March's market freeze no obstacle as Far West volume rises

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Municipal issuers in the Far West sold $38.7 billion in bonds during the first six months of 2020, according to Refinitiv data.

That pushed volume in the nine-state region 8.8% ahead of the same period in 2019, even as the market ground to a near-halt in March as the COVID-19 pandemic set in and stay-at-home orders sent shock waves through the bond markets.

Many issuers moved spring sales planned in mid-March and April from a set date to taking it on a day-by-day basis as they watched the bond market for signs rates had stabilized enough to re-enter.

The several-year movement to refund amid historically low interest rates received a shot in an arm when Treasury yields dropped below 0.6% as jobless rates topped 30 million on April 30.

California priced $2.095 billion of state general obligation bonds on March 10, the region’s largest sale in the half, just days before Gov. Gavin Newsom issued a stay-at-home order that shuttered many businesses. The region’s second largest sale came from the Regents of the University of California, which priced $1.9 billion Feb. 27. California also had the third largest sale when it priced $1.4 billion of state GOs April 16.

That was the first deal by a large issuer as the markets started to settle following the March turmoil, California State Treasurer Fiona Ma said during a joint CDIAC/CSFMO public finance webinar held the second week of August.

The state entered the market with $1.1 billion and added refunding bonds “because it was clear the market was functioning better than expected,” said Tim Schaefer, California deputy treasurer of public finance. “The true interest cost on the later sale was 2.67% versus March when it was 2.4%, a slightly higher interest rate.”

“What is stunning about the environment we are in now is how quickly it came in and how rapidly the market and economy reacted to those events,” he said.

The treasurer’s office has been very conscientious about creating what Schaefer called “business continuity plans.” But the speed with which the pandemic struck and the shock to the state’s and national economy could not have been anticipated, he said.

State Treasurer Fiona Ma said California was the first big issuer to sell bonds after the March-April pandemic-induced shock to the municipal bond markets.

“We couldn’t have imagined two or three years ago the rapid escalation in unemployment the state experienced in March and April,” Schaefer said.

“There were harrowing moments before we reached the point we were doing well,” he said. “Our people in the state treasurer’s office were energetic, agile and dedicated.”

Refundings across the region doubled to $10.2 billion, while new money bond sales declined by 6.5% to $21.2 billion. Deals Refinitiv counts as combined new money/refundings accounted for $7.3 billion, down 6.6%.

Private placements increased by 48% to $2.7 billion, competitive deals dropped 52% to $3.4 billion and negotiated deals grew by 22.2% to $32.6 billion.

Sales from all California issues were up 6.1% year-over-year to $27.7 billion. The state government's sales fell 32.8% to $3.5 billion, still the region's largest issuer.

That $3.5 billion of California GOs was about $1.7 billion new money and $1.9 billion refundings. In the first half 2019, the state sold $1.5 billion in new money, and $3.7 billion in refundings.

If the other state agencies are added in, long-term new money sales were $5.2 billion and refundings were $2.9 billion, compared to the prior year’s bond sales with $3 billion of new money and $4.8 billion in refundings, he said.

New money issuance from all California issuers in the first half was down 6.3%% to $14.4 billion, but refunding volume doubled to $7.3 billion.

Taxable volume has picked up very sharply, Schaefer said.

Taxable deals accounted for 34% of the California municipal bond market in the first half, according to Refinitiv.

“Taxable issuance in the market was generally no more than 10% over the last 10 years,” Schaefer said.

The federal tax bill of 2017 eliminated tax-exempt municipal bond refundings, but low overall market rates have permitted issuers to refund bonds that haven't reached their call dates with taxable paper at lower rates than their outstanding tax-exempts.

The market has experienced net flows into mutual funds for tax exempts every month for the past four years, and then in March $45 billion went out, Schaefer said.

The overall rate compression means taxable bonds can also make sense for municipal issuers issuing new money debt, he said.

“If the universe of buyers is only limited to tax-exempt, and you can borrow almost as cheaply on a taxable basis, and taxable buyers are still buying at a more rapid clip than tax-exempt mutual funds, then maybe it’s the smart place to go,” he said.

And large, diverse issuers like California had already been tapping the taxable market for projects like high-speed rail that have a strong connection to the private sector, which restricts the use of tax-exempt bonds.

“It makes more sense to sell into the taxable market, so you don’t create problems on the private vs. governmental portion of the project,” he said. “When the differential (in interest rates) is minor, and it was, we just sell taxable. We sold some taxables earlier this year and got a very good reception from the market.”

The most significant change Sara Oberlies Brown, co-head of Stifel California, has seen from California local government issuers is the growth in pension obligation bond sales.

“This time last year, only two POBs would have come to market,” Brown said. “This year we are up to 10, and some of the POBs are in large size offerings, which is different from last year."

She is seeing issuers taking a cautious approach to pricing new money bonds.

“Issuers have put some projects on the shelf,” Brown said.

“They are doing a water or sewer project, or a fire station, but not the new city hall,” she said. “The other projects moving forward are those at the point they need to continue, despite the uncertain conditions.”

With POBs, she said, some of the sales are certainly driven by pandemic-related revenue losses, but use of the financings by high-quality issuers has lifted some of the taboo surrounding POBs.

“Issuers that would not have considered it a couple of years ago are seeing respected neighboring communities consider or pursue POBs, and that gives them comfort and cover,” Brown said.

School districts are also moving ahead on construction projects, which Brown said indicates they don’t believe they will be doing distance learning forever, Brown said.

California, Washington, Oregon and Hawaii were the only Far West states to see growth in overall sales volume.

Washington’s soared by 47.4% to $4.4 billion in 76 sales, from $3 billion in 53 sales in 2019. The state saw a 15.5% increase in sales for education to $1.1 billion, electric power sales jumped to $836.2 million, and general purpose sales were up 17.4% to $958 million.

Washington, the Far West's second-largest source of bonds after California, had the region’s largest deal outside of California, and sixth-largest overall, when the state priced $785.3 million Feb. 12, and sixth-largest overall.

Oregon experienced a 22.1% increase in sales to $4 billion, not enough to beat Washington’s first half surge. In Oregon, education issuance more than doubled to $2 billion, while transportation fell 80.4% to $72.7 million and electric power quadrupled to $433.6 million.

Citi topped the regional senior manager table edging BofA Securities, credited by Refinitiv with $5.1 billion in volume compared to BofA at $4.74 billion. JP Morgan followed closely with $4.73 billion.

Public Resources Advisory Group led the rankings of financial advisors, credited with $7 billion. Public Financial Management secured second again, with $4.5 billion. KNN Public Finance came in third with $2.5 billion.

Orrick Herrington & Sutcliffe continued its position atop the bond counsel rankings, credited with $13.8 billion. Stradling Yocca Carlson & Rauth came in second with $4.8 billion in volume. The third slot went to Hawkins Delafield & Wood with $4 billion.

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