CHICAGO — Midwestern issuers’ embrace of the taxable Build America Bond program drove a 13.1% drop in tax-exempt issuance last year as BABs accounted for $10.8 billion of the region’s $66.4 billion of issuance in 2009.
Overall, issuers borrowed slightly less in 2009 than a year earlier, which saw $66.8 billion sold, for a drop of less than 1%, according to Thomson Reuters. The number of deals increased, however, to 4,282 from 3,845.
Borrowing picked up in the third and fourth quarters when $18.6 billion and $17.7 billion was issued, respectively. Those figures reflect heightened use of the federal BAB program following its spring debut. Tax-exempt issuance totaled $49.9 billion compared to $57.5 billion a year earlier. Taxable issuance surged by 171% to $15.8 billion from $5.8 billion.
“There was a lot of enthusiasm for BABs with issuers on the long end and even among smaller governmental units that used them in serial maturities,” said Richard Ciccarone, chief municipal research analyst at Illinois-based McDonnell Investment Management LLC. “I expect that to continue through the year, especially among higher-yielding credits.”
Midwestern issuers sold a total of 337 deals that included BABs. The program provides issuers with a direct-pay 35% interest subsidy. Though it is set to expire at the end of this year, the Obama administration has proposed making the program permanent with a 28% subsidy.
In addition, the region saw $834 million of qualified school construction bonds, which offer buyers a federal tax credit. Another $248 million was borrowed using other stimulus programs.
New money accounted for nearly $39 billion of issuance, for a 20.9% increase over 2008. Refunding fell by 20.5% to $17.1 billion from $21.5 billion, even as many issuers were still busy restructuring floating-rate debt hurt by insurer downgrades and the 2008 auction-rate market failure.
General obligation bonds accounted for nearly $27 billion of total issuance, an increase of almost 40%. Revenue-backed borrowing was around $40 billion, a drop of nearly 17% . State agencies led among types of borrowers, issuing $19 billion, a 14.1% decline over the previous year.
Issuance varied across sectors and states. Borrowing dropped to some degree by issuers in Illinois, Michigan, Ohio, and South Dakota. The economies of Illinois, Ohio, and Michigan are among some of the most fiscally challenged in the nation.
Issuance rose in Indiana, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and Wisconsin. Borrowing by states rose 66.4% to $8.6 billion from $5.2 billion.
General purpose bonding led among sectors, representing $15.7 billion of total issuance for an increase of 21.2% over 2008. Education followed at $17.8 billion, for a 7.2% increase over the previous year.
Health care borrowing remained strong at $12.2 billion, but fell off from a high the previous year of $18.1 billion, for a 32.5% drop. Health care dropped in every Midwestern state — often by more than 50% — except in Illinois, Iowa, and Wisconsin. The decline was largely due to continued fallout from the market turmoil that roiled the industry in 2008, one market participant said.
“In 2008, so many transactions had to be restructured because of the auction-rate crisis, and because of the general meltdown in the markets, many hospitals found themselves with transactions that didn’t work anymore or with capital structures that had suddenly become much riskier than they wanted,” said Ken Kaufman of Illinois-based health care financial advisory firm Kaufman, Hall & Associates Inc. “In 2008, a lot of people were in the market fixing these things, and so in 2009 you wouldn’t expect to have as many transactions.”
With many issuers scrambling to refinance troubled debt in 2008 and deferring projects in 2009 due to the increased difficulty in accessing capital, the sector could see some build-up of new money going forward, according to Kaufman.
At the same time, many hospitals continue to play it safe when it comes to taking on new debt.
“People are really assessing their strategic situations,” he said. “There’s a buildup of new money, but it’s a little hard to say how much of a buildup. The industry is very bifurcated right now, with very strong double-As doing extremely well, and if they have things they want to do they can come to market with a very strong credit. But many [issuers] below double-A are not doing very well and may be more reluctant to be borrowers right now, either for credit or debt-capacity reasons.”
Ciccarone said he doesn’t necessarily see spreads narrowing in the health care sector, making it difficult to predict new-money issuance as borrowers weigh their willingness to pay higher rates.
Fixed-rate issuance rose by 37.3% to $57 billion while floating-rate issuance with a short put fell by 67.9% to $7.5 billion, as issuers fled to the stability offered by fixed-rate structures after the turbulence in the floating-rate and auction-rate markets.
The use of bond insurance and letters of credit also dramatically fell. Just 463 issues totaling $6.1 billion were offered with insurance, a 60.3% drop over a year earlier, when $15.3 billion in 720 deals was insured. LOCs were used on 129 deals totaling $5.2 billion, a 57.4% drop over 2008’s $12.3 billion in 298 transactions.
The Illinois Finance Authority — the state’s largest conduit issuer, which sells on behalf of nonprofit hospitals and higher education facilities — retained the top spot, selling $4.1 billion in 43 issues, down from $4.6 billion in 2008.
Wisconsin rose to a second-place finish, issuing $2.4 billion in 11 transactions, led by its $1.5 billion sale in March that restructured its outstanding tobacco bonds. The deal marked the largest sale in the region last year. It was led by Barclays Capital.
The Indiana Finance Authority followed with $1.2 billion of issuance in 31 deals. Ohio was in the fourth spot with $1.8 billion in 15 transactions. Minnesota was fifth with $1.7 billion in 13 deals.
The second-largest deal of the year, and the largest health care deal of the year, came from Ohio, which in August priced $804.4 million of new-money and refunding bonds on behalf of the prestigious Cleveland Clinic. JPMorgan was the senior manager on the deal.
Before entering the market, the clinic decided to offer just under $500 million of new-money bonds — nearly double the amount it originally planned to sell — to take advantage of relatively low fixed interest rates. Officials added that they were “a little bit concerned” about what the market would look like in two years, when they had originally planned to issue more new-money debt.
The third-largest deal of the year — and the first prepaid gas bond deal in more than a year — came from Nebraska’s Central Plains Energy Project, which sold $718 million of variable-rate revenue bonds in mid-August. The debt carried triple-A ratings based on the rating of RBC Capital Markets, which acted as underwriter, remarketing agent, gas supplier, and liquidity supplier.
Ohio-based public power provider American Municipal Power Inc. completed the fourth-largest deal, $605 million of revenue bonds sold in November. The bulk of the debt was taxable BABs. BMO Capital Markets was the lead underwriter.
Chicago’s $611 million new-money and refunding GO sale in January, with William Blair & Co. running the books, was the fifth-largest sale.
The merged Bank of America Merrill Lynch knocked Citi out of the top spot among senior managers in the Midwest, senior managing 85 deals totaling $9.1 billion, while Citi fell to sixth place, senior managing 36 deals worth $2.9 billion.
JPMorgan finished second, leading 86 deals totaling $7.2 billion. It had finished second in 2008. Morgan Stanley ranked third, senior managing 59 deals worth $5.4 billion. Goldman, Sachs & Co. dropped to ninth place, leading 26 deals worth $2.3 billion, from fifth place a year earlier.
Regional firms completed the top 10. Piper Jaffray & Co. rose to fifth place from seventh a year earlier, leading 218 deals totaling $3.3 billion. Robert W. Baird & Co. jumped seventh place from ninth with 420 transactions worth $2.9 billion. RBC and Stifel Nicolaus & Co. rounded out the top 10.
Public Financial Management Inc. moved back into the top position among financial advisers, working on 246 issued totaling $7.9 billion. Kaufman Hall dropped to second place, advising on 35 deals worth $3.9 billion. Scott Balice Strategies finished third, advising on 41 deals worth nearly $3 billion. Chapman and Cutler LLP retained its top position among bond counsel, followed by Dorsey & Whitney LLP and Squire Sanders & Dempsey LLP.