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Volume Growth Affected Sectors Unevenly

A rising tide of municipal bond volume did not raise all bond sectors in 2012.

In a year that saw 30.7% growth in overall volume in par value from 2011, two sectors contracted. Five other sectors saw vigorous growth from about 20% to 30%. Three others exploded at rates from 37% to 67%.

Transportation led the pack, climbing 66.8% to $54.9 billion in 2012 from $32.9 billion in 2011 (see related story elsewhere in this supplement). However, it was still down 17.9% from $66.9 billion. What explains this rollercoaster?

The Build America Bond program was expiring in 2010. Many transportation issuers advanced bonds that would have otherwise been sold in 2011 and 2012 to take advantage of the program, said Fitch Ratings managing director Mike McDermott.

Things were slow in 2011 for three reasons, he said. First, some of the bonds had been advanced.

Second, airlines were reducing flights to make sure the ones they did have were more thoroughly booked. As a result some airports deferred construction projects, which meant they were selling fewer bonds.

Third, some airports received federal stimulus grants for runway projects, which also contributed to airports selling fewer bonds.

Transportation bond issuance jumped in 2012 because airports did a lot of refundings, McDermott said. The toll road arena also saw an uptick of deals, some of which were public-private partnerships.

McDermott said he thought in 2013 there would be more toll road deals. On the other hand, airports should cut their issuance a bit, he said. There might be an uptick in airport rental car facility bonding, which is usually a mix of alternative minimum tax and tax-free munis, he said.

The utilities sector, which excludes autonomous electric power utilities, showed the second largest growth. It grew 44% to $45.7 billion in 2012 from $31.7 billion in 2011 — a return to the level of 2010, which saw $44.6 billion issued.

Most of the sector consists of water and wastewater utilities, though it also includes combined utilities, natural gas utilities, telecommunications utilities, and others.

The Puerto Rico Aqueduct and Sewer Authority sold the biggest issue in this area, $1.8 billion on Feb. 15. The Texas Municipal Gas Acquisition & Supply Corp. issued the area’s second largest issue, $1.4 billion.

The high level in 2010 was probably skewed upwards by Build America Bonds issuance, said Ted Chapman, a senior analyst of the Standard & Poor’s infrastructure group, speaking about water and wastewater issuance.

The jump in 2012 was probably mainly due to increased refunding volume, he said.

At the end of February 2013, the U.S. Environmental Protection Agency will release a once every four year report on capital project needs for water systems. Chapman expects it to show needs in excess of $330 billion, adding, “I think that will bring some headline attention to the needs of the sector.”

Chapman expects water and sewer bond issuance to increase in the second half of 2013. For the year he expects a total between the 2011 and 2012 figures.

“The large increase in water-sewer issuance for 2012 is largely due to issuers taking advantage of lower rates through refunding, getting out of variable-rate debt through either refunding or issuing fixed-rate debt, and addressing deferred capital improvements that were placed on hold during the economic downturn,” said Moody’s vice president Ted Damutz.

“There has also been more discussion of staying ahead of forthcoming [Environmental Protection Agency] requirements; for example, many water-sewer systems have been moving to chloramine disinfection enhancements to their systems to improve water quality.”

The public facilities sector saw the third-fastest growth, growing by 37.4% from 2011 in par value.

Health care volume jumped 30.1% to 2012 from 2011. “We definitely had a very busy year,” said Emily Wong, Fitch Ratings senior director.

Most of the increase was refinancings, according to Wong. The entire credit spectrum was active.

So far the current year is off to a slow start, she said, adding that it is unclear where things are headed.

Electric power issuance increased 28.7% from the level of 2011, but was still down 51.6% from the 2010 level.

The pattern from 2010 to 2011 to 2012 is not “terribly surprising,” said Fitch managing director Dennis Pidherny. Back in 2010 electric utilities were building a wave of new generator facilities, including new coal-fired generators. Also some of the issuance was connected with two nuclear plants under construction.

Most of the increase in electricity issuance this year was probably refunding, Pidherny said. There has not been much new construction.

Because of the economic downturn, electricity demand either declined or stabilized since 2009, he said. There’s now excess generating capacity, except in Texas.

There were no new major projects started in 2012.

Pidherny said he expected this paucity of big new projects will continue in 2013 and thus there will be little new money issued.

In recent months electricity demand has been picking up, but remains sluggish, wrote Standard & Poor’s primary credit analyst Jeffrey Panger.

Housing was up a modest 19% from 2011. Yet even at about $11 billion in 2012, it was still down sharply from its peak of $30.8 billion in 2006.

Very low interest rates have caused state housing agencies to cut their issuance, said Fitch senior director Charles Giordano. The agencies’ borrowing costs is so close to the prevailing mortgage rate that they do not have an advantage, he said.

Instead, the agencies are issuing direct pass-throughs (types of mortgage-backed securities) backed by Fannie Mae, Freddie Mac or Ginnea Mae. They are making about 10 to 50 basis points, far less than the roughly 100 basis points they used to make.

The low interest rates are making the financing of apartment building construction advantageous, he said.

The main reason issuance was up in 2012 was that the agencies are taking advantage of the low interest rate environment to refinance their debt, he said.

Once interest rates go up, the agencies will issue more bonds, Giordano said.

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