Volume in the municipal market for the month of May was the third busiest on record, as issuers continued to leave the auction-rate security market in droves.

More than $37.2 billion in debt was sold through 933 issues, marking a 13% decrease from last year's record volume of $43 billion, according to preliminary data from Thomson Reuters. The total for the month brought year-to-date volume to $173.4 billion, within 5.8% of the $184 billion sold between January and May 2007.

The evidence of the disruption in the ARS market was clear in this month's numbers.

Issuers turned to variable-rate bonds in an effort to keep their floating-rate exposure at the same time they were turning their back on the auction-rate market. More than $15.6 billion was issued as variable rate, short put, for a 315% increase over last year's total of $3.8 billion, according to the data. Variable-rate debt constituted 42% of May's total volume.

"The vast majority [of the volume], no doubt, is the restructuring of ARS," said Tim Mackin, head of trading and underwriting at NatCity Investments Inc.

Not a single linked-rate deal was sold in the month, or the year, according to the data. Thomson Reuters places auction rate transactions in this category.

Fixed-rate deals were down 34.7% to $21.1 billion from $32.4 billion the year before.

Coupled with a 41.7% increase in the amount of refundings, to $11.9 billion through 219 deals, from $8.4 billion a year ago. The presence of such refunding activity further shows issuers closing down ARS programs.

"This is not a typical municipal new issue calendar," Fischer said. "Refundings should be very small at this point because of negative arbitrage."

Credit enhancement volume totals also showed the dislocation. Letters of credit and standby bond purchase agreements were used on $12.4 billion worth of bonds in the month, while bond insurance only wrapped $7.6 billion. LOCs specifically increased 476.4% to $8.8 billion from $1.5 billion in May 2007, while standby bond purchase agreements added liquidity to $3.6 billion of debt in May, compared to $836.5 million last year.

This was despite the fact that costs for liquidity facilities have increased in response to the current crisis.

"I don't think you need any more evidence than that," Fischer said. "Bond insurance has fallen and is apparently stabilizing at about 20% of the market."

Among sectors, only health care issuers and state government agencies showed an increase over last May, with most of the other categories declining between 10% and 60%. Health care issuers sold $8.7 billion of debt, a 54.3% increase over last May's totals of $5.6 billion, while state agencies sold $15 billion in debt, a 16.7% increase over last May's volume of $12.8 billion.

While informative, the volume numbers do not capture the total supply in the market. Many issuers are changing the modes on their ARS instead of refinancing, and the mode changes are not counted in Thomson's data. This makes it much harder to get an accurate reflection of market supply.

"We have auction-rate bonds changing modes and not being refinanced," Fischer said. "As a result they are going into the market and we are not seeing them."

Some market participants have estimated that as much as 25% or 30% of the bonds in the primary market can be attributed to issuers refinancing out of ARS. While Mackin could not confirm the number, he did say it was probably close to being accurate.

"That wouldn't be a bad guess," Mackin said. "I would imagine it is a significant portion over the last few months."


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