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Refis Continue as January Volume Climbs

JAN 31, 2013 5:41pm ET
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It’s a new year, but talk of municipal bond issuance still revolves around the same subject: refundings.

Monthly Data

Long-term muni bond volume for January jumped 39% over the same period one year earlier. The market saw issuance of $24.2 billion in 777 deals last month, compared with $17.4 billion in 723 issues in January 2012, Thomson Reuters numbers showed.

But refinancings — and advanced refundings, in particular — stood out among the numbers, muni watchers noted. In fact, both new-money and refunding deals were up for the month.

Refunding issuance climbed 35% last month to $10.8 billion in 392 issues from $8.0 billion in 389 deals in January 2012. New-money volume rose 34% for the month, to $9.1 billion in 314 issues from $6.8 billion in 277 issues. Combined new-money refunding volume, though, vaulted 64% last month, to $4.3 billion in 71 issues from $2.6 billion in 57 offerings.

Low interest rates continue to shape an environment where refi numbers will remain a significant part of the muni issuance equation. In this, January refunding numbers were no surprise, according to Michael Zezas, vice president of municipal bond research for Morgan Stanley

“The issuance increase is in line with the modest growth we expected this year,” he said. “The pickup in refundings is also expected given the number of in-the-money calls becoming current this year.”

The nature of the refundings could well change, said John Mousseau, a portfolio manager with Cumberland Advisors. While current refundings of older bonds comprised roughly half the issuance last year, he said there should be a lot of advanced refundings this year.

The market has already seen this in numbers for the end of December and the beginning of January. Then, participants started to do advance refunding deals with call dates out around two years, Mousseau said.

The thinking held that the negative arbitrage of selling munis and buying Treasuries was such that “it made more sense to lock in today’s rates, even if you made a little negative arbitrage in the first couple of years,” he said. “What you’re seeing now is they are pushing that envelope out; we’ve started to see some bonds in 17 and 18 calls start to get advanced refunded.”

Beyond refundings, tax-exempt issuance rose 25% last month over one year earlier. But taxable volume catapulted 160% to $3.7 billion in 69 deals against $1.4 billion in 56 issues in January 2012.

Negotiated issuance rose 58% in January against the same month in 2012, while competitive volume increased just 6% over the same period. Revenue bond issuance proved more popular than for general obligation bonds. Volume for the revenue bonds climbed 63% last month versus the same period in 2012; GO issuance rose 16%.

Issuance of fixed-rate debt also proved far more popular among municipalities last month than the variable-rate variety. Fixed-rate volume rose 41% in January against the same month in 2012.

By comparison, variable-rate short put volume plunged 82% last month compared with January 2012. And there was no variable-rate long put or no put issuance last month, against one deal for $1.0 million in January 2012.

The largest issuing sectors of the market reported mixed results for January, compared with one year earlier. Education issuance increased 51%, to $8.7 billion from $5.7 billion in January 2012. General purpose volume climbed 23% last month, to $5.5 billion from $4.4 billion in January 2012. Transportation deals jumped almost 200%, to $4.1 billion from $1.4 billion one year earlier.

By contrast, monthly volume for electric power, health care and utilities sectors fell 49%, 3% and 46%, respectively, from the same period in 2012.

Among the largest government sectors, state agencies witnessed a 122% increase in issuance last month over the same period in 2012, rising to $8.3 billion from $3.7 billion. Issuance from districts weighed in about 10% higher than in January 2012, to $4.6 billion from $4.2 billion one year earlier.

For their part, direct issuers saw the biggest jump in issuance in all categories, a Mighty Mouse-level 18,708% boost to $1.6 billion in six deals last year from $8.4 million in one issue in January 2012.

Topsy-turvy numbers distinguished issuance among states in January. California led the way, jumping from fourth place over the same period in 2012 on a 79% increase in volume. Issuers in the Golden State floated $2.48 billion of debt in 49 deals last month, compared with $1.38 billion in 40 issues a year earlier.

On the back of the month’s biggest deal, New Jersey leapfrogged from 14th place to second last month with a 469% increase in volume. The Garden State issued $2.45 billion in 20 deals in January, against $431 million in 33 issues one year earlier.

Ohio — yes, Ohio — placed third last month, after coming in 15th one year earlier. Issuance in the Buckeye State rocketed almost 500% in January, to $2.37 billion in 28 deals, versus $397 million in 14 issues this time last year.

New York issuance placed fourth in January, jumping 56% over the same period one year earlier. Issuers in the Empire State floated $2.25 billion in 38 deals, compared with $1.44 billion in 39 issues.

Washington rounded out the top five, on a 52% increase in volume in January. The Evergreen State issued $1.72 billion in 24 deals last month, against $1.13 billion in nine issues a year earlier. Texas, which ranked first this time last year, fell to seventh place on 8% less issuance from the year before.

As mentioned, the month’s largest deal hailed from an issuer in New Jersey, one of three that crossed the $1 billion mark in January. The New Jersey Economic Development Authority on Jan. 23 floated $2.25 billion of taxable and tax-exempt refunding bonds for schools.

On the same day, the state of Washington followed with almost $1.4 billion in various purpose new-money and refunding GOs in a competitive offer. JobsOhio Beverage System issued $1.11 billion of economic development taxable bonds on Jan. 29.

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