LOS ANGELES — The GOP tax bills' threat to the municipal bond industry means an uncertain future for the market's professionals, except for the guarantee of long hours this December.
The House and Senate tax bills remain in flux, but contain provisions that would end advance refundings and, in the House bill, wipe out private activity bonds, taking down a large segment of the muni market.
That's created a rush by issuers to get as much of that debt out the door as they can before the end-of-year deadline written into the tax bill. Once Jan. 1 hits, the future is less clear.
The House and Senate versions of the bills are different enough to make it tough for muni-focused firms to gauge what the potential fallout could be.
“I really think workforce issues for all muni market participants cannot occur until after a bill passes, if one does, so the damage, if any, can be assessed,” said Howard Zucker, a partner with Hawkins Delafield & Wood LLP.
“Despite the uncertainty, general business still seems to be moving forward as usual on the recruiting side of my desk,” said Erin Rose Baggott, of Denver-based Executive Search Placements, which serves the municipal bond industry.
“Both our clients and their bankers are in the usual rush to close deals before the end of the year, while continuing to seek out new talent for expansions in 2018 despite happenings on the Hill,” Baggott said.
Threats to private activity bonds and advance refundings have issuers who were planning to sell bonds in first quarter 2018 working to price those deals before the end of the year.
Issuance isn’t expected to surpass the $54.7 billion hit in December 1985, before the last major tax proposal to impact the muni market, but it could soar to $45 billion, Alan Schankel, managing director and municipal strategist at Janney,
Partners at San Francisco-based Jones Hall, where the practice centers on bond finance, are expecting to spend a lot more time at the office during the typically slow holiday week, said Dave Walton, a partner in the firm’s tax practice.
Walton remembers what it was like in 1985 when tax reform placed a sunset on industrial development bonds.
“It was unbelievably busy. People were working 18-hour days and working Christmas Eve, so they could close deals between Christmas and New Year’s Eve,” Walton said. “There weren’t enough hours in the day or people to do it.”
Jones Hall hasn’t told associates to cancel any holiday vacation plans, but the firm’s lawyers have been told that if they are available they should minimize their time away.
“Most people here have families and we are sensitive,” Walton said. “But, like the farmers say, you have to make hay while the sun shines. None of the partners are heading to Hawaii for vacation; it will be Christmas in San Francisco this year.”
Come January, there could be plenty of opportunities to take time off, Walton said.
Usually the week before Christmas and New Year’s is dead, said James Wawrzyniak, a Jones Halls partner.
“We usually have an agreement among the partners that someone will come into the office that week,” Walton said. “But the old guys like me, we have seen it before in 1985.”
When the tax bill passed in 1985, though the industrial development bonds were slated to sunset on Dec. 31, 1985, it took until August 1986 for the impact to be felt, Walton said.
“When Congress finally passed the Tax Reform Act of 1986, the effective date was in August, but we didn’t know that most of the year, so everything was up in the air.”
“They could amend the bills to say they are effective upon passage,” Walton said. “But I’m not holding my breath.”
Broker-dealer Stifel underwrote as sole or senior manager 65 issues last December and the firm is “looking at a 40% increase with our calendar to-date looking to year-end,” said Stephen Heaney, director of public finance.
“You have to take a step back and guess which tax bill is going to come out, because you have certain issues with the House bill and certain issues with the Senate bill,” Heaney said.
Both bills would ban tax-exempt stadium bonds and advance refundings and lower the corporate tax rate from 35% to 20%. The House bill would scrap private activity bonds.
“With the lower corporate tax rate, you have the potential for decline in demand, but the elimination of advance refundings and stadiums would result in a decline in supply,” Heaney said.
Stifel had already been anticipating a decline in refundings for the next couple of years, because of the furious pace of refundings over the past several years, he said.
With that in mind, Stifel has been less likely to take on a lot of new people, Heaney said.
The broker-dealer, which focuses on mid-market and small to mid-size issuers, does see opportunities for growth, but primarily by adding to its public finance footprint outside of California.
“We have California pretty well covered with both people and offices,” Heaney said.
The national firm has 140 bankers in 28 offices across the country, he said.
“We added two bankers in Pennsylvania this year. Those two bankers enable us to cover Pennsylvania and New Jersey and down south, but if you look at that market it’s larger than having two people to do the kind of banking that Stifel does,” Heaney said.
A shift to new money issuance could fill part of the gap if refunding volume falls off.
“We have bankers who focus on mid-size issuers, general government and school districts,” Heaney said. “Those bankers focus on those issuers, and have relationships with those issuers, and they would work with them whether they do refundings or new money issuances.”
He added that Stifel has seen an uptick in new money issuance this year that it expects to continue, particularly if the economic climate remains stable.
Jones Hall added two new partners in 2016 and two more this year, Walton said.
“We are growing,” Walton said. “Obviously, if business drops way off, things could change, but I don’t see that happening in our practice, because the vast majority of what we do is governmental.”
Jones Hall works with state and local governments on general obligation and revenue bond issuance. It doesn’t do a lot of work involving the private activity bonds threatened in the House bill.
“I think we are going to see a dip in work for everybody in the first quarter or first half of next year while these issues get sorted out; and it will be worse for some firms than others,” Walton said.
Firms that do a lot of 501(c)3 hospital work will be hit hard if the House bill passes and PABs are gone, Walton said. Non-profit hospital networks are large financial corporations and issue a lot of debt and do a lot of refinancings, he said.
“The loss of tax exemption could put a real dent for people with that kind of practice,” Walton said. “We at Jones Hall have no plans to lay off anybody or to hold off on promoting anybody.”
Orrick, Herrington & Sutcliffe, the highest-volume bond counsel firm, “is positioned well,” said Justin Cooper, a partner in the San Francisco office.
“Orrick is lucky to have a very large public finance group that is multi-generational from junior to senior partners,” Cooper said. “We are active in every sector of the municipal bond market.”
The law firm’s practice includes every category of municipal bond law work including trustee, he said.
“We would obviously prefer that H.R. 1 not pass in its current form,” Cooper said. “It would mean some loss of business in the short and medium term.”
While the 1986 tax bill resulted in a contraction in the market, Cooper said, Orrick came out of it stronger than before.
“In 1985, Orrick had a small business in San Francisco, but by 1995 it had offices in Los Angeles, New York and San Francisco,” he said.
Orrick Public Finance has promoted 12 or 13 people to partners through internal promotion since 2006, he said.
“We are hiring out of law schools, promoting people to partners, then they become star partners,” Cooper said.
“The talent engine is the key to our business,” he said.
“I think we are positioned well,” Cooper said. “If we don’t get a serious overhaul, we are well positioned, but if we get one, we are positioned to build on our market share even in a contracting market.”
The last time California had major infrastructure investment was under Pat Brown, who was governor from 1959 to 1967, Cooper said, so there is a lot that needs to be repaired and rebuilt in addition to all the new construction needed. The state is headed toward having a population totaling more than 50 million people, he said.
“There is no way government can meet those needs without borrowing, so there will be a public finance business,” he said.
