share, edging out Bank of America Merrill Lynch’s $2.45 billion and 8.7% share. Citi fell to fourth, behind JPMorgan. Raymond James | Morgan Keegan rounded out the top five.
First Southwest Co. retained its top ranking among financial advisors with $6.25 billion of deals, followed by RBC with $2.68 billion, Estrada Hinojosa & Co. with $1.64 billion, Public Financial Management with $1.18 billion and Southwest Securities at $1.09 billion.
McCall Parkhurst & Horton also retained its top spot among Southwest bond counsel, credited with $4.36 billion of volume for a 15.4% market share, followed by Fulbright & Jaworski at $3.7 billion and 13% share.
Vinson & Elkins, last year’s No. 2 bond counsel, dropped its public finance unit this year, with the team moving to Bracewell & Giuliani. Bracewell ranked fifth in the first half, behind Kutak Rock and Andrews Kurth.