DALLAS - Issuers in the Southwest sold $42.8 billion of municipal bonds in the first half of 2015, according to data from Thomson Reuters, a 39% year-over-year increase that puts the region on track for a record.
With July sales up 42% compared to the same month last year, the pace shows no sign of slackening as major issues await pricing. Looming over the market is the risk of a Federal Reserve rate hike .
"The interest rate hike is a threat because of all the conversation about it," said Don Frost, executive vice president for finance at the San Antonio-based Frost Bank. "Most of the conversation tends to be on the short rates and the Fed trying to get a tool back into its toolbox."
Frost said the record volume jibes with his experience as Frost Bank plays a larger role in public finance. The state-chartered bank co-managed some major deals, including the Texas Transportation Commission's region-leading issuance, and led on some others including one from the San Antonio Independent School District.
"We're having a record year," Frost said. "Texas offers such high-quality paper, and the economic metrics are so positive that it's easy to sell. However, it does taper in the fall, historically."
Also hanging over the economy are falling oil prices, which are expected to impact most of the region's states, particularly Oklahoma and New Mexico.
With rates lingering near historic lows, refundings in the first six months rose 89% across the Southwest to $20.5 billion, compared to new money issues of $11.6 billion, down 16%. Combined issues grew 78% to $10.7 billion.
"The low rate environment seems to have stimulated a lot of unanticipated refunding activity earlier in the year that appears to have trailed off in recent months," said Douglas Benton, vice president at Cavanal Hill Investment Management. Benton said his analysts consider a Fed rate hike overdue.
With issuance in the first quarter up more than 60%, second-quarter volume rose 23% compared to the same period last year.
However, July's volume of $7.95 billion ran about 12% higher than the monthly average of $7.1 billion in the first half of the year. Volume ranged from a high of $8.9 billion in March to a low of $5.4 billion in February.
As the Fed continued moving the goalposts on the rate hike and inflationary pressures weakened, investors grabbed the short end of the yield curve.
"The muni-to-Treasury ratio on the front end of the yield curve has caused the negative arbitrage numbers to decline," Frost said. "And therefore that's encouraged a lot of pre-refundings."
Record volume for the Southwest came in 2008 when issuers combined for $72 billion. The next highest volume of $66.5 billion came in the Build America Bond year of 2010. The next year, volume fell to an 11-year low.
If volume for the last five months of the year maintains the current average, Southwest issuance could exceed $78 billion. In the fourth quarter of last year, Southwest volume ramped up 131%, carrying over into a strong January 2015.
Among the Bond Buyer's five regions, the Southwest ranks third in dollar volume this year behind the Northeast's $54.1 billion and the Far West's $48.3 billion. All eight states in the Southwest region saw bond volume climb sharply in the first half of the year compared to the year before. In Texas, which accounts for 62% of the region's volume, issuance was up 30% to $26.4 billion from 879 issues.
Utah registered the highest percentage increase of 116% to $2.5 billion, followed by Colorado's 97% rise to $2.7 billion. The Texas Transportation Commission remained the top issuer with $2.39 billion of new money and refunding, just slightly behind the $2.43 billion it issued in the first half of 2014.
The TTC has one issue remaining this year, according to James Bass, chief financial officer for the Texas Department of Transportation.
TxDOT will gain new funding for future issues if voters approve Proposition 7 on Nov. 3. That ballot measure would dedicate $2.5 billion of revenue from the sales and use tax annually to the State Highway Fund starting in 2017 and ending in 2032. Last year, TTC issued a record $5.52 billion.
Trailing TTC in the first half of this year were Arizona's Salt River Project at $925 million, the North Texas Tollway Authority at $863 million, the Utah Transit Authority at $861 million, and Texas A&M University System at $740 million.
The TTC's deals helped JPMorgan stay atop senior managers, credited by Thomson Reuters with $4.56 billion of deals, followed by Citi at $4.25 billion, RBC Capital Markets at $3.78 billion, Morgan Stanley at $3.43 billion, and Wells Fargo at $3.14 billion.
Bank of America Merrill Lynch fell to ninth place with $1.57 billion. In the first half of 2014, BAML ranked first in the Southwest with $3.44 billion of deals, though JPMorgan landed on top by the end of the year. Nationally, BAML was top senior manager for the first half of this year.
FirstSouthwest Co., the perennial leader among financial advisors in the region, was credited with $10 billion, followed by RBC Capital Markets with $3.9 billion, and Estrada Hinojosa at $3.7 billion. Public Financial Management, the national leader, ranked fourth in the Southwest with $2.2 billion, followed by BOSC with $1.85 billion.
Bond counsel ranks were led by McCall Parkhurst & Horton with $8.2 billion of transactions.
Norton Rose Fulbright's $4.95 billion earned a second place, followed by Andrews Kurth's $3.94 billion. Rounding out the top five were Bracewell & Giuliani with $3.05 billion and Ballard Spahr with $2.83 billion.
In Arizona, where Salt River Project was top issuer, Goldman Sachs held top spot among senior managers with $925 million. RBC Capital Markets ranked first among financial advisors with $1.14 billion of business, while Squire Patton Boggs led bond counsel firms with $1.05 billion.
The Arkansas Development Finance Authority led issuers in that state with $290 million, while Crews & Associates ranked first among senior managers with $525 million. Stephens Inc. topped financial advisory firms with $196 million of deals, while Friday Eldredge & Clark led bond counsel with $932 million.
The University of Colorado Hospital Authority led issuers in the Centennial State with $265 million of bonds. North Slope Capital came out on top among financial advisors with $496 million of deals with RBC Capital Markets first among senior managers with $621 million.
Kutak Rock led bond counsel firms with $1.23 billion of transactions.
In the Sunflower State, the Kansas Development Finance Authority ranked first among issuers with $499 million. The KDFA is certain to hold that spot after pricing $1 billion of pension bonds in August.
Piper Jaffray was first among underwriters with $479 million of deals, and Columbia Capital Management led financial advisors with $542 million. Gilmore & Bell came out well ahead among bond counsel with $1.79 billion of bonds, nine times the combined totals of the other members of the top five combined.
The New Mexico Hospital Authority led that state's issuers with $237 million of bonds, and JP Morgan took the top spot among senior managers with $544 million. RBC Capital Markets remained top financial advisor with $537 million of deals, while Modrall Sperling outranked other bond counsel with $631 million.
The Oklahoma Development Finance Authority led the Sooner State's issuers with $272 million while Morgan Stanley topped senior managers, credited with $249 million. Top financial advisor Stephen H. McDonald was credited with $302 million of business, while the firm of Hillborne & Weidman led bond counsel with $411 million.
In Texas, Citi edged out the region's top senior manager JP Morgan with $3.22 billion of business to JPMorgan's $3.19 billion. Estrada Hinojosa was second-ranked financial advisor behind FirstSouthwest.
The Utah Transit Authority's $861 million gave it the number-four rank among all the region's issuers, while Morgan Stanley ranked first among senior managers in the Beehive State with $1.1 billion. Zions Bank retained top spot as financial advisor with $1.5 billion while Ballard Spahr placed first among bond counsel with $2.15 billion.
