PHOENIX - Total municipal issuance is expected to fall to $362.5 billion in 2018 in part due to tax reform restrictions on certain types of issuance, according to the Securities Industry and Financial Markets Association’s latest Municipal Issuance Survey.

SIFMA’s survey, slated for an official release Tuesday, projects declines in both long-term and short-term muni issuance. Respondents said they expect total long-term municipal issuance to fall to $322.5 billion in 2018, from an expected $407.8 billion in 2017. Short-term issuance is expected to decline to $40.0 billion from a projected $46.7% in 2017. The total expectation among respondents, which included seven firms, is that total muni issuance will be down more than 20% from the $454.6 billion projected to be done before 2017 is over.

Tax reform legislation brewing at the time of the survey appeared to be a major driver of survey responses.
Tax reform legislation brewing at the time of the survey appeared to be a major driver of survey responses. Bloomberg News

The survey took place between Nov. 15 and Nov. 30, after both the House and Senate had introduced sweeping tax reform legislation but before the Republican majorities in both chambers created a compromise bill last week. As such, respondents were mindful of the possibility that private activity bonds might be eliminated: a measure included in the House tax bill but which did not survive through to the final version. But the elimination of tax-exempt advance refunding bonds, another factor cited by survey participants, did make its way into the Republican compromise legislation.

“Respondents were polled as to events that would most likely have the greatest effect on the municipal market in 2018,” the survey said. “Survey respondents almost unanimously considered the restrictions on private activity bonds and/or advance refundings to have the greatest effect, followed by fiscal pressures associated with underfunded pension programs and reductions in federal transfers to state and local governments.”

The share of refundings of the total issuance is expected to decline in 2018, with 27% of long-term tax exempt issuance expected as refundings in 2018 compared to 45% in 2017. Respondents said they expected alternative minimum tax issuance to dry up entirely in 2018, though the individual as well as corporate AMT appeared likely to be repealed at the time of the survey. The final bill retains the individual AMT.

Respondents also expected a drop in corporate tax rates to have an effect on the municipal market. The final bill would slash the rate to 21% from 35%, which experts have said could make munis less attractive to own for banks, property and casualty insurance companies and life insurance companies.

Respondents said they expected approximately 50 issuers to default in 2018 for a par value of $2 billion, and that general purpose and education would be the two largest issuance sectors for 2018, followed by utilities and transportation. In prior years, the general purpose sector has traditionally been the largest issuing sector by gross amount, according to SIFMA.

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