The development sector grew by 36% and public facilities grew by 11%, making them the biggest gaining sectors in the first half of the year, according to Thomson Reuters data.
In dollar terms they were up $2.2 billion and $420 million, respectively. In dollar terms, housing was up a bit more than public facilities, increasing $450 million, though its 5.6% percentage increase lagged that of public facilities.
Total municipal bond volume was down in the half by 12.4% from a year earlier.
The sectors with the biggest declines were electric power at 55% and utilities at 23%.
The sectors with the biggest issuance levels were education with $63.7 billion, general purpose with $46.1 billion, transportation with $22.8 billion, and health care with $20.4 billion.
Regarding development’s increase in the first half, Bond Buyer contributing editor and veteran municipal analyst John Hallacy said, “Economic development is mostly new money and affected by perhaps a fear that tax reform may shut down some of the issuance.”
Citi municipal strategist Jack Muller said that since development is a fairly small sector the percent increase may have just been a random event.
In the development sector, private placements were up 285% by par value and 50% by issue number. “Private placements have been thriving due to the very low rates being quoted and the ease of getting financing quickly,” Hallacy commented. “In addition, the disclosure burden is not as great due to the lack of a public offering.” Since the deals tend to be small in the development sector and public deals can have significant fixed costs, development issuers may be moving more towards private placements.
Regarding the increase in public facilities volume, Hallacy said, the category “was driven by issuance for judicial purposes and for civic and convention centers.”
To explain the decline in the electrical sector, Hallacy said the sector had done a tremendous amount of refunding in the first half of 2016 obviating the need to do more. Since natural gas was relatively cheap existing gas-based plants could be used profitably and this reduced the need to build new ones. Further, issuance was depressed by the cancellation of two major nuclear power plants.
The decline in the utilities sector was partially due to concern about whether clean water programs would be renewed, Hallacy said.
State agencies’ issuance in the electric power sector was down 96%. Santee Cooper and MEAG are state level issuers that canceled their nuclear projects in the first half, Hallacy noted.
In the general purpose sector state agencies were up 164%. “Debt could have been shifted from state governments to state agencies,” Muller said. “Especially with growing concerns over pension burdens, some state governments may be looking to reduce the amount of debt serviced by their general funds.”
In healthcare pediatric hospitals were up 131% because children’s hospitals have become very popular, Hallacy said. “It is easier to fund-raise for missions focused on children. Institutions want to be one of the two or three pediatric centers in the state.”
Muller said the fact that housing sector taxable issuance was up by 59% was a special case of a generally increasing interest in taxable municipal bonds, from non-traditional investors and particularly foreign-based investors. These investors generally look for higher yields and this sector gets better yields compared to equivalently-rated bonds in some other municipal sectors.
The transportation sector was whipsawed in the first half, climbing 45% in the first quarter and dropping 36% in the second. Both Muller and Hallacy said that the sector was sensitive to federal policy and that there was a great deal of uncertainty in the first half about what this would be. Hallacy also noted that given low gasoline prices federal gas tax revenues were not keeping pace with needs.
Issuance was probably strong in the first quarter because the deals were already planned before the Trump administration, Muller said.
Within the transportation sector, the seaport subsector saw a 300% increase. “Trade has been a focus of economic growth," Hallacy said. "Also, the supertankers are traversing the Panama Canal and most ports are still not deep enough to accommodate the super-ships.”
In the transportation sector, cities and towns increased 263% from a year earlier. Hallacy cited “rough winters, widening heavily travelled routes, fixing roadbeds, matching state spending, [and] growth in new areas" as possible explanations.
The sanitation subsector of the utilities sector was down by 63% probably because “clean water has been the focus in the post-Flint (Mich.) world,” Hallacy said. “Sanitation is just not as sexy.”
