Taxable municipal issuance soared during the first half of 2013 as borrowers refunded existing debt at new low rates.
With the 10-year triple-A-rated taxable municipal bond yield hovering around 2.41% at the beginning of 2013, and the 30-year at 3.80%, issuers were able to borrow money at cheap rates. The yields have fallen from 4.67% for 10-year triple-A taxable munis and 5.73% for the 30-year debt since Municipal Market Data started tracking them in June 2009.
“We aren’t surprised by the increase in taxable issuance,” said Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management. “We think this adds depth and liquidity to the overall market as well as a broader base of potential buyers.”
For the first six months of 2013, taxable municipal issuance jumped nearly 90% to $24.23 billion from $12.77 billion for the first six months of 2012. The number of taxable deals rose to 715 from 551 in the first half of 2012.
The bigger jump in gains came during the first quarter, as $11.1 billion was issued in 298 deals, up 92% from $5.78 billion in 211 issues in the first quarter of 2012.
During the second quarter, 417 deals priced with a par value of $13.13 billion, up 88% from 340 deals with a par amount of $6.99 billion in the second quarter of 2012.
Refundings led the surge in issuance over new-money deals. With record-low interest rates, issuers were able to take advantage of looking at existing short-term or variable-rate debt and moving it out on the yield curve, according to Heckman.
Refunding taxable municipal debt jumped 172% for the first half of the year to $9.51 billion with 369 deals, up from $3.5 billion in 231 deals for the first half of 2012.
“The general theme was the low level of interest rates that allowed for refinancings,” said Adam Mackey, head of muni fixed income at PNC Capital Advisors. “There are more astute crossover buyers focused on the muni space as each year goes by. Build America Bonds started that and the program did get more non-traditional types of buyers involved. As interest rates have declined, issuers can do taxable deals and still get savings.”
Combined debt with both taxable and tax-exempt portions rose 94% for the first half of the year to $3.8 billion in 53 deals to $1.96 billion in 31 sales.
New money deals rose 49% to $10.92 billion in 293 offerings from $7.31 billion in 289 issues.
“There was more activity where issuers brought a taxable and tax-exempt tranche and that accounts for some of the increase in issuance,” Heckman said.
Borrowers of taxable municipal debt were much more active in the negotiated market, coming with $20.36 billion in 562 deals, up 98% from $10.26 billion in 388 issues in the first six months of 2012. Competitive issuance rose 47.6% to $3.02 billion from $2.05 billion. Still, the number of competitive deals fell to 132 from 139.
Taxable revenue bonds increased more than general obligation issues, rising 103% to $17.26 billion in 284 deals from $8.51 billion in 232 transactions in 2012. Taxable GO debt increased 64% to $6.97 billion in 431 issues from $4.26 billion in 319 deals.
Market participants said the increase in taxable muni bond issuance helped lure crossover buyers as taxable munis looked more attractive than their taxable corporate counterparts.
“The reality is it’s hard to find double-A credits with decent spreads on investment-grade corporate bonds, so investors clamor for this type of paper,” Heckman said. “With taxable munis, you’re buying a stronger double-A credit and it helps bolster the average credit rating in a portfolio.”
Of the top 25 largest bond sales in the first half of 2013, 14 deals had taxable components and 10 of those 14 taxable deals had refunding components.
The largest taxable deal in the first six months of the year was $2 billion of Florida Hurricane Catastrophe Fund Finance Corp. economic development bonds that priced April 10. The deal sold with better spreads than Treasuries and also better than Cat Fund officials anticipated, Florida Division of Bond Finance director Ben Watkins said at the time.
Underwriters expected that the minimum level for the blended rate on the transaction would be around 3%, and the deal came at 2.61%, attracting 139 buyers.
The double-A rated offering came with $500 million at an interest rate of 1.29% maturing in 2016, $500 million with a 2.1% rate maturing in 2018 and $1 billion with a rate of 2.99% maturing in 2020.
The second largest taxable deal was $1.11 billion of JobsOhio Beverage System economic development bonds, priced Jan. 29. JPMorgan and Citi were joint book-runners.
Yields ranged from 0.87% on 2015 bonds to 3.98% on bonds with a 2029 maturity and 4.53% on bonds maturing in 2035. The spread to Treasury ranged from 60 basis points on the 2015 bonds to 110 basis points over on the 2022 maturity and 137.5 basis points on the 2035 bonds.
The deal spurred an 11-fold surge in development bond issuance in the first half to $3.82 billion in 31 issues from $333.6 million in 21 deals a year earlier.
Six of the top-10 taxable deals were in the education sector, including a $956.2 million issue from the Missouri Higher Education Loan Authority, $787.7 million of University of California bonds, $563.8 million from the Kentucky Higher Education Student Loan Corp., $540.6 million of North Carolina State Education Assistance Authority debt, $536.9 million of Denver School District bonds and $371.4 million of bonds from the Vermont Student Assistance Corp.
Taxable issuance in the education sector climbed more than 180% to $9.95 billion in 328 deals from $3.51 billion in 208 deals in the first half of 2012.