DALLAS — Expansion of the bank-qualified bond criteria designed to spur borrowing by small local governments seems to have been effective.
A total of $17.57 billion of bank-qualified bonds were sold through 3,211 issues in the first six months of 2010, according to figures from Thomson Reuters. That is a 5% increase from $16.73 billion in bank-qualified debt sold in the same period last year in 3,101 issues.
The American Recovery and Reinvestment Act of 2009 raised the limit on bank-qualified debt to issuers that sold $30 million of debt a year from the previous limit of $10 million annually.
The stimulus act allows the banks to deduct 80% of the purchase price of bonds issued in 2009 and 2010. However, the bonds cannot exceed 2% of the bank’s total assets.
The expansion allows bonds brought to market by conduit issuers to be bank-qualified if the actual borrower fits within the $30 million cap.
Private-activity bonds also can be designated as bank qualified.
The move was designed to enable smaller towns and districts to place additional debt with local banks and other lenders.
“I think it is working as expected,” said Hank Tansey, vice president for trading and underwriting at Morgan Keegan & Co. “It is bringing some new players, and larger players, into our market, and it is providing cost savings for many smaller issuers.”
Morgan Keegan was the lead underwriter for bank-qualified bonds in the first half of 2010, with $1.35 billion of bonds over 180 issues. RBC Capital Markets was the second most-active underwriter, with $1.23 billion sold over 155 issues.
The list of top underwriters had some new players in the first half.
Specialized Public Finance Inc. was the 10th largest financial adviser, with $260.1 million of sales in 42 issues. The firm was 20th on the 2009 list, with $135.5 million in 20 sales.
Stephens Inc. fell out of the top 10 of bank-qualified underwriters, going to $182.3 million in issuance over the six-month period, from $254.4 million in the same period of 2009.
Raising the issuer limit to $30 million per year from $10 million made bank-qualified bonds more attractive to large lenders, according to Tansey.
“The fewer line-items in their portfolio, the better the lenders like it,” he said. “They don’t want 500 line-items on their books.”
“Expanding the size of the borrowing that can be accomplished with bank-qualified bonds brought in new bidders,” he added. “That lowered the costs for borrowers by a significant amount.”
Tansey said bank-qualified bonds are attractive to buyers who are looking for a long-term advantage, especially for borrowers that normally issue $25 million or so a year.
“There is a premium being paid for these bonds due to the attractive price curve 10 to 20 years out, ” he said. “It might not be as much as it has been in the past, but it is still providing savings for small borrowers.
“The higher ceiling is accomplishing what it was intended to do,” Tansey added. “It has created more demand for the product by bringing in the big banks, it is providing small borrowers with lower costs, and it is popular on the buy side.”
The use of bank-qualified bonds for refinancing has been more popular so far in 2010 than it was during the first two quarters of 2009.
A total of $7 billion in refunding bonds were offered in the first half, up 30% from the $5.37 billion issued as bank-qualified debt in the same period of 2009. There were 1,270 refunding issues in 2010.
Activity was up in the first quarter of 2010, with $8.31 billion of bank-qualified bonds in 1,425 issues, up almost 23% from the $6.76 billion in 1,351 issues in 2009’s first quarter.
Sales picked up in the second quarter, with $9.26 billion in 1,786 issues, but that was more than 7% below second-quarter 2009’s $9.97 billion in 1,750 issues.
New-money bank-qualified bonds issued in the first six months of 2010 totaled $8.83 billion, down almost 14% from $10.24 billion last year.
Combined refunding and new-money bank-qualified bonds totaled $1.74 billion in the period, up more than 54% from $1.12 billion in 2009.
Health care providers greatly expanded their use of bank-qualified bonds to finance projects or refinance existing debt in the first half of 2010.
Many of the issuers were disqualified from using them before the annual ceiling was lifted.
A total of $507.7 million of the bonds were issued in 46 sales by health care agencies and nonprofits, up more than 170% from $187.8 million in the first half of 2009.
The largest portion of the volume came from educational issuers, with $8.38 billion of bank-qualified bonds sold through 1,440 issues.
The first-half totals are down slightly from the same period of 2009 when $8.59 billion were sold in 1,446 issues.
