LOS ANGELES — Far West issuers sold $48.3 billion of municipal bonds in the first half of 2015, a 70% increase from the first six months of 2014 that was driven by refundings.
First quarter sales set the pace with a 130% increase to $24.9 million, but robust second quarter sales also produced a 32.3% increase over 2014 numbers to $23.4 billion, according to Thomson Reuters data.
The Far West bond market, as a whole, has experienced improved credit quality, but that is particularly true of California, so it is not surprising to see an increase in debt issuance coming after a period of reduced issuance, said Michael Johnson, Managing Partner, Co-CIO & Head of Research Gurtin Fixed Income Management, LLC.
California issuers sold $31.7 billion, up 56% over first half 2014, making the Golden State the nation's leading source of municipal bonds.
California state government also priced the largest municipal bond sale nationally on March 4 with a $1.9 billion general obligation sale, according to the Thomson Reuters data.
Refundings, not new money issuance, were the main driver in the California state government's issuance, which Johnson said likely came as a result of improving credit quality and the continued low interest rate environment.
"California is experiencing the best credit quality it has seen in more than a decade," he said.
The state currently holds ratings of A-plus, Aa3 and AA-minus from Fitch Ratings, Moody's Investor's Service, and Standard & Poor's, respectively.
The region's drop in new money bonds, down 13.5% to $11.8 billion, could be a result of refundings crowding out new money issuances, Johnson said.
Many issuers do not have the capacity to refund a significant quantity of debt and issue new money, so some issuers are temporarily putting aside new money needs, Johnson said. When interest rates rise and refunding savings decrease, it should result in an uptick in new money sales, he said.
According to H.D. Palmer, a California Department of Finance spokesman, if lease-revenue issuance is included for 2014, the state actually issued more new money bonds for infrastructure projects during the first half of 2014 than this year. During the first half of 2014, the state issued $2.4 billion of GOs and $1.2 billion in lease revenue bonds, for a total of $3.7 billion.
During its 2015 spring sale, it sold $3.2 billion in GO bonds, but $2.1 billion refunded old debt into better interest rates. Only $1.1 billion of GO sales were new money, though the state also issued $243 million of lease revenue bonds for a total of $1.3 billion issued for new infrastructure, Palmer said.
Bond sales have dropped compared to historic levels since Brown took office, partly because Brown wanted to reduce what he calls the state's mountain of debt. The governor's several-year mantra about tackling the state's "wall of debt," was related to budgetary debt for operational costs, not to issuing general obligation bonds to pay for infrastructure projects, Palmer said.
Brown also made a point of spending down bond proceeds before issuing new debt.
The state made the final of $929.7 million payment Aug. 5 on $15 billion in so-called "economic recovery bonds" authorized in 2004 to cover deficit spending.
"We differentiate between issuing GO bonds to take care of the general needs of the state and budgetary borrowing to fund operations," he said.
California typically executes a large GO issuance in March and another in November to cover the cash flow needs of infrastructure projects, Palmer said.
State expenditures on highway and road improvements, in addition to anticipated bond issuance for its high-speed-rail project, will impact whether second half sales surpass what the state issued in the first half of 2015, Palmer said. State lawmakers are holding a special session on transportation.
The state currently anticipates issuing a combined $142 million for transportation projects during its fall sale, which includes $49.6 million for high-speed rail, Palmer said. Those figures assume the California Transportation Commission uses another $1.1 billion in commercial paper authority it currently has to fund projects, he said.
The treasurer's office isn't anticipating a material difference for fiscal 2015 over fiscal 2014. If interest rates remain low, the state could see an increase in upcoming refundings in late 2016 early 2017 taking out debt that matures from 2006-2007 issues, according to Deputy Treasurer Tim Schaefer.
Overall, issuers throughout California sold 56% more municipal bonds during first half 2015 then they did a year earlier.
Among all California issuers, first-half new money issuance was down 23.2% to $7.6 billion, according to Thomson Reuters. California refundings more than doubled to $15.9 billion during the same period, while combined new money/refunding issuance grew by 159.8% to $8.2 billion.
Education represented the largest sector in the Far West, with $18.4 billion sold, more than double sold for that sector a year earlier. The transportation sector, at $3.6 billion was down 28% from the year before; general-purpose bonds were up 136.4% to $10.6 billion.
The Golden State Tobacco Securitization Corporation's $1.6 billion deal March 25 was credited as the region's second largest deal, followed by the Regents of the University of California with a $1.67 billion March 13 sale. The UC Regents, however, actually priced two separate deals that day totaling $2.8 billion.
Washington state government had the Far West's largest deal outside California with a $998.6 million GO sale on January 21.
Washington retained its ranks as the second largest overall source of issuance in the Far West with $8 billion from all state and local issuers, up 76.4% year-over-year.
Ellen Evans, Washington's deputy treasurer for debt management, said the state usually goes to market twice a year to borrow funds for ongoing capital projects authorized by the legislature.
"This 'cash-flow financing' is expected to cover approximately six months of expected capital expenditures by all state agencies," Evans said. "The state's debt portfolio is very consolidated: nearly all bonds are backed by the general obligation pledge, although bonds for transportation projects are first payable from either tolls or motor vehicle fuel taxes."
Washington refundings for all issuers grew by 138.7% to $3.6 billion, while new money grew 2.6% to $1.9 billion.
Issuers in the state sold $1.9 billion in education bonds and $1.4 billion in electric power bonds. Volume in both sectors was up with a 96.9% increase in education and a 91.4% increase in electric power bond sales from 2014.
Trailing Washington in bond volume, at $3.5 billion, was Oregon. The state experienced a 180% increase from first half 2014. The 2015 jump follows the 52.6% decline the state experienced from 2013 to 2014.
The spike in Oregon sales occurred in both new money, up 154% to $1.42 billion, and refundings, up 235% to $1.37 billion. Combined new money/refunding deals grew 152% to $747 million.
Education was the state's busiest sector with $2 billion in sales, more than seven times the level of the previous year. General purpose grew by 384% to $802 million.
First half volume rose in every state except for Montana, which experienced a 38.3% decrease to $127 million. Increases for the Far West's other states were 173% to $810 million for Alaska, 21.9% to $731 million for Idaho, 71.9% to $2 billion for Nevada, and 143.1% to $103.6 million for Wyoming.
In Hawaii, where only one $69 million deal reached the market during the first half of 2014, issuance soared to $1.25 billion on seven transactions.
The Far West's top senior manager was Bank of America Merrill Lynch, credited with $7.4 billion, followed by JPMorgan with $6.3 billion, and then Morgan Stanley with $6.1 billion.
Public Resources Advisory Group secured the top slot in the region's financial advisor table, credited with $6.4 billion, ahead of Public Financial Management at $4.6 billion and Piper Jaffray & Co. $3.8 billion.
Orrick, Herrington & Sutcliffe LLP continued its dominance atop the Far West's league table for bond counsel. Foster Pepper PLLC was second, and Stradling Yocca third.
