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Southeast Recoups Volume Loss; Benefits From Low Refunding Rates

BRADENTON, Fla. - Municipal bond issuance in the Southeast in the first half of the year was up by 57% to $34 billion.

As much of the region continues to lag in recovering from the economic downturn, new-money bonds were up only 18% in the first six months while refundings increased by 106% to $16.5 billion, according to Thomson Reuters.

Though slow-growing revenues and property assessments have stunted bond sales for capital needs the past few years, there is a silver lining in the current low-interest rate environment, according to market participants.

Refinancing outstanding debt has provided abnormally large savings - for some issuers as much as three times over the typical 4% threshold for refundings - and that has helped stabilize budgets and increase future bonding capacity for pent-up needs, they said.

Issuance was up in every state in the Southeast, with most of the debt coming to market in the second quarter.

Georgia, North Carolina and Tennessee issued more new-money bonds than they refunded, statistic show. In the remaining eight states in the region, refundings increased an average of 400%.

The highest amount was debt sold for general purposes with $8.5 billion, up by more than half over last year. The category included more than $1.3 billion in new-money sales by Florida's Citizens Property Insurance.

Southeastern issuers also focused on selling bonds for educational purposes with $8.2 billion in sales, up 40%. Transportation and utilities bond sales were $4.6 billion each and up by 92% and 101%, respectively.

Throughout the region issuers preferred selling by negotiation, which was up by 81%, and issuing tax-exempt paper, up by nearly 70%.

Though they mostly sold revenue bonds with $23 billion in volume, general obligation bond sales were up 80% to $11 billion. Private placements were down 79% to $174 million.

While most bond issues have been refundings this year, some local governments are beginning to discuss undertaking new projects, said David Moore, managing director at Public Financial Management Inc., the top financial advisory firm in the Southeast with 83 deals and $7.3 billion of sales this year.

Though tax-exempt interest rates have bounced off lows in recent days, Moore said rates remain attractive for issuers.

"I talked with our offices around the South and each has significant refundings in the queue, and some new money," he said. And there is a light at the end of the tunnel for more new-money deals. "I think we are going to continue to see focus on big infrastructure," Moore added. "There are a lot of pent-up transportation needs."

He also believes there will be more discussion of pension bond issues nationwide, "and the South is not going to be immune to that," Moore said.

Though big new-money deals may be scarce right now in the Southeast, he said future financings may be aided by the focus on refinancings.

"Never in my career have rates been so low that refundings really had a material impact on the operating budget," Moore said. "The upside of the ongoing recession is that it's enabling corporations and governments to reduce debt service so much that it is rippling into operating budgets or creating capacity for new projects."

Florida maintained the top spot in the region, selling the most paper in the first half with $7.7 billion.

At the state level, most legislatively authorized new debt has been issued, and the focus has been largely on refundings for savings.

Since January 2011, the triple-A rated state has refinanced nearly $2.9 billion of outstanding debt, resulting in savings of $536 million, officials said.

Virginia issuers increased sales by 168% to $6 billion. That made the state the second-largest issuer in the first six months of 2012. Overall totals in Virginia were aided by the state's sale of $1.56 billion of bonds for its aggressive transportation program.

Public Resources Advisory Group, which advised on the state's transportation deals, maintained its place as the No. 2 financial advisory firm in the Southeast with $3.1 billion in transactions.

Georgia, typically the second-largest issuing state in the region, dropped to third place in the first half with $4.3 billion of sales, up 20.6%. Of that amount, the state sold $737 million of general obligation bonds in June for colleges and other capital needs.

The state of Louisiana sold the most bonds in aggregate with $1.8 billion in five transactions, which was more than any other single issuer in the region. Statewide, issuers increased volume by more than 65% in the first half of 2012, with $2.38 billion in 45 sales.

Much of Louisiana's increased activity came from refunding tranches, which totaled $1.8 billion compared to $574.6 million of new-money issues, including two large state refundings in the first half of 2012.

Treasurer John Kennedy said more can be expected before the end of the year.

"The state is trying to take advantage of historically low interest rates, and I'm pushing very hard to get all our local governments to do the same," Kennedy said. "I don't know how long the rates will stay low, but when they start going up we'll not see rates this low in our lifetime."

Louisiana state and local governments have realized net present-value savings of about $150 million from refundings approved by the State Bond Commission so far in 2012, he said.

The state refunded $803 million of fuels tax bonds in May and $567.7 million of general obligation bonds in June. A new money tranche of $443.7 million was sold in March for the state's capital outlay effort.

Deals by the state of Louisiana propelled its adviser, Lamont Financial Services Corp., to become the third-ranked financial advisory firm in the region with $1.9 billion in volume. First Southwest Co. held the third spot as adviser last year. It ranked fifth for the first half of this year.

Kennedy said the state does have a new money deal on tap later this year, and plans to sell about $340 million of the 20-year road bonds that have been authorized by the Legislature to fund the first phase of a program to upgrade state roads in rural parishes.

"We're trying to structure it so that as many of the bonds as possible can be issued now while rates are low," he said. "We may have to issue some of them in a draw-down mode, but we need to get as many of the $340 million sold as soon as is possible."

There were no surprises in the positions of senior managers compared to the first six months of last year, except the amount of transactions sold throughout the region.

Citi, which declined to comment on maintaining its rank as the top senior manager, worked on $6.4 billion of deals in 62 issues for a market share of 18.9%. Last year, the firm won the top spot with $3.8 billion of deals.

JPMorgan kept the second senior managing slot with $5.3 billion and a market share of 15.6%. Last year, the bank worked on $3.2 billion in sales.

Bank of America Merrill Lynch doubled its efforts this year to maintain the third spot with transactions totaling $4.7 billion. That was up from $2.4 billion last year.

Firms serving as bond counsel did some repositioning in the first half of this year, and increased their work as well.

McGuireWoods LLP rose from fourth place last year to become the top bond counsel this year advising on $2.6 billion of deals. Last year, the firm worked on $1.4 billion in transactions.

Squire Sanders LLP moved to second place, from first last year, with $2.2 billion of deals.

King & Spalding dropped to third place this year, from second last year, advising on $2.2 billion of offerings.

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