Health care, development, and environmental facilities led the way down

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Health care, development, and environmental facilities issuance all plummeted by 50% or more in the first half of 2018 in what was generally a weak first half for overall municipal issuance.

Environmental facilities was down 66%, development was down 61%, and health care was down 50% in the first half, compared with an overall municipal issuance decline of 18%. All percentages are for dollars of par value unless otherwise stated and are comparisons to the first half of 2017. All statistics are from Thomson Reuters.

The sectors with the biggest dollar value declines were education ($18.6 billion), health care ($10.3 billion), and development ($5.1 billion).

Just two of the 10 municipal bond sectors grew in the first half – public facilities by 15% and transportation 5%.

The sectors that were biggest by par value were education ($45.8 billion), general purpose ($44.2 billion), and transportation ($24.5 billion).

Two analysts said that the period was characterized as the aftermath of the end of 2017, during which some issuers had reacted to fears of changes to federal taxation on municipal bonds.The drops in environment and development issuance were due to governments having pulled their bond sales into 2017 in fear of losing the ability to sell tax-exempt private activity bonds, said Bond Buyer Contributing Editor John Hallacy and Citi Municipal Strategist Jack Muller.

There was a Congressional proposal in fall 2017. “Because they raced to issue debt in 2017, their pipelines were likely relatively dry in the beginning of 2018,” Muller said.

The reflux in health care issuance was also probably due to fears in 2017 of tax changes that might be coming to the sector in 2018, Hallacy said. This had led some issuers to sell in late 2017 rather than in early 2018. He said the reduction in merger and acquisitions in 2018 also diminished the sector’s bond issuance.

Hallacy explained the 15% growth in the public facilities sector by saying that it is driven more by “basic needs” rather than outside factors.

As an explanation for the expansion of transportation in a weakening market Muller said, “There was something of a holding pattern on supply there in 2017 as some issuers wanted to wait and see if the White House would come through on its platform of affecting an infrastructure investment plan. Since the details of the initial framework were unclear, issuers may have been hesitant to issue debt for the first half of 2017 for fear of missing out on any potential soon-to-be-introduced incentives.

“Legislation for this never took shape, and it’s possible that by 2018 some of the infrastructure entities that were holding off on spending found that they could postpone maintenance no longer,” Muller said.

Besides these sector-wide shifts in the first half of 2018 there were also some unusual developments within sectors.

Whereas the education sector was down 29%, the higher education subsector was down 42%. “Higher education did a lot of refunding last year and there has been a lot done via [non-municipal] taxable debt and direct lending that does not always hit the books in the municipal realm,” Hallacy said. “Higher ed has also embraced P3s to an extent, especially for student housing.”

The general purpose sector was down 4% in the first half, less than the overall 18% decline, and grew 16% in the second quarter compared to the first quarter. “General purpose capital programs are steady, relatively constant, and hard to postpone,” and were less affected by the concerns with tax changes that affected other sectors, Muller said.

Within general purpose, state agency issuance was up 13%. Hallacy explained this by saying that interest rates are low and state credit is relatively strong.

Though the health care sector was down 50%, the nursing home subsector was up 21% and the life care/retirement subsector was up 71%. Hallacy said, there are “aging baby boomers and beyond who have retired and there is a real need for these facilities.”

Elsewhere in the housing sector the cities and towns category went up 306% in dollar volume and 100% in issues. “Low income housing is a critical need,” Hallacy said. “In California it is reaching crisis proportions and they cannot get enough supply. New York City is putting a push on for more affordable units.”

Within public facilities, the stadium and sports complexes subcategory grew 389% and to 11 issues from 9 issues. “The category was going to be eliminated under the tax bill last year,” Hallacy said. “The category was spared and it unleashed some pent up demand.”

While the utilities category declined 6%, the gas subcategory shot up 642% and the number of issues went to 28 from 12. Hallacy said the while the reason for this was unclear, he noted that more natural gas is being exported that the bond issuance increase was probably connected to offshore delivery.

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