A year-end surge lifted volume in the Southwest
With a strong fourth-quarter kick, bond volume across the Southwest surged to $78.2 billion, the highest since a record $83.4 billion in 2016, according to the data collection firm Refinitiv.
The 2019 total represents a 24% increase over the $62.9 billion issued in 2018, the first year after loss of advance refundings to new federal tax policy.
To take advantage of continuing low rates, issuers turned to taxable deals, which increased more than 217% over the previous year. Refundings doubled to nearly $22 billion, while new money was essentially flat at $46.2 billion.
“It looks like supply really picked-up in the fourth quarter of 2019,” said Douglas Benton, senior municipal credit manager at Cavanal Hill. “Unfortunately for those of us in the tax-exempt world, supply wasn’t as large due to the allure of taxable refundings. Dealer inventories were sparse in early 2020 so the recent pick-up in supply has been a welcome change.”
Tom Kozlik, head of municipal strategy and credit at Hilltop Securities, cited natural growth as a long-term factor for volume in the Southwest, particularly Texas.
“Regional demographic trends point toward a regular increase of population growth in the southern United States, including Texas, per the U.S. Census Bureau,” he said. “With this type of growth comes the need for infrastructure and municipal bonds. Last year we saw the water and sewer, school district, airport and other transportation related sectors all contribute significantly to the meaningful increase in Texas.”
Kozlik is predicting record volume market-wide for 2020.
“Low rates and the concern issuers now have about missing out on them are what will drive them to raise funds in the near term,” he noted in a market commentary. “Also, it does not hurt that there are, in some cases, ten-ish years of pent-up demand for spending. In addition, there are other needs including affordable housing, homelessness, mental illness, green initiatives, climate risks, cybersecurity protection and education projects that are going to drive 2020 issuance.”
Voters’ continuing support for bond issues, including record approvals in Texas in 2019, indicates further growth in volume, he said.
“For Texas specifically it has been a Lone Star State growth story, plain and simple,” Kozlik said. “The Texas economy has been thriving. Texas led the nation in job gains in 2019. There was growth in almost every sector year over year led by the construction, educational services and the financial sectors. The Texas population also increased more than any other state in 2019.”
Of The Bond Buyer’s five regions, the eight-state Southwest ranked third in volume for 2019 behind the Northeast’s $113.3 billion, and the Far West’s $85.1 billion.
Nationally, Texas ranked third in volume behind California and New York and ahead of Florida and Pennsylvania.
Issuance in Texas of $43.7 billion made up about 56% of the region’s total. Colorado volume tripled to $12.6 billion, placing the Centennial State second to Texas. Arizona’s $7.9 billion ranked third, followed by Oklahoma and Utah at $3 billion, Arkansas at $2.9 billion, Kansas at $2.8 billion, and New Mexico at $2.2 billion.
Texas’ volume increased 31%, making it second behind Colorado in terms of percentage growth. Arizona’s 85% growth made it the third gainer.
Arkansas and New Mexico saw volume fall 32% while Kansas volume fell 15%. Oklahoma dropped nearly 7% while Utah volume ran nearly 3% below 2018.
The Colorado Health Facilities Authority ranked first among issuers with $3.9 billion from 12 sales during the year.
The Texas Private Activity Bond Surface Transportation Corp. ranked second with $1.86 billion from three issues, followed by the Arizona Industrial Development Authority with $1.8 billion from 36 issues. Rounding out the top five issuers were the city of Austin with nine issues worth $1.4 billion, and city of Houston with $1.37 billion in seven issues.
Colorado Health Facilities also had the largest single deal with $1.76 billion sold Aug. 7. Texas PAB Surface Transportation Corp.’s Dec. 10 deal for $1.2 billion ranked second, followed by a $1.17 billion sale Aug. 7 for Dallas-Fort Worth International Airport. Fourth place went to the Texas Water Development Board’s $859 million on Sept. 24, with Houston’s $771 million deal Aug. 20 rounding out the top five.
For the third year in a row, Citi topped the ranks of senior managers in the region, credited by Refinitiv with a record $9.84 billion on 98 deals, nearly a 50% gain over Citi’s 2018 totals. With two fewer deals, J.P. Morgan also broke the $9 billion mark, followed by RBC Capital Markets, BofA Securities and Morgan Stanley.
Hilltop Securities remained atop financial advisors in the region, credited with 383 deals valued at $15.9 billion, a nearly 14% increase over 2018. In second with 66 deals valued at $5.7 billion came Estrada Hinojosa & Co., followed by PFM Financial Advisors with $4.6 billion, and RBC Capital Markets with $3.9 billion. Ponder & Co. made the top five with $3.5 billion on 18 deals.
Perennial bond counsel leader McCall Parkhurst & Horton maintained its lofty perch in 2019, credited with 334 deals valued at $12.4 billion, a 20% growth rate over 2018. Norton Rose Fulbright took the No. 2 position from Bracewell, which fell to third. Kutak Rock and Gilmore & Bell remained in fourth and fifth respectively.
Among the sectors, education remained by far the largest with more than 1,000 deals valued at $27.5 billion, a 50% increase over the 2018 totals. In Texas, education issues grew 59% to $17.2 billion.
Regionally, colleges and universities boosted issuance 373% to nearly $4 billion. Texas colleges and universities saw a 783% increase to $2.1 billion.
Texas recorded only one down quarter for volume in the second quarter’s 16% drop, but the strongest by far was the fourth quarter, when volume surged 110%.
For the region, volume soared 83% in the last three months of the year.
In Arizona, as in Texas, Citi was the top underwriter with nearly $2 billion of deals. RBC Capital Markets was Arizona’s top financial advisor, and Greenberg Traurig led bond counsel ranks. The Arizona Industrial Development Authority was top issuer with $1.8 billion.
Arkansas’ home-grown Stephens Inc. led that state’s book runners with $663 million while Crews & Associates topped financial advisors with $618 million. Friday Eldridge led the state’s bond counsel, and the Arkansas Financial Development Authority led issuers with $651 million.
RBC Capital Markets topped Colorado’s senior managers, credited with nearly $1.7 billion, while Ponder & Co.’s $2.86 billion of deals led financial advisors. Kutak Rock led bond counsel with Colorado Health Facilities Authority as top issuer for the state and region.
Piper Jaffray’s $602 million of deals led senior managers in Kansas, and Columbia Capital Management was top financial advisor. Gilmore & Bell was top bond counsel, and Wichita’s $236 million made it top issuer in the state.
As in Colorado, RBC Capital Markets was first among senior managers in New Mexico with $1.12 billion of deals while The Majors Group led financial advisors. Modrall Sperling Roehl was leading bond counsel, and the New Mexico Municipal Energy Acquisition Authority was top issuer at $616 million.
In Oklahoma, D.A. Davidson’s $544 million made it top senior manager with Stephen H. McDonald as first among financial advisors. Floyd Law Firm was top bond counsel, and the Oklahoma Water Resources Board’s $242 million of bonds made it top issuer.
Wells Fargo ranked first among Utah’s senior managers with $458 million, while Zions Bank remained top financial advisor. Gilmore & Bell was top bond counsel, and the Utah Housing Corp. was top issuer with $565 million for the year.