2015 Year-End Muni Volume is Highest in Five Years

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Municipal bond volume fell for a fourth straight month in December, ending the year on a low note, with the past four months being the only ones in 2015 to show year-over-year declines in volume.

Monthly Volume

Long-term municipal bond issuance fell 43.4% to $22.19 billion in 886 transactions from $39.19 billion in 1,078 transactions in December 2014, according to Thomson Reuters data. That brings the 2015 volume total to $397.7 billion -- significantly higher than the $339 billion and $334 billion of the past two years and the highest figure since 2010, but falling just shy of the elusive $400 billion plateau.

Back in the summer, many market participants predicted volume would exceed $400 billion, something that has happened rarely and has not occurred since 2010. However, December volume posted the smallest total of any month this year, leaving 2015's total just short of the mark. Still, munis will finish the year with the highest issuance since 2010, when the record of $433.27 billion was set.

"Yes, it is disappointing that we did not reach the $400 billion mark," said Sean Carney, director and head of municipal strategy at BlackRock. "But think about what happened through April and even the first half of the year, when we saw issuance well above historical patterns. The reality was we would never able to sustain that pace."

That became evident as the year went on. Volume was up 67% quarter-over-quarter over the first three months of the year, 30.3% the second quarter and 17.4% the third quarter. Volume then fell 24.2% quarter-over-quarter during the last three months.

"Supply was outpacing demand in the beginning months of the year and we had front-heavy issuance because of the rates and all of the talk about the Fed. The end of this year we experienced the opposite, as we saw pull-forward issuance where issuance has dropped off and demand has increased," said Carney.

Refundings have now declined in five of the past six months, plummeting 55.2% to $7.06 billion in 346 deals in December from $15.75 billion in 468 deals a year earlier.

New money issuance dropped 14.4% to $11.24 billion in 481 transactions from $13.14 billion in 516 transactions a year earlier.

Carney also believes that new-money borrowing should increase in 2016, even though market experts have been saying this for some time to no avail.

"Each year we get further removed from the recession, the more willing issuers are to take on new debt, and we saw good acceptance at the ballots in November. I think we see a pickup in new-money issuance as the year goes on," said Carney .

Tom Kozlik, managing director and municipal strategist at PNC Capital Markets said he believes new-money will continue to be in the $150-$175 billion range.

"Many of the metrics that drive the municipal market are still not or are just over the 2007 peak," said Kozlik. "The new money amount will stay around where it has been. Revenues are what drives new money and the revenue side is not rising at the pace it was in 2001-2007."

Kozlik said that credit quality will fall for issuers who have not accepted and adjusted to the new fiscal reality.

"Some issuers are raising fees in order to increase revenue but that's only a short-term solution. They can't keep on doing that forever," said Kozlik.

Issuance of revenue bonds fell 38.6% to $15.68 billion, while general obligation bond sales dropped 52.3% to $6.51 billion.

Negotiated deals were down 51.1% to $14.54 billion and competitive sales decreased by 10.2% to $5.63 billion.

Taxable bond volume was 43.6% lower to $1.44 billion from $2.56 billion, while tax-exempt issuance declined by 42.5% to $20.30 billion. Minimum tax bonds declined to $449 million from $1.29 million.

Bond insurance declined for the fourth time in five months, as the par amount of deals with guarantees slipped 5.1% to $1.76 billion in 132 deals from $1.85 billion in 142 deals in December 2014.

The infrequently used zero-coupon bonds were one of the few categories that saw improvement in December year over year, nearly doubling to $234 million from $118 million. Letters of credit also improved, increasing 4.8% to $256 million from $245 million.

Development was the only sector to see growth this past month compared to last December, jumping up 31.6% to $1.10 billion in 29 deals from $837 million in 50 deals. All of the other sectors saw at least a 30% drop off, with the exception of housing which fell 16.3%.

Colleges and universities saw a 45.2% increase to $886 million from $611 million, while all other types of issuers saw at least a 22.8% decrease.

With 2015 in the books, it is no surprise that California had the most bond sales for states, defending its title from last year. The top five state issuers have been the same for most of the year, with not much changing: Texas, New York, Florida, and Pennsylvania round out the top five.

The Golden State kept the top spot with $54.02 billion of issuance in 2015, up from its 2014 total of $47.37 billion – good for a 14% increase year over year.

The Lone Star State saw a 12.4% increase to $46.27 billion from $41.15 billion. The Empire State notched a 14.1% uptick to $42.80 billion from $37.52 billion. The Sunshine State vaulted 46.9% to $20.57 billion from $14.01 billion and the Keystone State was up 64.8% to $17.78 billion from $10.79 billion.

Looking ahead to the new year, Carney believes that the second half of 2015 will be similar to 2016 and that Fed will have fewer hikes than the four the market is currently pricing in.

"The Fed might hike twice or three times but regardless we don't think it will affect the muni market," Carney said. "If anything, it will actually help because the long end of the curve or belly will flatten, as any hike will have a bigger impact on the front end, the shorter maturities," said Carney.

Kozlik's prediction for 2016 to similar to the one he had for 2015 that didn't exactly come to fruition. Kozlik said that more than likely refunding levels will fall with rising interest rates but what hasn't been getting attention is new money and he feels as though it should be on people's minds.

"Credit quality is not as great as people think it is. Issuers are concerned about their credit quality," said Kozlik. "Issuers want to keep flexibility in their budget and issuing debt is the opposite of that. There will need to be more activity on the revenue side in order for new money to grow."

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