Development, healthcare, and electric power led sector issuance decline
In a year of widely declining municipal issuance, the development, healthcare, and electric power sectors saw the steepest drop-offs.
Development was down 50.4%, healthcare was off by 42.7%, and electric power declined 40.1%. The slides compared with an overall decline of 23.5% in total issuance.
All percentages are for par value unless otherwise stated and are comparisons to the figures for 2017. All dollar-value and number-of-issues statistics are from Refinitiv.
The sectors with the biggest dollar value declines were education (about $38 billion), healthcare (about $23 billion), and general purpose (about $18 billion).
The biggest sectors by par were general purpose ($86.9 billion), education ($83.2 billion), and transportation ($51.6 billion).
In late 2017 there was a proposal in the United States Congress to end the ability to sell tax-exempt private activity bonds. Several analysts said concern about this affected shifts in sector issuance in 2018.
“Development got a lot of issuance in 2017 from advance refundings, which were pulled forward into the end of that year as a result of tax reform,” explained Jack Muller, associate with the Citi Municipal Strategies Team. “With some of those deals pulled forward, and without the ability to execute new advance refundings in 2018, issuance was impacted. In healthcare, we saw a very similar phenomenon.
“And, in addition, healthcare issuance by municipal issuers in the corporate market increased in 2018, in an effort to tap a different demand base,” Muller continued. “This likely cannibalized a bit of municipal market issuance in that sector.”
Piper Jaffray managing director Justin Hoogendoorn said rising rates and the elimination of tax preferred advance refunding sharply reduced refunding in 2018 and these were the prime causes of the decline in healthcare issuance.
Regarding the 40.1% decline in the electric power sector, Hoogendoorn said, “In addition to the tax reform and interest rate trends [upward in 2018], the changing administration played a role as Environmental Protection Agency regulations became a focal point.
“The Trump administration’s relaxed view of environmental goals put issuer’s long-term capital development in flux, as anticipated reductions of environmental enforcement and potential relaxation of rules limited development,” Hoogendoorn said. “Utilities may have placed certain retrofitting of coal power plants and investments in renewables on hold ... We would expect issuance to increase in 2019.”.
The only sector to see an increase in 2018 was public facilities, which grew 21.2%. “The reason public facilities did not follow suit was likely just happenstance,” Muller said. “It is a relatively small sector but the median deal size may be large.
“Project finance deals for things like stadiums and convention centers are relatively rare, but they require borrowing hundreds of millions of dollars at a time, if not more,” Muller said. “A few large deals can bring up year over year numbers materially and that is likely what happened in 2018.”
Muller said the fact that within public facilities civic and convention centers had a 46.1% increase and “other recreation” had a 258.3% increase supported his argument.
The sector with the smallest decline outside of public facilities was housing, with a 1.1% decline. Bond Buyer Contributing Editor John Hallacy said “housing is counter-cyclical in munis. As rates climb, there is more demand for the lower rates that municipal deals provide.”
Muller explained this by saying, “With the current flatness of the yield curve and the aggressive pattern of rate hikes witnessed in 2018, some state housing finance agencies (HFAs) are rotating their business model toward borrowing to fund mortgage lending, which they will retain on their balance sheets.
“When interest rates were at their lowest in the front end of the curve, HFAs found it more profitable to originate the mortgages and sell them in the secondary market, keeping their balance sheets light,” Muller said. “This did not require long-term borrowing.”
Within the education sector, college and universities went down 50.3%. Hallacy said, “They issued a lot pre-[federal] tax reform[, which went into effect at the start of 2018]. They also use more taxable financing and direct lending that is not counted in our numbers.”
To explain the decline in college and university issuance, Muller said, “Borrowing by state governments/agencies to fund higher education is declining in some states because of difficulty balancing budgets and increasing pension contributions. Oftentimes, when a state needs to reallocate expenses, it is higher ed funding that gets shortchanged, for whatever reason.
“As pension liabilities grow and public pressure to fund them mounts, some states are becoming more aggressive with their contributions, and they must often take money from other parts of the budget like higher ed to do so,” Muller said.
While the transportation sector went down 19.9%, the seaport subcategory increased 165.4%. Hallacy said this was because “increased trade and deeper draft ships including supertankers have required deeper ports and more cranes and ship-side storage facilities.”