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Trend in the Region

Far West Volume Falls Like the Rest

SAN FRANCISCO — As goes California, so goes the Far West. Sales by municipal bond issuers in the region fell more than a third in 2011 from 2010.

Far West Annual Review

Far West issuers sold less than $53 billion of bonds last year, down 39%, according to Thomson Reuters. The total is the lowest since 2001, when $51.2 billion was issued.

As usual, California issuers led the Far West with $35.4 billion in volume from 741 sales. The volume decline of 42% in California drove the regional fall-off.

California state issuance dropped 53% to $4.9 billion in 2011, from $10.5 billion in 2010. The state set a municipal market record by selling more than $23 billion in 2009. Last year it was only the third-largest issuer in the country.

“The main causes are very obvious. California still has a structural budget deficit problem and the state has shifted the burden to local governments,” said Bud Byrnes, chief executive officer of Los Angeles-based RH Investment Corp., a broker-dealer specializing in California municipal bonds. “This is real-life belt-tightening that we haven’t seen in many years. There is going to be less issuance of debt because of a restricted ability to pay.”

Local authorities in California cut issuances by 62.7% last year from 2010, to $7.7 billion, while districts issued 25.5% less debt over the same period, according to Thomson Reuters.

On the state level, Gov. Jerry Brown has also made it a priority to tackle what he calls the state’s “wall of debt,” including the percentage of the general fund dedicated to debt service. The administration has been pushing departments to use unspent bond proceeds, if possible, before selling new bonds.

The downward trend is expected to continue, with state budget plans calling for the issuance of about $5.2 billion of new-money general obligation bonds in 2012.

Over the last 10 years, California has issued $87 billion of GOs. From 2007 through 2010, it sold $53.8 billion, according to Thomson Reuters.

Last year, the state skipped its annual spring bond sale for the first time since at least 1988.

The drop-off in Far West issuance also reflects the demise of the taxable Build America Bonds program.

In 2010, taxable bond issuance represented more than 43% of Far West volume, as issuers went to market before the year-end expiration of the BAB program, which offered a 35% federal subsidy to issuers on taxable interest rates as an alternative to tax-exempt issuance.

In 2011, taxable municipal bond issuance fell 86% in the region.

“If you pull out the BABs, you are going to see the issuance really dropped off in 2010,” Byrnes said.

Education was the largest sector recorded in Thomson’s Far West data, with $12.6 billion in issuance, which was down 27.7% year-over-year. Transportation issuance fell 63.5% from 2010 to $5.7 billion.

Regional refunding volume increased 28.2% to $19.1 billion as issuers sought to take advantage of lower interest rates in the market starved by a lack of supply. New-money sales fell 64.9% to $21.6 billion.

Bank of America Merrill Lynch topped Citi for first place in the Far West league table for senior managers, credited with almost $8.4 billion in volume, with Citi second and JPMorgan third.

Public Resources Advisory Group topped the region’s financial adviser chart, ahead of Public Financial Management.

Orrick, Herrington & Sutcliffe LLP retained its accustomed position atop the bond counsel rankings, credited with 35% market share.

Washington had the second-largest presence in the Far West, as issuers there sold $8.4 billion of municipal bonds through 191 deals, a 32% decrease from 2010. The state’s electric power sector dropped 40% to $1.7 billion, while transportation debt sales fell 50% to $1.1 billion, and education was off 43.6% to $1.1 billion.

Citi held the top senior manager spot in Washington, while Seattle-Northwest Securities Corp. remained the top-ranked financial adviser. Foster Pepper PLLC stayed the top bond counsel.

In Oregon, muni volume decreased 26.2% to $2.8 billion, while the number of issues fell to 113 from 143. Volume in the housing sector dropped 85% to $42 million, though education issuance rose 33% to $785 million.

A big bond sale at the end of the year — the region’s third largest — bolstered Hawaii’s numbers, though volume there was still down 21.7% from 2010, to $2.3 billion.

Hawaii’s combined new-money and refunding issue of $1.3 billion in November came after the state stayed out of the market for more than a year and a half.

The state typically issues GOs twice a year to pay for infrastructure costs, but had not issued bonds since February 2010, said finance director Kalbert Young, in order to reduce debt service costs in 2011.

The state needed to replenish the bond fund, he said.

“We were enthused by the buyer interest in Hawaii bonds, and the amount of retail interest as well as institutional interest the bonds received,” Young said.

Despite some trepidation about the size of the sale, the results were gratifying.

“Even though the market had a low level of supply, there was also evidence of waning appetite in the overall market to be able to digest that large of an issue,” Young said

Hawaii plans to issue more GOs later in the year, he said.

The two largest deals in the region in 2011 were California GO sales, topped by a $2.4 billion issue in September.

Nevada experienced the steepest volume decline, dropping by 55.8% to $1.7 billion.

“A big driver of our bond volume was growth that required new schools, roads, and all those infrastructure projects that growth propels,” said John O. Swendseid, a Reno attorney with Swendseid & Stern, the Nevada arm of Denver-based law firm Sherman & Howard LLC. “We didn’t see the growth in 2011.”

When the economy crashed, Nevada fell hard, with one of the largest home foreclosure waves in the country.

The state’s counties and cities did capitalize on good ratings to conduct refundings in 2011, however, Swendseid said.

Alaska was the only state in the Far West to buck the trend of declining volume, with activity up 47.6% to $1.4 billion.

Idaho experienced a 32.3% decline in bond issuance in 2011 to $517 million.

“Volume is already significantly higher in 2012,” said Eric Heringer, a financial advisor in the Boise, Idaho, office of Seattle-Northwest. “For the most part, volume last year was refinancings and not a whole lot of new money.”

The new issues Heringer has been seeing this year are almost exclusively refundings too, he said.

Wyoming volume was down 41.6% to $209.5 million.

Montana volume was down 71.1% to $202.3 million, after the expiration of the BAB program.

“Projects were frontloaded into that,” said Kreg Jones, managing director of fixed-income capital markets in the Great Falls, Mont. office of D.A. Davidson & Co. “It was also the effect of the recession, which had states and counties watching their budgets more closely.”

It could be a different story in 2012, however, as his firm is starting to see a spate of current refunding activity, Jones said.

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