New Money Spurs Volume in Midwest

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CHICAGO – The issuers of the Midwest sold $41 billion of municipal bonds in the first half of 2016, according to Thomson Reuters data.

2016 Midyear Midwest Statistics

New money borrowing spurred a 10.1% increase in issuance from the region compared to the first half of 2015, the biggest such boost in any region.

The increase was nearly divided between the first quarter and second half. The uptick mirrored a 10% gain in volume that marked the end of last year.

New money paper accounted for $18 billion of total issuance in 1,238 deals during the first half, growing at a healthy clip of 19% compared to the same period last year. Refundings dropped by 15.3% to $15 billion. Combined new money and refunding issues rose to $8 billion from $4.2 billion.

A year ago this time, new money had declined by 13.1% while refunding shot up 88%. The Midwest finished off 2015 with a 2.9% drop in new money and an overall refunding jump of 28.2%.

"There's plenty of infrastructure needs out there" that, coupled with an improved economy and low rates helped spur new money deals, said Richard Ciccarone, president of Merritt Research Services.

Still, Midwest borrowers remain conservative and low rates haven't drawn them into the market at the rate one might think because they remain sensitive to adding debt burdens and are reluctant to raise taxes, Ciccarone said.

Many local Midwest economies impacted by the recession only really started recovering in recent years and the greater stability could fuel investment in essential infrastructure needs.

"There is very strong demand for roads, streets, bridges, major capital infrastructure and transportation," said Diana Hamilton, president of Sycamore Advisors, ranked 10th in the Midwest among advisors.

Water and sewer is of big interest to governments right now, several market participants said. That's due to the needs of the sector and the heightened attention on clean water issues sparked by Flint's water contamination crisis.

Refundings have tapered off because the low interest environment has persisted long enough that many issuers have already refunded what they can. Others are waiting to pull the trigger when they suspect rates are headed up, market participants said.

"We have been in such a low-rate environment for a long period of time so really all of the advance refunding opportunities have been taken care of," Hamilton said. "People are just waiting for current refunding."

Advance refunding opportunities for some will be constrained because negative arbitrage on the escrows established to refund the outstanding debt when it becomes callable cuts into savings levels.

More debt carried insurance, a letter of credit, or some other guarantee but the amount coming from the Midwest with such backing remained modest with just $1.9 billion carrying insurance, $541 million carrying a LOC or standby purchase agreement, and $5.5 billion backed by some other form of a guarantee.

With long-term rates remaining at record or near record lows most of the region's debt -- $39.1 billion -- was sold using a fixed-rate structure.

Issuance in five Midwestern states – Illinois, Iowa, Minnesota, Ohio, and Wisconsin – picked up while issuance from the other six – Indiana, Michigan, Missouri, Nebraska, North Dakota, and South Dakota – tapered off.

Illinois-based borrowers led the pack offering $8.5 billion of debt in 392 deals and recorded the largest gain of 53.1%. Michigan, Ohio, and Wisconsin followed.

Districts retained their spot as the leading borrowers, rising by 7.2% to $12.3 billion. State agencies followed with $11.5 billion of issuance, up 12.1%.

Local government was mixed. While districts issued more as did cities and towns, borrowing among counties declined. Colleges and universities issued more during the first half of the year then they did last year.

Education-related borrowing remained the largest source of debt from the region, rising by 6.6% to $15.8 billion. General purpose bonding gained steam, displacing healthcare related bonds as the second biggest source with $7.5 billion sold for 32.9% increase. Healthcare declined by 1.8% to $6.4 billion.

Chicago led the pack as the region's largest issuer with $1.4 billion of borrowing that included GO and revenue-backed deals. The Wisconsin Health and Educational Facilities Authority followed at $1.2 billion.

WHEFA served as the conduit for the region's largest single transaction -- $1.02 billion of a $1.9 billion borrowing by Ascension Health Alliance in April. It was led by Morgan Stanley.

Alabama and Michigan conduits handled the remainder of the transaction.

Illinois was the second-largest issuer with $1.03 million, followed by the Illinois Finance Authority with $930 million and the Wisconsin Public Finance Authority with $919 million.

The Chicago Board of Education's $725 million sale in February that was led by JPMorgan and Barclays was the Midwest's second largest transaction of the first half. The deal was delayed a week and scaled down as the junk-rated district struggled to find buyers. The district is expected to return to the market during fiscal year 2017 tapping a portion of $945 million in borrowing authority the board is expected to approve Wednesday.

Ohio State University's $600 million March sale under a novel, $1 billion borrowing program was the third-largest transaction. The design gives the university structuring flexibility because it closely mirrors a corporate shelf registration program, allowing the university to move more nimbly when attractive market opportunities arise through June 30, 2017.

"From an investor perspective, the novel shelf offering structure was very well received," said Michael Papadakis, deputy chief financial officer, treasurer and vice president of Financial Services & Innovation at OSU.

Other larger deals from the region during the first half included Illinois' competitive sale of $550 million of GOs in June and its $480 million sale in January, and Chicago's $500 million deal in January.

The region will see a series of big deals boost second-half volume levels based on recent sales and ones in the pipeline.

Chicago has billion-dollar-plus new money and refunding GO and airport deals coming in the second half. Illinois is set to borrow $573 million of new money Thursday and the Illinois Finance Authority has a $500 million state revolving deal up next week.

The Great Lakes Water Authority is preparing its first bond issues since launching on Jan. 1, when it assumed Detroit's $5.5 billion water and sewer debt portfolio and took charge of regional water management. The authority expects to refund up to $600 million of sewage disposal system revenue bonds and will sell up to $1.13 billion of new money and refunding water supply system revenue bonds this fall.

Already since the second half started July 1, Wisconsin has brought $915 million in refunding bonds, Minnesota has sold $788 million of new money and refunding paper, and Presence Health Network has brought $1 billion of new money and refunding bonds.

Brian King, a managing director and head of public finance banking at Cabrera Capital Markets, said his firm has been busier than usual for the summer months responding to requests for proposals. "I think issuers want to be ready to jump into the market with refundings in case rates start to rise," he said.

Bank of America Merrill Lynch took the top spot among senior managers of Midwestern issuance, credited by Thomson Reuters with $5.6 billion of volume. Stifel Nicolaus followed with $3.3 billion, Morgan Stanley with $2.9 billion, JPMorgan with $2.63 billion, and Robert W. Baird & Co. with $2.6 billion. Citi, RBC Capital Markets, Barclays, Fifth Third Securities, and Piper Jaffray rounded out the top 10.

Last year BAML also led the region among senior managers in the first half, followed by JPMorgan. The latter ended up winning the top spot for 2015 followed closely by BAML.

Among advisors, Public Financial Management far outpaced its competitors advising on $8.1 billion. The firm was the top advisor for the first six months of last year and finished out 2015 easily in the top position.

In second among first-half FAs was Acacia Financial Group at $2.3 billion, followed by Kaufman Hall at $1.9 billion, Ehlers & Associates with $1.8 billion, and by Umbaugh with $1.5 billion.

Chapman & Cutler LLP also retained its top position among bond counsel, credited with $3.8 billion. Gilmore & Bell PC followed with $2.6 billion, then Ice Miller LLP with $2.5 billion, Thrun Law Firm with $2.2 billion, and Dorsey & Whitney LLP with $1.9 billion.

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