Sectors Grow At Faster Pace Than Overall Market

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Howard Cure, managing director and director of municipal research at Evercore Wealth Management LLC, speaks during the Bloomberg Cities & Debt Briefing 2010 at the Contemporary Jewish Museum in San Francisco, California, U.S., on Wednesday, March 10, 2010. State tax revenue in the U.S. fell for a record fifth straight quarter in the final three months of 2009, according to the Nelson A. Rockefeller Institute of Government, and local governments have struggled to erase the deficits that have emerged. Photographer: Tony Avelar/Bloomberg *** Local Caption *** Howard Cure

Backed by refunding volume driven by low interest rates, sector-by-sector issuance outpaced the growth in the overall municipal market in the first half of 2015.

Long-term bond issuance was up 44% from the first half of 2014, in par value. The biggest gains were electric power by 130%, education by 85%, and health care by 81%. On the downside, transportation shrank by 22%, health care by 20%, and public facilities by 15%.

In the first half "refundings worked to displace, at least in part, infrastructure financing," said Bank of America head of municipal bond research Phil Fischer.

"Refunding activity surged in most sectors: development, education, electric power, general purpose, healthcare, public facilities, transportation, and utilities." The respective refunding expansions by par value were 90%, 117%, 580%, 86%, 100%, 89%, 36%, and 79%.

Citi senior municipal strategist George Friedlander said the general rule was the longer the bond's initial maturity, the more likely it was to be ripe for refundings. Bonds that were eligible for short advanced refunding were also this way. When there were very low rates in the first few months of the year, some sectors whose bonds fit these bills were likely to be refunded, he said. These included electric power, hospital, and transportation revenue (though not transportation general obligation) bonds.

When rates were particularly low at the start of the year, some bonds past their call date and with fairly short periods to maturity became refundable, Friedlander said, noting education as an applicable sector.

Evercore director of municipal research Howard Cure said refundings may slow in response to projected rising interest rates. Friedlander, however, noted that this has already happened to an extent, causing refunding volume to dip 5.6% in July.

"Infrastructure deferral would be consistent with the decline in new-money issuance," Fischer said. "This happened in development, electric power, health care, public facilities, transportation and utilities."

Governments' restrained sale of new-money bonds for capital improvements stems from their desire to reduce debt levels, Cure said.

Friedlander noted that, along with a concern about debt capacity, governments also had a political aversion to taking on new debt.

Friedlander said these factors helped explain shifts in the transportation sector, where refunding volume was up 36% but new money declined 44%. These factors also explained why airport issuance was down 18% and the toll roads, highways, and streets subsector was down 34%, he said.

"Issuance of airport bonds may be down since many bonds in this sector are issued subject to the alternative minimum tax, which cannot be advance refunded," Cure said.

"I think in the toll roads, highways and street issuance sector, a decline in issuance is particularly due to concerns over the renewal of the federal gas tax and questions about the reliability of federal funding to support these programs," Cure said.

Cure explained the health care sector's 81% expansion by saying, "there is steady demand for hospital revenue bonds since they offer higher yields than many other sectors. Hospital systems are trying to take advantage of this demand."

Cure continued, "The sector also has capital demands particularly for upgrades to technology to address recording keeping required by the federal government and the Affordable Care Act. Also, through recent court decisions, there seems to be less likelihood of repealing the Affordable Care Act, which provides more stability to the sector."

While there was an overall 44% rate of growth in the first half, several subsectors experienced either much more or much less growth.

In the electric power sector, state agencies issuance increased 212% and district issuance grew 525%. In health care, counties and parishes issuance expanded by 223% and district volume went up 271%. In utilities, counties and parishes' subsector grew by 374%.

On the other hand, in the transportation sector, local authorities' issuance declined 37%.

Some of these subsector shifts may have had real reasons while others may have just been due to random factors, Friedlander said.

 

 

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