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Note Issuance in 2012 Mirrors Prior Year's Pace

The steady but flat volume of note offerings that carried over into 2012 from the previous year was largely sustained by a shift in issuance patterns among municipalities.

The disappearance of smaller issuers thatdecided to curtail their debt last year, or lock in the historically low interest rates in the long-term market, were offset by deal flow from larger municipalities that typically rely on the short term for cash-flow borrowing.

As a result, total note issuance was virtually unchanged at $60.46 billion in 2,924 issues, versus $60.64 billion in 2,901 issues in 2011 — a decrease of merely 0.3%, according to new data from Thomson Reuters.

Many large issuers sold the same or more note debt throughout the year. “But a lot of local governments had less need for cash-flow borrowing, which equaled the flat volume,” observed Alan Schankel, managing director of municipal strategy and research at Janney Montgomery Scott in Philadelphia.

Richard Ciccarone, chief executive officer at McDonnell Investment Management LLC in Oakbrook Terrace, Ill., agreed, noting that “as revenues improved for governments and enterprises in 2012, there was diminished demand for working capital.”

“With absolute long-term rates at or near the lows of the last 40 years, issuers were more inclined to lock in lower borrowing rates and less likely to take haven in the short-term markets to reduce costs — even though short-term rates were next to nothing,” Ciccarone added.

Schankel observed that many smaller municipalities scaled back their note issuance to reduce their liabilities, but that was offset by the larger issuers that made their usual appearances last year.

For instance, he said that New Jersey was one “headline” issuer that remained a strong fixture in 2012’s short-term market, selling $2.6 billion of general obligation notes in November, the third largest note deal of the year and one of three deals issued by the state in 2012 totaling $4.7 billion. It also came on the heels of New Jersey note sales of $2.15 billion in 2011 and $2.25 billion in 2010.

California led the market with the largest note deal of the year: a $10 billion GO financing that was priced by JPMorgan and Wells Fargo Securities in August 2012. The deal was $800 million shy of the combined total of two note deals issued in 2011. Meanwhile, Texas issued $9.8 billion of competitive GO debt in August, the same amount it sold in 2011.

Overall, the imbalance between small and large issuers could be explained by the 3.7% decline in general-purpose note issuance to $44.14 billion via 1,711 issues from $45.84 billion among 1,612 issues,

“In general in 2012, municipalities and states were borrowing to plug cash-flow holes that were created in 2009 and 2010,” Schankel said. “Issuance was down slightly, which reflected that some smaller states and local governments were getting their houses in shape and tightening things up,” he said.

The scaling back contributed to a two-year decline in overall note issuance from $65 billion in 2010, he added.

“Normally, you would expect note issuance to correlate somewhat with the annual increases in state and local budgets,” said John Hallacy, managing director of muni research at Bank of America Merrill Lynch. “But the level of cash-flow imbalances is the greater determinant. These imbalances were reduced due to modest revenue growth and budgetary restraint.”

Meanwhile, like the industry total, both tax-exempt and new-money note issuance remained barely unchanged over 2011’s levels.

New-money deals held at $60.01 billion from 2,873 issues, a mere 0.05% decline following $60.326 billion in 2,875 issues the year before.

Tax-exempt issuance far outpaced that of taxable note sales and remained steady for the second consecutive year, posting $59.09 billion from 2,752 issues in 2012 on the heels of $59.56 billion from 2,757 issues in 2011. By way of comparison, taxable notes rose just 5.3% to 168 issues totaling $1.108 billion, up from 139 issues totaling $1.053 billion in 2011.

The largest 12-month decrease in 2012 came in September, when issuance dropped 62% to $3.33 billion from 270 issues, following $8.77 billion from 282 deals in 2011. February saw the largest increase as issuance jumped 116.3% to $2.765 billion from 177 deals, versus $1.278 billion among 162 issues.

Herman Charbonneau, executive vice president and manager of public finance at Roosevelt & Cross Inc., said the volume of notes sold in the market does not appear to be strongly influenced by the level of rates. Issuers, large and small, took advantage of the historically low interest rates that were prevalent in 2012, as refunding debt rose 73.1% to $372.8 million from 41 issues, up from $215.4 million from 23 issues in 2011.

“Bond anticipation financing is probably more influenced by the shape of the yield curve than the level of short-term rates,” Charbonneau added. “Very low long-term rates will probably induce more bond financing and inhibit an increase in note volume even if short rates begin to approach zero.”

Meanwhile, among other notable trends in 2012, both the flat overall volume and continued strong demand caused spread compression between A-rated and lower-rated notes, Schankel said. “There was strong demand for the issuers in small communities with good underlying financials and no rating — that’s where the yields came down.”

Meanwhile, yields on higher-rated debt stayed relatively unchanged, he noted.

“While demand was elevated in 2012, versus 2011, there were a lot more people bidding on notes and more spread compression,” he added.

Schankel said there were no meaningful trends elsewhere throughout the short-term note market last year. Even the 166.5% jump in health care note issuance to $251.6 million from 12 deals was too insignificant to make much of a contrast to the $94.4 million from seven issues in 2011.

He said the same was true for the bond insurance sector, which grew by 299%. The two note offerings in 2012 only increased its total to $41.1 million, up from one deal issued in 2011 totaling $10.3 million.

Meanwhile, some sectors didn’t just decline in 2012 — they saw a total drop in note issuance to zero. But Schankel again said most of the movements were of little importance because those sectors posted relatively low issuance in 2011.

He noted that the housing sector made no trips to the note market last year after selling only two issues in 2011 totaling a scant $69 million.

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