Note volume declined by 3.1% in the first half of 2015 as state and local government finances continued to strengthen, decreasing their reliance on short-term borrowing needs, municipal analysts said.
"More conservative budgetary assumptions are being incorporated into issuers' financial profiles and a meaningful effort is being made to bolster reserve balances," said Jeffrey Lipton, managing director and head of municipal research and strategy at Oppenheimer & Co.
"A number of issuers that perhaps needed to access the note market over the past two years are in better credit shape and are not necessarily pressed to pursue cash flow financing," Lipton said.
Issuance of short-term notes — those maturing in less than 13 months — fell to $15.72 billion among 1,117 issues as of mid-year, compared with $16.22 billion over 1,170 issues over the same time frame in 2014, according to Thomson Reuters data.
Revenues in California and Texas were so strong the states each canceled large note sales. Texas for the first time in nearly three decades canceled a planned tax and revenue anticipation note sale due to the adoption of a biennial budget with spending below revenue projections. California also will not need to issue revenue anticipation notes this year for the first time since 2000 because of its stout balance sheet.
For many, the need for short-term borrowing simply declined while finances and credit increased in the first half, analysts noted.
"Credits are definitely getting stronger — with the exception of Puerto Rico — and good evidence of that is note issuance," said Phil Fischer, head of municipal bond research at Bank of America Merrill Lynch.
"The decline in the outstanding stock of notes is one of the best barometers of the health of state and local finances," Fischer said.
January kicked off with a 17.1% decline as $1.17 billion of notes were issued among 128 deals, down from $1.41 billion over 150 deals in the first half of 2014. Meanwhile, June ended with $7.45 billion of note issuance among 382 deals, a 13.6% decline from the $8.63 billion issued among 381 deals at mid-year in 2014.
April was one month that saw a sharp increase, however, as issuance jumped 40.1% to $1.80 billion in 153 deals from $1.29 billion in 146 transactions.
"There are those issuers that continue to pursue fiscal austerity measures and have chosen to prioritize capital needs and balance debt issuance against, for example, pension funding requirements, which tend to crowd out other expenditure items," Lipton added.
Local authorities, for instance, trimmed their exposure to note issuance by 42.4% in the first half of 2015 to $560.8 million in 36 deals, from 42 deals totaling $974.1 million a year earlier, while cities and towns saw a 15.5% increase in note issuance to $7.14 billion over 733 sales. While the amount was higher than the $6.18 billion in the first half of 2014, the number of deals fell from the 744 issued in 2014.
Among the sectors, transportation showed a noticeable decline, dropping 55.3% to $262.9 million over 23 deals, from $588.2 million over 28 deals, while electric power soared to $215.8 million and seven transactions from $5.0 million in four deals.
Lipton said short-term cash flow borrowing usually rises during periods of greater financial stress, when budgetary flexibility and the ability to manage interim shortfalls become limited. That is the case with Illinois, where its widely publicized financial problems caused note issuance to increase to $30.6 million among 14 issues, up from $14.8 million in 16 issues in 2014.
Overall, many other categories of note issuance declined across the board.
Taxable note issuance fell by 60.8% as volume declined to $452.2 million in 23 deals from $1.15 billion over 79 deals. Refunding volume also suffered, dropping by 76.9% in the first half to $171.7 million in 11 deals, from 15 deals in the first half of 2014 totaling $742 million.
Issuance of notes with standby purchase agreements fell to zero from one deal in the first half of 2014, when a single note deal totaled $150 million. At the same time, issuance of linked-rate notes dropped 83.3% to $49.9 million in two deals, down from five deals totaling $299.4 million.
"We also think that part of the story has been the ability to lock in attractive long-term rates, with longer-term borrowings ahead of a Federal Reserve Board tightening sequence," Lipton said.
New-money note issuance — the highest of any segment of the note market in the first half — remained virtually unchanged with $15.54 billion issued among 1,103 deals, compared with $15.48 billion over 1,155 financings in 2014's opening half.
Tax-exempt note issuance had the second highest volume but did not much of an increase. In the first half of this year, $15.23 billion was issued over 1,053 deals, compared with 1,090 deals totaling $15.06 billion a year ago.
