Long-term bond sale volume dropped considerably in 2011 compared with the year before, amid a cautionary environment and the absence of the Build America Bond program.
Issuance of long-term debt totaled $295 billion overall in the United States last year, a 32% decrease from the $433 billion sold in 2010.
Of the 10 sectors Thomson Reuters analyzed, only local economic development realized an increase.
Development rose 33.5%, to $14.6 billion from $11 billion, led by the New York Liberty Development Corp. Its four sales totaling $5.7 billion of Liberty bonds for the reconstruction of the World Trade Center, primarily led by Goldman, Sachs & Co., placed among the six largest deals in that category for 2011.
Other New York debt rounded out the top six. The Hudson Yards Infrastructure Corp. in October issued $1 billion, essentially to fund the extension of New York City’s No. 7 subway line, and the Empire State Development Corp. in December offered $702.4 million of new-money personal tax income bonds for capital spending. JPMorgan and Bank of America Merrill Lynch managed the sales for those agencies, respectively.
“There is some development activity, and some in housing, but largely, everything else is pretty flat,” said Bill Brandt, the president and chief executive of consulting firm Development Specialists Inc. and the chairman of the Illinois Finance Authority.
Brandt expects the 2011 trends to continue this year. “We won’t see a great deal of development but we’ll muddle through,” he said.
The biggest drops were in environmental facilities, which fell 64.7%, to $2.8 billion from $7.8 billion; electric power, 62.4%, to $11.3 billion from $30.2 billion; and transportation, 50.8%, to $32.9 billion from $66.9 billion. Next was public facilities, which decreased 35.9%, to $7.2 billion from $11.3 billion; general purpose, 29.8%, to $83.8 billion from $119.4 billion; utilities, 28.9%, to $31.7 billion from $44.6 billion; and education, 26.1%, to $74.5 billion from $100.7 billion.
“There has been a lot of talk about natural gas getting legs again, which means some of the more expensive green-energy projects will take a back seat,” Nick Potonak, managing director of CastleOak Securities LP, said of the environmental decline. “These projects aren’t going away, but at this point, green technology doesn’t have a lot of investor appetite.”
Dan Hartman, a managing director at PFM Group Inc. of Philadelphia and head of its public power group, said much of the activity in that sector will coincide with any economic rebound.
“New power plants were delayed when the economy was down. When people see the economy up, people will be using more power and transmission lines,” he said. “You see that throughout a lot of the sectors, but especially in public power.”
“We’ve seen a rebound in [public power] volume, to some degree,” he added. “I think there will be significant refinancing and restructuring activity. We’ve already seen a fair amount come to market in 2010. We’ve had deals on tap for the $2 billion to $3 billion range for early 2012.”
Housing realized only a slight drop, 8%, to $9.1 billion from $9.9 billion.
David Miller, a managing director at PFM and the head of its transportation practice, said caution is the operative word in that sector, as issuers anxiously monitor developments in Washington for possible budget cuts. “People are very worried about federal funding,” he said.
Miller expects transportation issues to be creative, citing Kentucky Gov. Steve Beshear’s proposal to fund his state’s half of the $2.6 billion Ohio River Bridges Project with federal funds and toll revenue bonds over six years. Kentucky, in a joint venture with Indiana, plans to build two new bridges across the Ohio River and rework the downtown Louisville interchange, where three interstate highways converge.
Miller said that with gas tax revenues down, given the greater efficiency of automobiles, toll revenue is increasingly popular for highway projects, despite the political risk of alienating voters accustomed to using those roads for free. “The message could be, 'If you want this road, you won’t get it unless it’s tolled,’ ” he said.
Health care was down nearly 15% in the past year, to $26.8 billion from $31.4 billion.
But “you have to look at the lower levels in the context of recent history,” said Lisa Goldstein, an associate managing director at Moody’s Investors Service. “In 2008, issuance peaked at its highest level in several years. It was a heavy, heavy year of debt refinancings for hospitals — auction rate to variable, variable to fixed.”
Goldstein said that overall, many hospitals and borrowers remain a bit skittish about new debt, given a greater emphasis on outpatient treatment. “If more people are going to outpatient centers, why does the hospital need a new tower?” she said.
She expects an increase in information technology spending.
“With reform, you’ve got to be able to measure your data now more than ever,” Goldstein said. “IT spending is mostly through cash flow or leases. There will be more IT spending, but it is typically not funded through bond proceeds.”
Economic uncertainty and sensitivity to tuition prices are prompting colleges to spend less and borrow less for significant capital investment, according to Moody’s vice president Karen Kedem.
“We expect new money to continue to be relatively low and concentrated among more highly rated borrowers,” she said. “We have seen a spike in refundings in the first quarter of 2012.”