Lost refundings took a toll on Midwest muni bond volume

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Municipal bond issuers in the Midwest sold $59.9 billion of debt in 2018, according to data from Refinitiv, a 28.1% dive from the year before as refunding activity plunged while new money borrowing was barely better than flat.

The Midwest's volume decline was the most of any of the nation's five regions. There were 3,145 deals last year, down from 3,882 transactions in 2017.

Borrowing was down year-over-year in all four quarters and across most states and sectors. Michigan and Minnesota were the only states with higher volume and housing and transportation issuance were the only sectors to record growth.

Refunding deals tumbled 57% to $11.4 billion while new money volume was up 1.8% to $41.8 billion. Combined new money and refunding deals totaled $6.7 billion, down 57.3%. New money saw stronger gains of 21% in the Southwest, 29% in the Southeast, and 31.2% in the Northeast.

“We are not growing or expanding” in most Midwest states and “there’s no rush to fix the existing infrastructure,” said Richard Ciccarone, president of Merritt Research Services LLC. “People that hold the public purse strings remain tight with the money and we are not attacking the problem as if it’s a major priority.

“Pension costs are growing and crowding out” other spending priorities, he added.

Illinois-based issuers took the top spot among the region's 11 states with $13.1 billion sold but that represented a 39.7% drop. Ohio followed with $8.5 billion sold, a 39.2% cut. Wisconsin, Minnesota, and Minnesota followed with numbers between $7 billion and $8 billion. Minnesota saw a volume gain of 11.7% and Michigan rose 1.4% while Wisconsin was off 37.4%.

The picture for issuance this year remains clouded with a handful of states seeing leadership turnover and several looking to new infrastructure and transportation borrowing potentially supported by gasoline tax increases if several governors get their way.

Illinois’ new governor, J.B. Pritzker, has outlined a rough timeline for borrowing $300 million in April to fund pension buyouts, followed by $1.5 billion of GO bill backlog borrowing in June, another $600 million of GO bonds for capital and $700 million of GOs for a pension buyout in August.

The state also may take up a new capital bill this spring but additional borrowing might not be needed this year and $2 billion of pension obligation bonds are not expected to sell, if lawmakers approve them, until 2020.

Chicago Mayor Rahm Emanuel has pitched a $10 billion pension bond, but the decision on whether to proceed will be made by his successor who will take office in May. Additional airport issuance to support a terminal makeover at O’Hare International Airport may also be on tap along with the city's first general obligation borrowing in two years.


Michigan’s issuance levels were helped by the Michigan Strategic Fund's $620 million of private activity bonds that are part of a public-private partnership that will allow the state to wrap up a highway project more than a decade early.

Kari Blanchett, a managing director at PFM Financial Advisors LLC, said she expects to see similar volumes for the state in 2019 driven by new money bonds.

The Michigan school volume was pretty strong last year much of which was associated with new money bond issuance, said Blanchett. “We are also seeing an increase in new money issuance from local governments which have deferred capital needs.”

In Indiana, municipal bond volume decreased by more than 26% to $3.5 billion from 2017 volume of $4.8 billion, but new money increased by 38%.

Diana Hamilton, president of Sycamore Advisors, said that the state is in line to see volume increase as local communities begin to recover from the property tax gap created by tax caps, the recession and tax reform, which combined has dramatically impacted issuance over the past few years.

“At least two things have happened in the last three years,” Hamilton said. ". "You have had changes in local income tax rates which allowed issuers a lot more flexibility to do local income tax pledges."

As a result, she says, communities have been making and will continue to make better use of local income tax structures and tax increment financing districts. Although local income tax is capped at 2.75%, Hamilton says cities like Indianapolis, which is at 1.9%, still have plenty of capacity.

Hamilton said that in March Indianapolis is expected to price a $610 million bond deal to fund a criminal justice center project.

Mark Miller, the director of the advisory firm Umbaugh’s Ohio office, said he expects Ohio volume to continue to see little growth.

"If you look back before 2018 ,when tax-exempt advance refundings went away, because rates were so low a lot of advance refunding that were being done were being on issues that had call feature in 2019, 2020 even as far as out as 2021,” Miller said. “So a lot of those bonds that we would view as being currently refundable have already been refunded.”

Miller said that some of the refunding volume in 2018 was done on a forward delivery basis meaning that issuers like the University of Dayton, which priced $50 million of refunding bonds on a forward delivery basis in April, were able to lock in more favorable rates.

"In 2018 there was a feeling that maybe interest rates would increase but that has changed and now the feeling is that rates will remain where they are and some people believe that there may even be the possibility for a rate reduction,” Miller said.

Education-based bonds led among sectors with $18.2 billion issued, a 23.6% drop, followed by general purpose borrowing for $12.9 billion, a 35.7% decline, and healthcare at $9.4 billion, down 38% from 2017.

Bond insurance recorded a modest gain as it was used on $4.1 billion of bonds, a 1.6% increase despite the overall volume decline. The use of letters of credit shot up to $901 million from $142 million.

Chicago led the pack as the top issuer in the region with $2.2 billion sold in seven deals. The city’s December sale for $2 billion of airport revenue bonds for O’Hare International Airport’s new terminal makeover also was the largest issue in the region.

Illinois followed with five deals totaling $1.7 billion and its $966 million sale in August marked the second largest deal in the region.

Ohio followed with $1.413 billion sold in 16 deals. The Chicago Board of Education came in fourth with its four deals totaling $1.411 billion and its $764 million new money and refunding sale in November was the third largest in the region.

The Wisconsin Public Finance Authority came in fifth with 46 deals valued at $1.3 billion and Chicago's Sales Tax Securitization Corp. was sixth with $1.3 billion sold in three deals.

The big Chicago, Chicago Public Schools, and Illinois deals were led by JPMorgan helping the firm win the top spot among underwriters in the Midwest.

JPMorgan was credited by Refinitiv with running the books on 108 deals valued at $9.2 billion. Bank of America Merrill Lynch followed with 80 deals valued at $5.8 billion, followed by Stifel Nicolaus with 217 deals valued at $3.5 billion. Citi, Robert W. Baird & Co. Inc., RBC Capital Markets, Goldman Sachs, Piper Jaffray, Morgan Stanley, and Barclays rounded out the top 10.

PFM Financial Advisors LLC ran away with the top spot, credited with advising on 309 deals valued at nearly $8.8 billion. Ehlers followed with 313 deals valued at $2.9 billion, and Columbia Capital Management LLC with 27 deals valued at $2.6 billion. Kaufman Hall, Acacia Financial Inc., Umbaugh LLP, Hilltop Securities, Springsted Inc., CSG Advisors Inc., and Swap Financial Group LLP rounded out the top 10.

Chapman and Cutler LLP took the top slot among bond counsel, credited with 261 issues valued at $4.3 billion, followed by Kutak Rock LLP with 155 deals valued at $3.9 billion, and Quarles & Brady LLP with 343 deals valued at $3.6 billion. Ice Miller LLP, Dorsey & Whitney LLP, GilmoreBell PC, Miller Canfield, Squire Patton Boggs, Dickinson Wright PLLC, and Katten Muchin Rosenman LLP rounded out the top 10.

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