PHOENIX - Far West issuers sold $44.7 billion of municipal bonds in the first half of 2016, an 8% decrease from the first six months of 2015 that was marked by a slowdown of refunding deals.
The first quarter was responsible for the volume dip, with a 19.5% decrease to $20.1 billion from nearly $25 billion in the first quarter of 2015. Second quarter sales of $24.6 billion produced a 4.2 % increase over the same period in 2015 to $24.6 billion, Thomson Reuters data showed.
Tom Schuette, partner and co-head of investment research & strategy at Gurtin Municipal Bond Management, attributed part of the volume decline to the likelihood that many of the refunding opportunities that made good sense have already been done.
"If you could refund something in market's sustained low rate environment, you likely already took advantage of it," Schuette said. "So the refunding activity that drove the market in recent quarters has started to slow."
California issuers predictably led the way, having sold $32 billion, up 0.7% over the first half 2015 and accounting for more than 70% of issuance in the Far West region. California's $2.95 billion general obligation issuance of March was by far the region's largest deal of the first two quarters, according to Thomson Reuters.
Though California bucked the regional trend by increasing total issuance over the first half of the year, it followed the trend of reduced refunding issuance. Refunding volume in the state fell 13.6% year-over-year to a total of $13.75 billion, with new money up slightly and combined issuance up 27.4% to a total of $10.45 billion on the year.
California has focused on debt reduction in recent years under Gov. Jerry Brown, and has continued to focus on refunding over new money. Tim Schaefer, the state's Deputy Treasurer, told the Bond Buyer that California wants to refund "all it can," but that the local governments appear to especially be looking to take advantage of low interest rates while they last.
"The locals appear to be refunding greater percentages than we are," said Schaefer, noting that his own internal numbers indicated that close to two-thirds of local issuance was refunding.
Schuette said a drop in issuance by local governments elsewhere in the region probably accounts for the overall volume decline, because most cities in the west haven't experienced robust economic recovery the way many California municipalities have.
"We believe that many state and local governments remain extremely cautious when considering new issuance," Schuette said. "Despite a well-documented backlog of infrastructure needs, many governments remain focused on repairing their balance sheets and seem hesitant to take on new debt service expenditures. States and localities see a future with budgets constrained by rising pension and healthcare costs, many face anti-tax sentiment and therefore are choosing to defer capital spending. This has particularly affected western states that may not have seen the rapid economic recovery that many California issuers experienced."
Another California GO issuance of $1.47 billion on April 19 was credited as the region's second-largest deal, followed by the $1.38 billion of California State University refunding bonds sold on April 8.
Washington was the region's second-largest issuance state, even as its volume dropped 28.3% to about $5.8 billion. Issuance by Washington State Government surged 80% to $2.5 billion, while issuance by state agencies fell by 92% to $72.9 million for the first half of 2016 from a year earlier.
The state's largest deal, and the largest non-California deal in the region for the first half of the year, was a Washington State GO sale of $672.6 billion that sold on Jan. 20. Its next-largest was a June 28 GO sale totaling $531.3 billion.
Washington Treasurer James McIntire said the state looks at bond issuance from a fiscal year perspective as opposed to comparing half year to half year. His figures showed that the state issued $3.46 billion in bonds in fiscal 2015 and $2.12 billion in bonds in fiscal 2016.
"We were actually down this fiscal year, compared to the previous year," McIntire said.
The bulk of the state's issuance has been in refundings, which fell to $860 million in fiscal 2016 from $2.61 billion in fiscal 2015, McIntire said. The state has saved $1.3 billion in interest costs through refunding since McIntire has been in office, McIntire said. The state only conducts refundings if it can achieve at least 5% in net present value savings, he said.
The state issues primarily general obligation bonds; and does that on a project-by-project basis to maintain cash flow as the state needs additional dollars for capital expenditures on various purpose GO and transportation investment activities, he said. "We work with our state agencies to anticipate those cash needs."
Montana experienced the greatest issuance growth in the region, selling $330.1 million in the first half of 2016. That was an 82.6% increase over issuance in the first half of last year. Wyoming experienced the largest decline in issuance, selling just $3.4 million in the first two quarters of this year after racking up almost $126 million in the same period of 2015 – a 97.3% drop.
Education was the region's busiest sector with issuance totaling just a hair under $15 billion. Private placement issuance, a growing trend nationally, increased 30.4% to $1.34 billion from $1.02 billion in the first half of 2015.
The Far West's top senior manager was Bank of America Merrill Lynch, credited with $6.7 billion, closely followed by Citi with $6.6 billion, and then JP Morgan with $4.8 billion.
Public Resources Advisory Group secured the top slot in the region's financial advisor table, credited with $8.5 billion, ahead of Public Financial Management at $6.2 billion and KNN Public Finance at $3.5 billion.
Orrick, Herrington & Sutcliffe LLP continued to far outstrip all other firms for the spot atop the Far West region's bond counsel rankings, credited by Thomson Reuters with $16.6 billion. Stradling Yocca came in a distant second, and Foster Pepper third.
