CHICAGO -- Issuers in the Midwest sold $87.2 billion of municipal bonds in 2016, a 23.4% year-over-year increase that was the biggest of any region.
The region's issuers shook off their typically conservative approach to borrowing in 4,454 bond deals, up from 4,337 the year before, according to data from Thomson Reuters.
"The pent up demand to issue debt to cover infrastructure, new schools, and even indirectly, working capital, has found some relief as issuers try to get ahead of higher rate potential," said Richard Ciccarone, president at Merritt Research Services.
Issuance volume nationwide was up 11.2%, a gain attributed to issuers taking advantage of low rates ahead of expected increases.
Borrowing ticked up in nine of the 11 Midwestern states, with all four quarters posting year-over-year gains, including the strongest jump of 40.7% in the third quarter.
New money accounted for $37 billion of the region's 2016 sales, up 28.6% from 2015 while refunding totaled $35.5 billion, for a 19.8% rise, and combined issuance totaled $14.8 billion for a 19.6% hike.
The Midwest's 2016 boom year followed more modest growth of 10% in 2015 and 6.9% in 2014, both due to the strength of refundings. Issuance was down 18% in 2013.
"The rate environment for most of 2016 led to increased refunding activity, but 'low for long' sentiment came to a halt after the election, with large upward moves in tax-exempt rates and US Treasury yields," said Huntington Capital Markets' head of public finance, Ryan Kozak.
Kozak said he expects issuers to accelerate new money plans to take advantage of current rate levels before possible movements higher due to tax reform or other initiatives of the current administration.
"There's strong activity to start the year in higher education, health care and development finance, and we think issuance in these sectors will continue to be robust in the first half of 2017," said Kozak.
All sectors saw increased borrowing levels with the exception of power.
Debt Thomson Reuters classed as education-related represented $26.4 billion of total volume, an 8% increase. General purpose followed with $17.1 billion, for a 38.1% increase.
Healthcare accounted for $14.5 billion of volume for a 54.7% hike.
The big healthcare jump was due to "new money from regional consolidation activity, as well as refundings that had been backburnered," said Mark Melio, managing partner at the Illinois-based Melio & Co. LLC which advises hospitals and healthcare systems.
Melio said he expects issuance to fall off this year for multiple reasons including uncertainty under the Trump administration about former President Obama's healthcare reforms.
"Margins have gotten much thinner in healthcare, rates have increased, and spreads have widened," he said. "Public offerings with substantial disclosure are being pushed aside as borrowers look to direct purchases by banks and other private placement investors. Tax reform and healthcare reform are looming and have added significant uncertainty…all of this means that borrowing will be down in the sector in 2017."
State governments returned to the market in droves, more than doubling issuance to nearly $9 billion from $3.6 billion. State agency borrowing rose 26.8% to $24.9 billion.
Revenue-backed borrowing rose 25.3%, accounting for $50.7 billion while debt classed as general obligation grew 20.8% to $36.5 billion.
Debt with credit support recorded gains across product lines; bonds carrying insurance were up 28.4% to $4 billion.
Borrowing rose in all but North and South Dakota with Illinois issuers leading the pack, selling $20.2 billion of debt for a 36.5% increase, followed by Michigan with $13.2 billion, an increase of 12.1%. Wisconsin had the healthiest percentage increase of 54.5% to $10.4 billion.
Ohio borrowing rose 18.7% to $11.3 billion, Minnesota rose 19.5% to $9.5 billion, and Indiana grew 22.4% to $7.9 billion.
Several professionals from the advisory firm Umbaugh said the combination of low rates and an improved economy drove increased borrowing among their clients. In Michigan, improving economic conditions made it more affordable to borrow especially in the kindergarten through 12th grade sector, said Jesse Nelson, a partner.
In Indiana, improved economic conditions and the low rate environment gave "communities some confidence to move forward with infrastructure improvements" to roads, bridges, and water works, said Todd Samuelson, an executive partner at Umbaugh.
Chicago's 12 general obligation and revenue-backed deals totaling $3.5 billion made it the top borrower in the region. Two O'Hare International Airport sales in November marked the second and fourth largest transactions to come from the Midwest.
On Nov. 3, the city sold $1 billion of general airport revenue refunding bonds with Morgan Stanley in the lead. It returned on Nov. 30 with $1.1 billion of new money and Bank of America Merrill Lynch in the lead.
The Illinois state government followed in the second spot among the region's issuers with eight deals valued at $3.4 billion, including the biggest Midwest deal of 2016 -- a $1.3 billion transaction that sold on Oct. 13 with BAML and Jefferies running the books.
During the course of the year, the state saw its spreads widen from 155 basis points over the top-rated benchmark on the 10 year in its first sale of the year -- a $480 million competitive GO issue – to 200 basis points on its last issue of the year – another $480 million GO sale that sold on Nov. 3.
The January sale was Illinois' first in 20 months and over the course of the year it experienced further downgrades and its budget impasse dragged on.
The Chicago Board of Education brought the region's ninth- and 10th-largest transactions with its $725 million sale in February that was delayed a week after it struggled to find buyers due to its deteriorating finances. It returned in December with a fresh credit structure that used a newly imposed capital improvement property tax levy to secure a $730 million issue.
Chicago in January issued $1 billion of new money and refunding but no new GO borrowing is planned until 2019. Water, wastewater, and sales tax backed deals initially planned for last year might come from the city in 2017.
Illinois has not said what new money or refunding might be in the works. The state Senate's sweeping bipartisan budget plan would authorize $7 billion of borrowing to pay down bills.
The Illinois Finance Authority finished third among issuers with 22 mostly healthcare and higher education related deals totaling $3.3 billion. It was led by a $1 billion new money and restructuring sale in July on behalf of Presence Health which marked the fifth largest transaction from the region.
The Michigan Finance Authority finished fourth among Midwest issuers with 13 deals totaling $2.6 billion and Wisconsin's state government came in fifth with 10 deals valued at $2.2 billion.
The Indiana Finance Authority finished sixth with 17 deals valued at nearly $2.2 billion.
The Wisconsin-based Public Finance Authority – established as a national conduit in 2010 -- cracked the top 10 with its 44 deals valued at $1.5 billion and the Great Lakes Water Authority in Michigan finished 10th with its two deals totaling $1.3 billion.
A $917.8 million October deal with Citi running the books was GLWA's first bond issue after launching Jan. 1, when it assumed Detroit's $5.5 billion water and sewer debt portfolio and took charge of regional water management.
"While the authority has no current intentions to enter the market again this fiscal year, we actively monitor opportunities for additional savings," GLWA officials said. "Our 2016 upgrades to the A category from all three rating agencies leave us well-positioned for future savings."
Ohio State University's $600 million taxable March sale under a novel, $1 billion borrowing program was the 15th-largest transaction in the Midwest. The bond structure gives the university structuring flexibility because it closely mirrors a corporate shelf registration program, allowing the university to move more nimbly when attractive market opportunities arise through June 30, 2017.
Bank of America Merrill Lynch easily claimed the top spot among senior managers in the Midwest league table, credited by Thomson Reuters with 94 transactions worth $12.2 billion. A year earlier BAML held the top spot with only $4.4 billion of issuance.
The competition was tighter among the second, third and fourth place finishers.
Morgan Stanley took second with 56 deals valued at $7 billion, Stifel Nicolaus & Co. Inc. finished third with 440 deals valued at $6.4 billion, JPMorgan finished fourth with 68 deals valued at $6 billion, and Barclays came in fifth with 35 deals values at $5.4 billion.
RBC Capital Markets, Citi, Robert W. Baird & Co. Inc., Piper Jaffray and Goldman Sachs rounded out the top 10.
Public Financial Management topped financial advisors, credited with 474 deals valued at $14.3 billion. Acacia Financial Group Inc. followed in a distant second advising on 41 deals valued at $4.8 billion and in third was Umbaugh LLP advising on 212 deals valued at $3.4 billion.
Ehlers, Kaufman Hall, Public Resources Advisory Group, Columbia Capital Management LLC, Springsted, Baird, and Hilltop Securities Inc. rounded out the top 10.
Chapman and Cutler LLP took the top spot among bond counsel, credited with 403 deals totaling $8.6 billion. It was followed by Kutak Rock LLP with 208 deals valued at $5.8 billion, and Ice Miller LLP with 206 transactions valued at $5.3 billion.
Gilmore & Bell PC, Dickinson Wright, Miller Canfield, Dorsey & Whitney LLP, Dinsmore & Shohl LLP, Quarles & Brady LLP, and Katten Muchin Rosenman LLP rounded out the top 10.
