The development and transportation sectors had the biggest percentage increases in 2017.
The former grew 49% and the latter climbed 22% compared to a year earlier in terms of par value. By comparison total municipal bond volume was down 1%.
The sectors with the largest dollar value increases were education with $4.57 billion and general purpose with $3 billion.
The sectors that shrunk the most in percentage terms were electric power, which dropped 31%, and utilities, which contracted 22%.
The biggest sectors by par value were education, $121.41 billion; general purpose, $104.64 billion; and transportation, $64.08 billion.
Several analysts said concerns about a possible loss of private activity bond tax-exempt status at the end of the year explained several sector expansions or shrinkages. This was key to the growth of the development sector, said JPMorgan managing director Peter DeGroot.
The rush to the market to assure the tax-exemption benefit also explained why transportation increased, since many non-profits issue in that sector, said Bond Buyer contributing editor John Hallacy.
As for the reasons for the electric power sector shrinkage, Citi municipal strategist Jack Muller said the Trump “administration has so far provided a good amount of ambiguity or vagueness on [federal energy policy], and it is common for any sector to have issuers that prefer to hold off on selling bonds when possible until some clarity on their regulatory environment is handed down.” DeGroot agreed that the industry was waiting to see what would happen with regulations and a possible national infrastructure program.
Hallacy had different explanations. The sector had already done many refundings in 2016 and there was comparatively little left to do.
Furthermore, a cancellation of the Santee Cooper nuclear power plant and uncertainty at MEAG Power on other nuclear power plants led to lower issuance.
Since the utilities sector was up 25% in 2016 from 2015, “it is possible that many issuers in the utilities sector [in 2017 had] fulfilled their maintenance/improvement funding needs for the time being,” Muller said.
Besides these big sector shifts, there were also large shifts within sectors in 2017.
In the education sector, state government issuance went up 137%. Muller said this was tied to higher education. Since higher education endowments had negative returns on average in 2016, it is possible that governments issued debt for education purposes to make up for the lack of endowment returns.
Hallacy cited new investment vehicles that may have led to more issuance, citing issuance through pooling arrangement or through guarantee programs.
Hallacy said a plunge of state agency issuance by 67% in the electric power sector could have been related to the potential end of private activity bonds and actual end of tax credit bonds.
In the general purpose sector state agency issuance went up 33% even as the sector declined by 2%. Hallacy said this was probably because issuers were using state level entities to leverage a better credit rating.
Pediatric hospital issuance shot up by 191% in 2017, probably because fundraising for the hospitals has been very effective, Hallacy said. “Given the greater level of donations, it is easier for the hospitals to expand and to sell bonds.” Another factor was that under the Affordable Care Act and Children’s Health Insurance Program, more children have insurance and there are fewer unpaid bills.
While the housing sector grew by 9% in 2017 this sector’s multifamily subsector grew by 21%. Muller thought this was another example of selling by nonprofits to avoid a possible loss of the tax-exemption.
Single family home prices have escalated, Hallacy said, and in this environment moderate income people are more likely to rent.
Hallacy and Muller agreed on at least one explanation of why in the housing sector refundings went up 26% even as refundings across all sectors went down 16%. They noted that in 2006 and 2007 housing issuance grew dramatically compared to earlier years. In 2005 housing issuance was $22.08 billion but in 2006 it had jumped to $30.79 billion. It was $30.47 billion in 2007 and fell to $17.96 billion in 2008.
Issuers had large amounts of bonds either becoming callable or entering into their second year of callability in 2017, Hallacy said.
“Whereas for much of the last decade [housing sector lenders] have preferred to create mortgages and immediately sell them into the secondary market as mortgage backed securities, they are resorting more and more to keeping the mortgages on their balance sheets and selling bonds to finance them,” Muller said. “In this large-balance-sheet model, low interest costs to the agency are key, so housing agencies may be placing increasing importance on refinancing and cleaning up their liabilities.”
Muller added, “The increase in new money issuance likely also has the effect of inspiring refundings as well, since it is easier to tack a refunding portion onto an existing bond deal than to enter the market for the express purpose of refunding.”
In the transportation sector combined issuance went up 153%. Hallacy said this was because, compared to some other sectors, transportation had delayed its refundings prior to 2017. So it had more to do. Federal policy on transportation also became a bit more certain in 2017.
