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Southwest Volume Rebounds on Refunding

FEB 11, 2013 5:13pm ET
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DALLAS — Outpacing the rest of the nation, the Southwest saw bond volume rebound 53% to $64.5 billion in 2012, according to Thomson Reuters data, with prospects for continued stability in the current year.

Southwest Annual Review

“We really anticipate, short of some drastic change in interest rates, a copy of 2012,” said Jack Addams, the head of public finance for First Southwest Co. “Volume ought to be in the same range.”

Coming off an 11-year low in 2011, issuance across the eight-state region rose by healthy percentages in every quarter but still fell short of the $66.56 billion issued in 2010, when Build America Bonds were available.

Colorado notched the strongest growth on a percentage basis, with volume rising nearly 92% to $8.4 billion, followed by Arkansas up 74% to $2.6 billion, Texas gaining 65% to $38.6 billion, and Kansas up 41% to $3.4 billion.

Utah’s volume grew 22% to $3.1 billion, while Arizona’s rebounded nearly 17% to $4.99 billion.

Only two states, New Mexico and Oklahoma, bucked the trend, with volume down 1.6% and 11.9%, respectively.

Nationally, bond volume increased 30% to $373 billion from $288 billion in 2011, according to Thomson Reuters.

With interest rates near record lows amid a steady economic recovery, refundings in the Southwest increased by more than 83%, compared to 72% growth nationally.

Dallas-Fort Worth International Airport, the year’s largest issuer with $2.5 billion, achieved net present-value savings of $212 million on a record $1.35 billion of refundings, according to Mike Phemister, vice president for treasury management at DFW.

The low rates also helped the airport lower finance costs for its $2 billion Terminal Renewal and Improvement Program with issuance of $1.17 billion of new-money debt.

“We believe that interest rates will stay low through 2013 and that Congress will not pass any retroactive tax reform affecting the municipal market,” Phemister said.

That outlook is prompting the airport to accelerate about $1 billion of bonds for its terminal remodeling program that it had originally planned to issue in 2014 and 2015, Phemister said. The airport is remodeling its four original terminals opened in 1974.

The large series of issues from DFW was a boon for First Southwest Co. and Estrada Hinojosa & Co., ranked number one and two, respectively, by volume as financial advisor services in the Southwest region.

First Southwest saw its business grow by about 30% in the year, according to Addams.

Michael Bartolotta, vice chairman of First Southwest, said bond issues for 2012 were well-distributed across all sectors, with notable issuance among airports and water utilities.

That’s reflected in the year’s data, with the housing sector the only one in the region with a decline, by 0.5%. Environmental facilities bond volume grew by 245%, the largest on a percentage basis, to $514.7 million.

Noe Hinojosa Jr., chief executive and co-founder of Estrada Hinojosa & Co., said he thinks calls for refundings may last another 18 months. Early call dates have saved issuers millions of dollars in the wake of the financial markets’ plunge in 2008.

For the year, Estrada Hinojosa was credited with 75 issues worth $4.9 billion to rank second as advisors behind the region’s perennial leader First Southwest, which had 466 deals worth $13.4 billion.

“For us, it was a spectacular year, the best since 2010,” Hinojosa said.

Behind DFW among the top issuers were San Antonio, with 10 deals worth $1.9 billion, Houston with $1.66 billion in 10 deals, and the Texas Municipal Gas Acquisition and Supply Corp. III with the largest single deal valued at $1.395 billion.

Bank of America Merrill Lynch was the top underwriter by volume with 66 deals worth $6.98 billion. BofAML’s 11.3% share of the market edged out JPMorgan Securities, which captured 10.1% on 45 issues worth $6.24 billion. Right behind them was RBC Capital Markets with 10% of the market on 201 deals valued at $6.2 billion.

RBC ranked second in the number of offerings behind Raymond James | Morgan Keegan, which had 225 that totaled $3.39 billion.

In par value, Raymond James ranked sixth, behind No. 4 Citi at $4.2 billion and No. 5 Barclays at $3.59 billion.

The bond counsel rankings were altered with the exit of Vinson & Elkins from public finance at the end of 2011, at which point members of that practice moved to Bracewell & Giuliani, which took the fifth spot in the rankings with 104 deals valued at $3.87 billion.

McCall, Parkhurst & Horton retained its top spot with $10.4 billion and nearly 17% of the market in the Southwest.

Fulbright & Jaworski’s $9.5 billion of deals kept it solidly in second place with 15.4% of the market, followed by Kutak Rock’s $4.48 billion and Andrews Kurth’s $4.3 billion.

Texas’ $38.2 billion of volume in 1,354 bond issues kept the Lone Star State in third place nationally behind New York’s $48.7 billion and California’s $41.6 billion.

Development, electric power and public facilities provided the largest boost to issuance. Deals backed by insurance increased nearly 25% to $1.83 billion, over 288 issues.

The Arizona Board of Regents issued the largest amount of debt at $535 million, followed by the Arizona Health Facilities Authority’s $532 million. The Grand Canyon state’s big push came in the first half of the year, followed by a drop in the second half.

Debt issues in Arkansas rose to $2.65 billion in 287 sales from $1.5 billion in 200 sales in 2011. Sales were almost equally split between general obligation bonds, which totaled $1.3 billion, and the $1.35 billion of revenue bonds issued in 2012.

The largest sale during the year was September’s competitive sale by the state of $225 million of grant anticipation revenue vehicle bonds authorized by voters in November 2011.

In Colorado, Denver was the largest issuer with nine deals valued at $1.07 billion, making it the Southwest’s largest issuer outside Texas.

Neighboring Kansas saw education issues more than double from 2011 to $1.1 billion.

The Kansas Development Finance Authority, which issues debt for many state agencies, edged the Kansas Department of Transportation as top issuer. The KDFA sold $499.1 million of bonds in 10 sales, with KDOT issuing a total of $496.3 million in three tranches.

The New Mexico Finance Authority, which was sidelined for much of the year by an auditing scandal, still managed to rank first among issuers in that state with two deals worth $244.7 million.

Oklahoma registered the Southwest’s largest drop in volume, falling to $2.26 billion in 334 sales from $2.56 billion in the 2011.

State agency issuance was off almost 50%, at $682 million.

Ever-conservative Utah saw almost half its debt for 2012 issued in a $1.5 billion fourth quarter.

The Utah Board of Regents was the state’s largest issuer, accounting for 20% of the volume with nearly $639 million from five issues.

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A recent phenomenon is the emergence of bonds with shorter call protection as funding alternatives for municipalities. However, the shorter call protection also dampens the potential upside for investors, which in turn reduces the price they are willing to pay.

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