Late refunding push spurred the Northeast's 2017 issuance jump

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Issuers in the Northeast sold $121.3 billion of municipal bonds in 2017, posting a 4% increase over 2016 after a fourth-quarter surge, according to Thomson Reuters data.

Issuance jumped 41.2% year-over-year for the final quarter, after declines in the second and third quarters.

Citigroup municipal strategist Jack Muller attributed the end-of-year rise to the municipal bond industry’s response to the threat of the then-pending federal tax reform bill, which ultimately axed tax-exempt advance refundings.

“By far the main cause for the spike was the tax bill’s refunding provision,” Muller said. “That sparked a lot of issuance that would have occurred in 2018 into late 2017.”

The Northeast region encompasses 11 states from Maine to Maryland along with the District of Columbia, Puerto Rico and the Virgin Islands.

The top five Northeast bond volume states for 2017 were New York with $48.9 billion, Pennsylvania with $21.6 billion, New Jersey with $12.2 billion, Massachusetts with $11.7 billion and Maryland with $11.3 billion.

The numbers in the Northeast largely mirrored those in the rest of the nation. Issuers in other U.S. regions also stepped up borrowing in the fourth quarter led by a 63% jump in the Midwest, 49% in the Southeast, 26% in the Southwest and 24% in the Far West. The only other region with a year-to-year volume increase was the Far West, which was up 5.6%. After the year-end rush to beat the tax reform bill, overall municipal bond sales were down 1% nationally from 2016.

Maryland saw the largest 2017 uptick among the region’s 11 states with a 50% year-over-year volume bump. Two big state government general obligation bond deals goosed the total: a $1.1 billion deal in March, and a $1.3 billion deal in August that was the region’s largest single deal from an issuer outside New York.

Refunding volume in Maryland was up 130% at $4.7 billion due largely to a late rush in response to the tax bill as well as interest rates remaining low throughout the year, according to Public Financial Management managing director Kathy Clupper. Issuance volume in Maryland was up 41% in the fourth quarter compared to 2016.

Pennsylvania’s bond sales increased 6% from 2016, helped by a 77.5% fourth quarter spike. The state sold $970 million in GO bonds on Nov. 8 to help the late surge. The Pennsylvania Turnpike Commission led issuers in the Keystone State with $2.3 billion of volume from five transactions followed by Philadelphia with $2 billion and the Pennsylvania Housing Finance Agency with $1 billion.

Smaller issuers also played a role in Pennsylvania’s late issuance jump.

Brad Remig, managing director in PFM’s Harrisburg, Pa. office, said he worked with many school districts and local governments late last year on refunding deals in an effort to achieve savings before the new tax law changes went into effect.

“Our office worked on a lot of refunding deals in the last 45 days of the year,” said Remig. “It was a perfect storm for late refundings.”

New Jersey volume was off 5% from 2016 despite a big year from the New Jersey Turnpike Authority, which came to market with $3.1 billion of bonds from seven deals. The New Jersey Economic Development Authority and New Jersey Educational Facilities Authority were also active in 2017 issuing $2.2 billion and $1.4 billion, respectively.

New Jersey was an outlier in that fourth-quarter volume was actually down year-over-year from 2016.

Dave Thompson, chief executive officer of Bordentown, N.J.-based Phoenix Advisors, said that 31% decline was skewed by an exceptionally busy end of 2016 in the Garden State.

A New Jersey Transportation Trust Fund $2.7 billion federal highway reimbursement revenue note transaction on Oct. 26, 2016 marked the largest Northeast transaction for the year, and Thompson said if not for a sale of that size, 2017 issuance numbers would have been in positive territory. The fourth quarter was the state’s busiest with $3.9 billion of issuance driven by uncertainty surrounding the tax bill, according to Thompson.

“Anybody who could pushed deals into the market in November and December when the tax bill was being passed because of what it would mean for refundings,” he said.

New York bond volume jumped 10.4% year-over-year aided by a 97.2% rise in the fourth quarter.

Large refunding deals by the Hudson Yards Infrastructure Corp. ($2.1 billion), Metropolitan Transportation Authority ($2 billion) and Empire State Development Corp. ($1.8 billion) marked the three largest municipal bond transactions in the Northeast.

Issuers from New York State sold the region’s top eight deals of 2017.

Refunding volume in the Empire State was up 32% overall for the year.

The Dormitory Authority of the State of New York was the region’s top issuer again with $7.4 billion from 28 issues and second nationally behind only California. The next four top issuers in the Northeast were also from the Empire State including the New York City Transitional Finance Authority with $6.5 billion, the MTA with $5.6 billion, New York City with $3.7 billion and the Empire State Development Corp. with $3.6 billion.

The Massachusetts state government was the largest individual issuer outside New York state, selling $3.1 billion of debt. Overall, volume in the commonwealth dipped 24% from 2016, but was up 6% in the fourth quarter.

Neighboring Connecticut saw a 21% issuance drop in 2017 despite a 17% fourth quarter increase. The state, which like New Jersey has credit pressures from unfunded pension liabilities, had a 27% dip in tax-exempt transactions and a 42% drop in refunding deals.

The Northeast’s top senior manager was once again Bank of America Merrill Lynch, credited by Thomson Reuters with a par volume of $21 billion including $12.1 billion in the second half. JPMorgan Chase ranked second and Citi third, with Morgan Stanley holding firm in the fourth spot. Goldman Sachs moved up to fifth place from sixth while Wells Fargo dropped from fifth to seventh.

Hawkins Delafield & Wood kept its hold as the region’s top bond counsel firm, credited with more than $11.3 billion on 217 transactions. Norton Rose moved up one spot to second place followed by Orrick Herrington & Sutcliffe in third. Mintz Levin Vohn dropped five spots from second place in 2016 to seventh in 2017.

Public Resources Advisory Group replaced PFM in first place in the financial advisor category after placing second a year ago. PRAG was credited with more than $25.5 billion of business on 87 deals. PFM was credited with $22.2 billion on 325 transactions.

They were followed by Acacia Financial Group and Hilltop Securities. Lamont Financial rose five spots from 2016 to round out the top five.

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Bond volume Sell side Primary bond market New York State Dormitory Authority New Jersey Economic Development Authority New Jersey Educational Facilities Authority Hudson Yards Infrastructure Corporation Metropolitan Transportation Authority Empire State Development Corporation Connecticut Massachusetts New York New Jersey Pennsylvania Maryland