Municipal debt issuance in the Northeast fell 13% during the first half of 2009 as the market for floating-rate bonds remained moribund and lower-rated credits continued to flounder. Volume did get a boost from the advent of the highly successful Build America Bonds program.

A State-by-State Review of Mid-Year 2009 Issuance in the Northeast

The region, including Puerto Rico, saw $57.95 billion of bond transactions in 1,054 issues compared to a record $66.61 billion in 1,203 sales in the first half of 2008, when volume spiked as issuers rushed to refinance their problematic auction-rate securities. This compares to $55.90 billion in the first six months of 2007, according to Thomson Reuters.

Variable-rate bond issuance fell 80% and the use of liquidity also plunged as the credit crunch put a pinch on letters of credit and standby purchase agreements.

LOCs enhanced $3 billion of bonds in the first half compared to $13.15 billion during the same period last year, a 77.2% decline. The use of standby purchase agreements fell even further to $613.1 million, a 91.6% collapse from $7.33 billion in the first six months of 2008.

Fixed-rate debt issuance was up 20.2%. Refundings fell by 48.0%.

The bond insurance model - battered by nearly two years of downgrades for major insurers- continued to crumble, with insured debt plunging to $6.512 billion, a 42.7% drop from. The increase in cost for insurance also contributed to the decline.

Issuance of bank-qualified debt shot up dramatically to $4.53 billion from $1.71 billion, a 165.1% increase. The American Recovery and Reinvestment Act expanded the market for such securities by increasing the amount an issuer can offer in a year.

"The stimulus act raised the threshold for bank qualified and expanded the volume dramatically," said Herman Charbonneau, senior vice president at Roosevelt & Cross Inc. "Since there is still a price advantage for bank-qualified paper, buying has supported that market and commercial banks have been participating in it."

The largest bond issue in the Northeast during the first half was June's $4.12 billion deal by the Puerto Rico Sales Tax Finance Corp., called COFINA by its Spanish acronym. Citi was the lead manager on the deal and Hawkins Delafield & Wood LLP was bond counsel.

The new taxable BAB program that was created under ARRA made its mark. The New Jersey Turnpike Authority and New York's Metropolitan Transportation Authority jumped in with the second- and third-largest deals in the region, respectively.

The NJTA's $1.75 billion toll road deal priced on April 20 with $1.37 billion of debt marketed as BABs and $375 million as regular tax-exempt bonds. Just three days later, the MTA priced $750 million of its $1.25 billion deal as BABs with the remainder going tax-exempt.

Dennis Enright, a principal at NW Financial, the NJTA's financial adviser, said the BABs deal, the third in the nation, showed that demand existed and that the new type of debt, subsidized by direct federal payments to the issuer, generated cheaper borrowing costs in comparison to the tax-exempt market.

"The issuance was considered a benchmark amount in the taxable market, $1 billion-plus, so it definitely broke new ground there," Enright said. "I think it paved the way for a lot of the BAB deals to be successful that followed ... the California people were sitting in Morgan Stanley's office watching to negotiate their deal the next day."

Rankings for senior managers shifted as large investment banks merged or vanished.

Citi senior-managed the greatest volume of deals, capturing 22.2% of the market with $12.86 billion of debt, including the Puerto Rico tax deal. The firm jumped ahead from its third-place ranking during the same period last year when it senior managed $8.19 billion of debt.

Citi managing director Bartley Livolsi, who manages all regions of public finance for the firm, attributed the increase to issuers looking for an experienced team.

"Our clients really gravitated toward us because of our ability to execute [deals] over long periods of time and when things got extremely difficult it was no longer the attitude that, 'Well, everyone can do these financings,' it was, 'This is a very serious time,' " Livolsi said.

"The end of '08 was so traumatic that come January there was real concern as to whether issuers would have market access and we had to systematically reeducate the marketplace to the fact that it's a very healthy market, that municipal clients are the strongest credits probably in the world."

Morgan Stanley jumped to the number two spot, up from fifth. The investment bank senior managed $7.65 billion of debt, a $1.95 billion increase.

The top senior manager for the first six months of last year was UBS Securities LLC, but the merger of Bank of America and Merrill Lynch & Co changed the landscape. Their combined issuance last year would have made them number one with $10.78 billion. This year Bank of America-Merrill Lynch ranked third, with $7.43 billion. UBS retreated from municipal underwriting but nonetheless did senior manage $837.6 million of debt.

Roughly half of the top 25 bond counsel firms handled less volume than they had in the first six months of 2008. This was not true for the top-ranked Hawkins Delafield & Wood, which worked on 95 deals totaling $9.78 billion, a $3.21 billion increase. Most of the firm's volume was from New York and Puerto Rico clients, including the Puerto Rico Sales Tax Financing Corp.

"Hawkins has a very strong client base in the Northeast, including Puerto Rico, where we have represented the commonwealth on some of its major financings for many years," said Hawkins managing partner Howard Zucker in an e-mail.

Zucker said that at a time when many firms are decreasing their public finance departments, Hawkins has added two partners.

Sidley Austin LLP slipped to second place, working on $5.54 billion of debt, while Orrick Herrington & Sutcliffe LLP was third at $3.57 billion.

The top three financial advisers remained the same. Top-ranked Public Financial Management Inc. saw its volume shrink to $8.46 billion on 165 deals from $9.05 billion but it was far out ahead of its peers. Second-ranked Government Development Bank for Puerto Rico worked on $5.92 billion of deals, and third-ranked Public Resources Advisory Group worked on $4.97 billion. NW Financial, which was adviser on the New Jersey BAB deal, made a leap to sixth from 28th, advising on $2.22 billion of deals compared to $232.3 million during the same period last year.

New York issuers sold the most debt in the region - $20.5 billion, compared to $21.69 billion in the first half of 2008. The Dormitory Authority of the State of New York, which sells bonds for medical facilities and higher education, as well as personal income tax bonds on behalf of the state, was the largest single issuer, selling $3.16 billion of debt.

New York City's credits - general obligation, New York City Transitional Finance Authority, and New York City Municipal Water Finance Authority - ranked second, third, and fifth, respectively, selling a combined $5.92 billion debt.

City deputy director for finance Alan Anders said the first half of 2009 was more receptive to large offerings as opposed to the ending months of 2008, when issuers were forced to reduce the frequency and size of their issues given the meltdown in the credit markets.

"We have been able to stay on target in doing our financings that were required in our capital program but we were able to do so on a regular borrowing schedule and borrowing size as opposed to the more frequent, smaller borrowings that we needed to do last October through December," Anders said.

Pennsylvania issuers sold $10.1 billion of debt during the first six months of 2009, roughly $20 million more than the same period in 2008.

In New Jersey, volume increased to $6.76 billion from $5.9 billion mostly due to the big BAB deal.

While Puerto Rico had the largest bond deal in the Northeast, overall volume in the commonwealth dropped to $6.15 billion from $7.5 billion. The island did not offer water and sewer and electric power debt this year as it did in 2008.

Bond sales decreased in Massachusetts as well. The state offered $4.79 billion of debt during the first six months of 2009 compared to $7.39 billion the prior year.

Connecticut's issuance during the first half of 2009 nearly halved to $2.59 billion of bonds and notes. The state boosted its bonding for transportation but cut back in most other sectors. Last year's volume was boosted due to a $2.27 billion pension deal.

In the District of Columbia, volume totaled $2.36 billion during the first six months of this year, compared to $2.09 billion of debt in the same period of 2008. Maryland issuance dropped to $2.22 billion from $3.91 billion in 2008, a 43.2% decline.

Rhode Island issuers sold $724.2 million, a 2.3% increase over the first half of 2008. Delaware's volume reached $519.7 million, up from $469.4 million the year before.

Maine issuers sold $592.3 million of debt, New Hampshire's volume totaled $444.7 million, and Vermont saw $177.4 million of bond issuance during the first half of 2009. Debt issuance in all three states declined.

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