WASHINGTON — Issuers that can sell bank-qualified bonds took advantage of low interest rates to refinance debt during the first half of this year.
Total bank-qualified volume jumped 71.4% to $13.74 billion in 3,506 issues, up from $8.021 billion in 2,345 issues during the same period last year.
Bank-qualified refunding bonds were the biggest portion of the overall total, soaring 154.5% to $8.12 billion in 1,856 deals from $3.19 billion during the same period last year.
New-money bank-qualified bonds were up 16.1% to $4.72 billion in 1,449 issues from $4.06 billion in 1,325 issues.
Combined new-money and refunding bond issues were up 18.7% to $901.3 million in 201 issues from $759.2 million in 172 issues.
The increase in refundings cut across all but two of 10 muni market sectors, according to Thomson Reuters data.
“Refundings were a very large portion of the bank-qualified issuance in the same way that refundings have been a very large portion, 50% if not more, in the general market,” said Tom Kozlik, municipal credit analyst at Janney Capital Markets LLC.
Bank-qualified volume closely mirrored the industry as a whole because interest rates are at record lows and that encourages issuers to refund previously issued higher-coupon bonds, Kozlik said.
Bank-qualified bonds are sold by small qualified issuers to banks. Typically, small issuers don’t issue debt often, so when interest rates fall, like they have been doing, issuers jump at the opportunity and chose to refund “because every single dollar they are saving they can put somewhere else,” Kozlik said.
“The smaller issuers definitely want to be able to pass that savings along to another organization,” he said.
There has been an increase in direct bank loans and private placements in recent years, partly due to provisions of the American Recovery and Reinvestment Act, which made it easier for banks to purchase more tax-exempt bonds during 2009 and 2010.
Under those provisions, banks could deduct 80% of the cost of buying and carrying tax-exempt bonds sold by small issuers whose annual issuance was $30 million or less, up from $10 million.
In addition, banks were eligible for the 2% de minimis interest expense deduction if their tax-exempt holdings did not exceed 2% of their assets. But the ARRA provisions expired at the end of 2010.
Municipal market groups have since been pressing Congress to reauthorize the increase to $30 million in annual issuance for issuers of bank-qualified bonds. However, lawmakers have been unsuccessful in adding the provisions to legislation this year.
“We’re committed to trying to get the bank-qualified issuance raised as opportunities in Congress arise, we will continue to pursue them,” said Michael Decker, managing director and co-head of munis at the Securities Industry and Financial Markets Association.
Mike Nicholas, chief executive of Bond Dealers of America, said that his group also been working to get an increase in the bank-qualified limit, which hasn’t risen since 1986, except during 2009 and 2010.
“Issuance would be that much better if the bank-qualified limit was increased,” Nicholas said.
Many Republicans associate the bank-qualified provisions with the federal stimulus and therefore oppose them.
Since the 2008 financial crisis, banks have been reluctant to provide issuers with letters of credit to back variable-rate bonds. Instead, they have been either making direct loans to issuers, or buying the issuers’ long-term bonds at short-term rates and holding the debt for two to three years.
The electric power and environmental sectors were the only two sectors that saw slight decreases in bank-qualified volume the first half of this year, down 20.7% to $95.5 million in 28 issues, and 7.8% to $13 million in four issues, respectively.
The development sector saw the largest spike in volume, up 94.6% to $115.8 million in 22 deals.
Volume in the education sector increased 86.9% to $6.75 billion in 1,608 deals in the first half of 2012, up from $3.61 billion in 991 deals.
Utilities saw a similar rise, 87.1%, to $2.13 billion in 587 deals, up from $1.14 billion in 335 deals.
Bank-qualified revenue and general obligation bond issuance was up significantly during the first six months of the year.
GO volume spiked 73.9% in the first half of 2012 to 2,901 deals at $11.44 billion from 1,951 deals totaling $6.58 billion.
Revenue bonds jumped 60% to 605 deals totaling $2.30 billion, from 394 deals worth $1.43 billion.
The biggest issuers of bank-qualified bonds were districts, cities and towns, which is not surprising, Decker said, because they are the mainstay of the bank-qualified sector.
Those issuers are trying to take advantage of the refunding opportunities available, he said.
Districts saw an 88.5% increase to $7.74 billion in 1,868 deals in the first half of this year, from $4.10 billion in 1,172 deals during the same period last year.
Issuances for cities and towns jumped 42.8% to $4.07 billion in 1,189 deals from $2.85 billion in 889 deals the first half of last year.
Counties and parishes, also among the largest group of issuers of bank-qualified bonds, saw a 95.7% increase to $786.6 million in 195 deals. That compares to $402 million in 114 deals during the same period last year.
Bank-qualified bond volume for colleges and universities surged 277.6% to $153.3 million in 28 deals, from $40.6 million in 10 deals.