AUSTIN – The municipal bond industry is moving toward a new reality in the face of tax reform, a shifting view of the federal role in state and local finance and less support for tax-exempt investments, industry experts told The Bond Buyer’s Texas Public Finance Conference Tuesday.
“I think 2018 is going to be a year of discovery to find out where we are,” said Ron Davis, managing director of Bank of America Merrill Lynch, who participated in a panel on the bond business. “People are looking around and saying, ‘What the heck is going on?’”
David Medanich, vice chair of Hilltop Securities, said he is sensing fear among investors over where interest rates are going.
“The new normal may be five or seven years away,” Medanich said, despite a strong economy in Texas and a growing need for infrastructure.
Few in the industry see any factors that would lift volume. Passage of a tax overhaul that lowered corporate tax rates from 35% to 20% gives banks less incentive to hold tax-exempt bonds, said Nicholas Samuels, vice president and senior credit officer for Moody’s Investors Service.
Medanich estimated that national bond volume for 2018 may fall as low as $270 billion in 2018.
Laura Powell, managing director for Wells Fargo, is anticipating about $294 billion of issuance, “which could be on the low side.” John Daniel, managing director for Barclays, anticipates volume of about $260 billion.
“New money issues typically grow at the rate of GDP,” Daniel said.
Issuers are slowly feeling their way into the new environment created by the federal tax bill, with the changed incentives it offers individuals and businesses to hold tax-exempt debt and the elimination of tax-exempt advance refundings.
Some industry observers think that advance refundings may have accounted for 20% to 25% of refundings in 2017.
"I don’t know that I’ve seen a magic bullet or magic pill that would give us what we had with advance refundings," Medanich said.
But Porter anticipates that issuers and investors will adapt to the new environment created by their elimination.
"There is the recognition that there are options for issuers out there" beyond the traditional 10-year call, she said. "It may lead to more tailored outcomes."
In January, the volume of bonds sold by Texas issuers fell 78% to $1.432 billion from a year earlier. Nationally, municipal bond volume plummeted in January, the after-effect of the run-up to the federal tax legislation, in which municipal issuers tried to beat uncertainty by pulling planned deals forward into 2017 from 2018, leaving the municipal market awash in bonds during the final two months of the year.
Total U.S. volume for the month plummeted 53.8% compared to January 2017, to $16.75 billion in 490 transactions from $36.01 billion in 777 transactions, according to Thomson Reuters data.
With 2017 bond volume in Texas down by 20%, industry leaders in the state experienced similar declines. Among the top five senior managers, combined volume fell to $19.28 billion from $24.46 billion in 2016.
Bank of America Merrill Lynch & Co. rose from fourth place among Texas senior managers in 2016 to the top in 2017 with 62 deals valued at $5.64 billion. BAML’s volume rose more than 46% from $3.86 billion in 2016.