Driven by Texas, Southwest bond issuance rose slightly in 2023

Southwest municipal bond issuance inched higher last year to $83.79 billion with Texas, which accounted for 70% of the debt, taking the top volume crown among states nationwide. 

The region's 0.6% gain over 2022 contrasted with the market's overall 2.8% issuance decline,  according to LSEG Data & Analytics, formerly Refinitiv. Market volatility, higher interest rates, pandemic aid, and slower economic growth contributed to the overall decline.

With $59 billion of debt sold, Texas edged out perennial bond giants California and New York to become the biggest volume state for the first time since 1981. The Lone Star State's 22.5% boost in bond sales was largely driven by the education sector's nearly $25 billion issuance, which marked a 25.1% increase over 2022 and represented 42% of Texas bond sales.

Texas public school districts piled on debt after voters approved billions of dollars of general obligation bonds in recent years for new or expanded facilities to accommodate growing enrollment, technology improvements, renovations, and enhanced safety measures, particularly in the aftermath of the May 2022 killing of 19 elementary students and two teachers in Uvalde, Texas.

The state was the home of the muni market's biggest deal of 2023 – the March sale of $3.52 billion of taxable customer rate relief bonds by the Texas Natural Gas Securitization Finance Corporation.

Douglas Hartman, managing director and head of Southwest municipal finance at Jefferies, which led that deal and ranked as the region's and state's top underwriter in 2023, said explosive growth in Texas is driving demand for infrastructure. 

"The growth in the state shows no signs of slowing down, so I expect debt issuance to continue its upward trend, certainly in the near term," he said in an email. "Over the past couple of years, there have been well over $100 billion of municipal bonds approved by Texas voters, most of which remain unissued." 

Public finance heads at Hilltop Securities, 2023's top financial advisor in the region and in Texas, said current interest rates may not be deterring some Texas issuers seeking to lock in construction costs that have been climbing. 

"I'm not sure how much the interest rate is going to impact (issuance) because when you have the demand you've got to build the infrastructure," said David Medanich, Hilltop's co-head of public finance.

Issuers in Texas are gearing up for this year's May and November bond elections. 

Georgetown Independent School District will have four GO bond propositions totaling $649.5 million on the May 4 ballot to fund school construction and safety, technology, and other projects.

The Dallas City Council agreed Wednesday to ask voters in May for $1.25 billion of GO bonds in 10 propositions, with more than $866 million earmarked for streets, transportation, parks, and recreation. The city's previous bond election was for $1.05 billion in November 2017.

A resolution passed by the Austin City Council Thursday aims to create an environmental investment plan that could include a November bond election to address climate change.

The largest drop in Texas issuance last year came from the healthcare sector, where it was down 63.6% at $954.6 million, according to LSEG data.

Colorado came in a distant second in the Southwest with nearly $6.79 billion of issuance, followed by Arizona with $5.1 billion. Among the region's eight states, only Arkansas joined Texas in having increased volume.

Eight out of the region's 10 biggest issuers were from Texas. Aside from the state's huge natural gas securitization deal, San Antonio sold nearly $1.7 billion of debt in six issues. The Colorado Housing and Finance Authority placed third with $1.585 billion in 38 deals.

Oscar Williams

Much of San Antonio's debt consisted of revenue bonds for CPS Energy, the nation's largest community-owned provider of electric and natural gas service. Ahead of the sale of general obligation debt last year, Fitch revised the outlook on San Antonio's AA-plus rating to positive from stable.

Jefferies, with $10.14 billion of debt in 65 deals, including the Texas natural gas securitization, rose to the region's top underwriter spot from third place in 2022. RBC Capital Markets, 2022's number one underwriter, slipped to second place with $7.41 billion in 113 deals. Piper Sandler, which moved to third place from second place in 2022, was credited with $5.6 billion in 99 deals.

Jefferies, RBC, and Piper also ranked first, second, and third for underwriting deals in Texas, where laws enacted in 2021 prohibit governmental contracts with entities that "boycott" or "discriminate" against the fossil fuel or firearm industries. After banning UBS in 2022, Citigroup was ousted in January 2023. Both announced plans last year to reduce or end their muni market activities nationwide.

In January, the Texas Attorney General's Office made Barclays ineligible to underwrite state and local debt, while five other big investment banks — Bank of America, JP Morgan Chase, Morgan Stanley, RBC Capital Markets, and Wells Fargo — remain under a review commenced last fall over their involvement with the Net Zero Alliance, which seeks a transition to net-zero greenhouse gas emissions by 2050.

In Oklahoma, Bank of America, JP Morgan Chase, which ranked second in 2022 for underwriting debt in the state, and Wells Fargo were banned last year under a similar law prohibiting contracts with companies determined to be boycotting oil and natural gas businesses. As a result, Wells Fargo resigned in May as lead underwriter for a $500 million Oklahoma Turnpike Authority revenue bond issue and was replaced by RBC.

BOK Financial Securities, RBC, and D.A. Davidson were 2023's top three underwriters in Oklahoma.

Hilltop is in a growth mode and has its eye on hiring people from inactive muni firms, according to public finance co-head Mike Bartolotta.

Hilltop was the region's busiest financial advisor again, credited with $15.1 billion of debt in 294 deals, followed by Estrada Hinojosa with $8.12 billion in 57 deals, and PFM Financial Advisors with nearly $7 billion in 61 deals.

McCall Parkhurst & Horton repeated as top bond counsel, credited with $18.2 billion in 353 deals, while Norton Rose Fulbright moved up to second place with $13.19 billion in 167 deals, and Bracewell dropped to third place at $9 billion in 104 deals.

The amount of insured bonds in the region rose 43.8% to $9.72 billion. In Texas, insured bonds totaled $7.9 billion, a nearly 60% increase over 2022. Some school districts turned to private insurance after the state's triple-A-rated bond guarantee program ran low on capacity until the Internal Revenue Service greatly boosted the limit it imposed on the Texas Permanent School Fund.