Healthy volume uptick makes Midwest a first-half standout

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Issuers in the Midwest sold $31.8 billion of municipal bonds in the first half of 2019, standing out among the regions with a sizable year-over-year volume gain.

Borrowing volume jumped 34.2% over the first half of 2018, according to Refinitiv data. The first quarter saw $13.8 billion of borrowing, up 29.6% year-over-year, while the second quarter saw $18 billion of issuance, up 38%.

The double-digit gains stood out during a period when the Southeast saw a 9.8% gain, Northeast issuance was up 7%, and volume fell in the Far West and Southwest. Bond issuance nationally was up 2% compared to the year-earlier period at $165.68 billion.

New money drove the regional uptick as it rose by 36.5% to $23.8 billion while refundings rose just 1.2% to $4.7 billion. Combined deals made up the remainder.

“The Midwest normally holds back,” making the new money numbers all the more striking, said Richard Ciccarone, president of Merritt Research Services.

Pent-up demand may have helped but so did the decision to move forward with some specific projects, Ciccarone said, noting that the actual number of issues for the first half declined over the same period last year.

Refinitiv recorded 1,537 transactions in the first half of 2019, down from 1,630 the year before.

“That means issuance is more concentrated,” Ciccarone said, adding that the continued low rates are particularly helpful when considering a project’s feasibility.

For the rest of the year, Ciccarone said the growing numbers in the second quarter are sending a “signal momentum that bodes well for this continued wave.”

Issuers could be pressed to enter the market with rates remaining low and a clear message from investors that supply is falling short of demand. The potential for an even lower interest rate environment shouldn’t stave off issuers as the promise of ample buyers combined with current low rates may be enough of a draw to “pull the trigger,” Ciccarone said.

More refundings could be on the way too.

“Given the extremely low interest rate environment, we are anticipating an increase in refunding issuances in the last quarter of 2019, including taxable refundings,” said Kari Blanchett at PFM Financial Advisors.

The second-half numbers will be boosted by at Minnesota's August sale of $660 million of general obligation bonds.

Illinois is planning a $1.5 billion GO bond sale to pay down its unpaid bill backlog but the timing has been held up by a pending lawsuit challenging the validity of $14.3 billion of outstanding debt.

Uncertainty because of the legal complaint has driven a widening of state spreads, which would make primary market borrowing more expensive. Out further on the horizon, Illinois is planning billions of new borrowing in the coming years to fund a newly approved $45 billion infrastructure program.

Governmental pension liabilities will continue to weigh heavily on issuer minds as borrowing is considered, Ciccarone said. That’s especially the case in Illinois. “Pensions put a damper on issuing new debt and it’s a political challenge,” he said.

Ten of the 11 Midwestern states recorded a hike for the first half with only Minnesota seeing a decline that landed at 12.3%. Indiana stood out as it saw a more than 200% gain, followed by Michigan at 72% and Missouri at 59%.

Michigan-based issuers led the pack accounting for $5.1 billion of the region’s volume followed by Ohio-based borrowers with $4.9 billion of borrowing, and Illinois at $4.8 billion.

Healthcare deals helped drive the uptick in Michigan, registering roughly $1.15 billion in volume compared to $4.8 million issued a year earlier.

Michigan education volume jumped to $2.8 billion from $1.6 billion.

“In Michigan issuance included a number of sizable voter approved referendums,” said PFM's Blanchett.

The flow should continue; Michigan school districts had roughly $985 million in voter-approved bond referendums passed in May.

Borrowing classified by Refinitiv as being for general purpose needs, development, and electric power all declined, while education led among sectors at $11.2 billion for a 12.1% gain. General purpose was second with $4.9 billion of bonding. Healthcare issuance more than doubled to a total of $4.4 billion taking the third spot among sectors.

Borrowing classified as revenue-backed accounted for $18.3 billion of first-half volume, up 75.2%, while bonds backed a full faith and credit pledge totaled $13.5 billion and were up just 1.9%.

Bond insurance was tapped for $1.6 billion up 5.6%.

State agency borrowing led among issuer types, accounting for $11.3 billion , up more than 100%, followed by district-level borrowing of $8.1 billion, up 8.5%, then cities and towns at $5 billion, up 14.8%.

The Midwest's largest first-half deal came from the Kansas City Industrial Development Authority, which sold $886 million in June led by Morgan Stanley. The proceeds are financing a major terminal makeover at Kansas City International Airport. Chicago followed with its $722 million March general obligation deal led by Barclays, followed by the Iowa-based PEFA Inc.’s prepaid natural gas deal in May for $614.5 million led by Goldman Sachs.

The Indianapolis Local Public Improvement Bond Bank followed with its $610.6 million March sale led by Bank of America Merrill Lynch and UBS Financial Services. Chicago’s Sales Tax Securitization Corp.’s January sale for $605 million led by Citi was the fifth largest.

The Indianapolis deal was sold on behalf of Indianapolis and Marion County for a justice center, and an assessment and intervention center.

Deals from the Michigan Finance Authority, the Ohio Water Development Authority, the Illinois Finance Authority, the state of Illinois, and the Ohio Higher Educational Facility Commission rounded out the top 10 transactions.

The Michigan Finance Authority was the top overall borrower, followed by Indiana Finance Authority, the Kansas City IDA, the Illinois Finance Authority, and the Wisconsin-based Public Finance Authority.

BAML took the top spot among senior managers, credited by Refinitiv with leading deals valued at $4.1 billion, followed by Citi with $3.2 billion, Robert W. Baird & Co. Inc. with $2.7 billion, Stifel Nicolaus & Co. Inc. with $2.6 billion, and JPMorgan with $2.5 billion. RBC Capital Markets, Barclays, Morgan Stanley, Goldman Sachs, and Piper Jaffray rounded out the top 10.

PFM Financial Advisors ran away with the top spot among advisors, credited with $5.1 billion of the region’s borrowing, followed by Baker Tilly Municipal Advisors LLC with deals valued at $1.9 billion, Columbia Capital Management LLC credited with $1.5 billion, Ehlers & Associates with nearly $1.5 billion, and Sycamore Advisors LLC with $1.1 billion. Melio & Co., PMA Securities, Acacia Financial Group, Hilltop Securities, and Blue Rose Capital Advisors Inc. rounded out the top 10.

Miller Canfield Plc took the top spot among bond counsel credited with deals valued at $2.8 billion, followed by Kutak Rock LLP with $2.3 billion, then Quarles & Brady LLP with $2 billion, Squire Patton Boggs with $2 billion, and Gilmore Bell Pc with nearly $2 billion. Chapman and Cutler LLP, Ice Miller LLP, Dorsey & Whitney LLP, Ahlers & Cooney PC, and Bricker & Eckler LLP rounded out the top 10.

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