Sell Side

Muni Bond Issuance Falls 13% in July

Long-term municipal bond volume fell 13% in July, hurt by rising interest rates and headline scares concerning Detroit's record bankruptcy filing and Chicago's downgrade.

Issuance dropped to $25.0 billion in 727 deals from $28.6 billion in 945 deals in July 2012, Thomson Reuters numbers showed. For the year to date, volume has dipped 10% to $200.8 billion in 7,123 deals from $224.1 billion in 7,939 issues.

Pronounced falloffs in refundings and taxable muni issuance contributed to the overall decline for July as bond sales decreased for most large sectors and state and local governments.

A dramatic rise in yields since the start of May strongly affected issuance, market watchers said. The 10-year, triple-A tax-exempt yield has jumped 101 basis points over the period to 2.67%, Municipal Market Data numbers show. The two-year rate has climbed 14 basis points to 0.43%, while the 30-year has rocketed 141 basis points to 4.20%.

The industry's woes worsened on July 18, when Detroit filed for what would be the largest municipal bankruptcy ever, with more than $18 billion in debt, and Moody's Investors Service cut Chicago's debt three notches to A3 after legislators failed to take sufficient action on its unfunded pension liabilities.

Refundings, which had powered a large jump in volume throughout 2012, plunged 49% in July from a year earlier, to $5.5 billion in 149 issues from $10.9 billion in 411 deals.

The sharp decline didn't surprise Sean Carney, BlackRock muni strategist.

"So, 10-year benchmark muni yields are higher by almost 100 basis points," he said. "The question becomes: how does this correction affect second-half supply on an absolute and, more importantly, on a net basis?"

Refundings have dropped 22% over the first seven months of the year, to $76.2 billion in 3,044 issues from $98.0 billion in 3,918 deals.

New-money deals climbed 15% this past month to $15.6 billion in 506 deals against $13.5 billion in 445 issues in July 2012.

For the year to date, new-money volume has ticked up 3% to $86.1 billion in 3,388 deals from $83.7 billion in 3,325 issues.

Taxable volume fell for the second straight month; it had been strong this year through June.

In July, taxable issuance declined 55%, to $1.6 billion from $3.5 billion one year earlier. Through July, taxable issuance has still climbed 59%.

Tax-exempt volume slipped 7% last month, to $22.5 billion from $24.0 billion in July 2012. Volume aside, the number of tax-exempt deals on the year has plunged, making each issue larger.

The average size of a tax-exempt issue grew 20% last month compared with one year earlier, and 31% from the average deal size during the first half of 2013. That has made paper harder to source for tax-exempt investors such as Duane McAllister, co-manager of the BMO intermediate tax free fund at BMO Global Asset Management U.S.

"For guys like me, it's hard to get the kind of size you want to buy, whether it's the state of Illinois that came or even Tuesday's Ohio Turnpike," McAllister said. "Everyone rushes in and you're 10 times oversubscribed, and it's hard to get the kind of allocation you're hoping for."

Negotiated volume shrank 3% last month to $20.1 billion from $20.7 billion. Competitive issuance contracted 23% to $4.7 billion from $6.2 billion.

Volume for revenue bonds fell 18% in July to $16.4 billion from almost $20.0 billion one year earlier. Issuance for general obligation debt July-over-July remained flat, at $8.7 billion.

Fixed-rate volume dropped 8% this past month. Variable-rate short-put issuance slowed 9%, while variable-rate long- or no-put issuance vaulted 91%, to $540 million from $283 million.

Zero-coupon issuance also soared 102% July-over-July to $166 million from $82 million.

Among the largest-issuing sectors, only transportation posted volume increases last month. Transportation issuance climbed 97% to $7.6 billion from $3.9 billion. Issuers of education, general purpose and utilities credits last month saw declines of 30%, 28% and 26%, respectively, from July 2012.

Bond insurance volume also saw its first appreciable climb in recent memory, rising 32% to $851 million from $647 million.

"A slight uptick in bond insurance leaves one to ponder whether this is a direct effect of higher rates," BlackRock's Carney said, "or does it coincide with modestly greater issuance within the smaller, less-frequent local authorities."

July volume numbers painted a mixed picture for state and local government issuers. Issuance for local authorities, districts and cities & towns climbed 26%, 1% and 15%, respectively. But state agencies issued 28% less in July than they did one year earlier, state governments 65% less and colleges and universities 100% less.

Issuers in California led all states with a 22% increase in volume from July 2012 numbers.

The Golden State jumped one spot from a year earlier on $31.4 billion in 530 issues from $25.7 billion in 448 deals.

Texas also jumped up one spot to second last month with 9% more issuance in July.

The Lone Star State issued almost $23.0 billion in 855 deals, against $21.0 billion in 782 issues a year earlier.

New York slipped two notches to third on 40% less in volume in July. The Empire State floated $17.4 billion in 422 issues versus $28.8 billion in 575 deals in July 2012.

New Jersey and Florida fill out the top five. The Garden State increased issuance in July 70% to $9.5 billion in 183 deals from $5.6 billion in 246 issues, leapfrogging from 12th place. The Sunshine State, holding its position on 9% less volume, issued $8.6 billion in 139 deals last month, against $9.4 billion in 128 issues in July 2012.

A deal for $2.92 billion of the Grand Parkway Transportation Corp. taxable and tax-exempt bonds on July 17 led all issues last month.

On July 24, the Bay Area Toll Authority in California followed by issuing $900 million in bonds.

The city and county of Denver floated $719.9 million of airport bonds that were subject to the alternative minimum tax as well as tax-exempt.

However, $1.1 billion of Ohio Turnpike and Infrastructure Commission revenue bonds that priced on Tuesday failed to make the reporting deadline for July numbers.

Still, it ranked as the second largest deal to reach the market last month.




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