Issuance Growth Varied Widely Between Sectors in 2015

The many sectors and subsectors of municipal bonds experienced widely varied rates of growth or decline in 2015.

Total muni volume was up 19% from 2014 by par value, according to Thomson Reuters data. By comparison, most sectors diverged substantially from this value: development was down 5%, education was up 47%, electric power was up 43%, environment was down 24%, general purpose was up 10%, health care was up 34%, housing was up 27%, public facilities was up 5%, transportation was down 11%, and utilities was up 8%.

The sectors with the biggest principal amounts of issuance were education with $126.7 billion, general purpose with $93.3 billion, transportation with $48.1 billion, utilities with $41.2 billion, health care with $34.4 billion, and electric power with $17.4 billion.

In both percent increase and dollar increase ($40 billion), education expanded more than any other sector in 2015. The increase came after years of low investment, said Phil Fischer, head of municipal bond research at Bank of America Merrill Lynch. Education is a government priority.

"The universe of refundable bonds was larger in the education sector versus other sectors and it looks like the issuers took advantage of the low rate environment," said Citi head of municipal strategy Vikram Rai.

Since many municipal bonds have 10-year call features and there was a $28 billion jump in education volume from 2004 to 2005, this contributed to the sector's increase this year, said Wells Fargo Securities managing director Natalie Cohen.

The increase in education volume may be due to efforts to upgrade school facilities with up-to-date technology, said Evercore director of municipal research Howard Cure.

The first half of the year saw 56% of all muni volume. The same half in the education sector had 63% of all education volume sold. Cohen mentioned a California Regents bond for $2.4 billion as affecting the balance. Cohen also said the low interest rates at the start of the year contributed to the sectors' increased refundings. Indeed, while refunding volume was up 29% for the muni market, it was up 47% in the education sector.

In 2015 in the education sector districts had a 37% increase and local authorities had an 85% increase. "I think many states have cut both operating and capital allocations to local school districts, which often require schools to rely more and more on their own resources to deal with growth or deferred maintenance," Cure said.

Electricity and health care increases were spurred by 89% and 37% increases, respectively, in refunding volumes, Fischer said. The sectors' refundings surged in the first half because what previously high spreads came down substantially in this period.

Heath care was another strong sector, seeing a 34% increase. The sector's growth was spread unevenly in bond types, with new money down 14%, refunding up 37%, and combined up by 125%, by par value. These health care bond types had $8.8 billion, $14.2 billion, and $11.3 billion of volume, respectively.

The health care sector was up primarily because of the growth in refundings, Cohen said. "In my opinion, healthcare issuance was heavier in the first half for several reasons, including cyclicality, good market conditions, a desire to get ahead of anticipated Fed rate hikes, an interest in getting ahead of the Supreme Court's decision on King v. Burwell (hospitals), and capitalizing on strong investor interest in health care bonds due to favorable fiscal year 2014 financial performance trends driven by higher patient volumes (hospitals) or occupancy rates (long-term care)," Cohen wrote in an email.

The housing sector did not follow the wider municipal pattern with increased refunding. Whereas new issuance was up 49%, refunding was down 7%. "New money issuance was likely up because lots of the Housing Finance Agencies are utilizing bond financing instead of selling their loans as a mortgage backed securities portfolio as they did in the past," Rai said.

In the transportation sector airport muni bond volume was up 33% while toll roads, highways, and streets volume was down 28%.

The increase in airports volume may be due to "improving financial conditions of airlines and an increase in enplanements and the need for airport expansions or maintenance," Cure said. An improving economy has led to people having more money to spend on air travel.

To explain the increase in airport bond volume, Cohen cited the large capital programs of O'Hare, Los Angeles, and Louis Armstrong New Orleans international airports. She also mentioned refundings as a factor.

As for the decline in toll roads and highways volume, Cure said, "I think part of the problem had been the uncertainty around the federal highway trust fund and a stable funding source. With the recent five-year renewal, as opposed to short-term authorization, there is more certainty around funding. I would suspect you will see an increase in issuance for toll roads and highway purposes for this year."

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