CHICAGO -- Municipal bond volume in the Midwest dropped 18.1 % in 2013 to $59.1 billion, from nearly $72.2 billion in 2012, as rising interest rates sapped refunding opportunities and new-money issuance was also down.
The 18% slump exceeded the national drop of 13%. The region's borrowing was completed in 4,016 transactions, down from 4,603 a year earlier according to Thomson Reuters.
The Midwest managed a slight 1.6% year-over-year uptick in the first quarter, when $13.3 billion was borrowed, before reversing in the second quarter when volume tapered to $21.2 billion for a 16.8% decline year-over-year.
A steep drop came in the third quarter as interest rates moved more notably upward and mutual fund outflows mounted. Third quarter borrowing plunged 40.9% from the 2012 period with only $11.2 billion in issuance. The fourth quarter decline narrowed to 8.6% with $13.4 billion borrowed.
New money borrowing accounted for $27.7 billion of Midwestern debt issuance, down by 9.1 % from 2012, while refunding dwindled by 30.1% to $21.2 billion. Combined deals fell by 17.1% to $11.4 billion.
All but one of the 11 Midwestern states closed out the year in negative territory and the drop came across many issuance sectors with the exception of transportation, housing and development.
Nebraska volume recorded the steepest drop, down 42.7% year-over-year, followed closely by Michigan where borrowers - stung by ripple effects from Detroit's historic bankruptcy filing in July -- issued 41.7% less debt dropping to $5.9 billion from $10.2 billion in 2012.
Midwest municipal news was also dominated last year by two triple-notch downgrades of Chicago's general obligation rating and Illinois' ongoing credit deterioration amid gridlock over pension reform. Lawmakers there finally passed a state overhaul in December.
The prospects for this year don't bode well as many municipal participants are predicting lackluster borrowing this year. "Based on what I've seen, it looks like we'll have another pretty low year for issuance," said Patrick Early, managing director, chief municipal analyst for Wells Fargo Advisors, which sells to retail buyers.
Detroit's ongoing bankruptcy, and its effort to treat its general obligation bonds as unsecured, could dampen appetite for GOs, especially in Michigan, Early added.
"I think there are potentially fallouts from what's being proposed in Detroit," he said. "The terrible treatment the general obligation is going to get might have some influence on the types of bonds that get done going forward, particularly in Michigan."
Bonds backed by revenue sources accounted for $35.1 billion of the region's issuance, according to Thomson Reuters, while debt defined as general obligation totaled $25.3 billion. Both slid nearly 20%.
Illinois issuers borrowed $13.2 billion compared to $16.4 billion a year earlier for a 19.5% drop. Minnesota recorded a 30.2% drop, , and South Dakota nearly 30% less. Ohio saw a slight uptick of 5.1% to $11.4 billion from $10.9 billion.
Education borrowers led the pack selling $17.7 billion of bonds, down 9.8% over the previous year, followed by general purpose issuance which slid 36.9% to $12.9 billion. Health care issuers borrowed $8.6 billion, reflecting a 24.1% drop. Health care analysts predicted a light year for issuance ahead as non-profit providers grapple with the rollout of the new federal health care law and ongoing volume declines.
"I think a lot of organizations are not looking to spending a lot in terms of bricks and mortar," Fitch Ratings health care analyst Jim LeBuhn told The Bond Buyer in a recent interview. "They're pulling back on capital spending, and a benefit of that is they're building up their liquidity positions for the uncertainty that they see."
Transportation borrowing rose by 29.8% to $5.9 billion as the sector benefitted from a big Chicago O'Hare International Airport deal. Housing deal volume rose 48% to $2 billion and development related issuance rose by 14.8 % to $4.9 billion.
State agency borrowing led the field seeing $17.8 billion issued in 306 deals, followed by district borrowing of $12 billion, cities and towns, credited with $10.4 billion, and state governments which issued $6.5 billion. The biggest decline of 35.6% came from states, followed by a 35% drop among local authorities. Counties was the only issuer group to rise, with $5.5 billion sold for a 32.5% increase.
Fixed-rate borrowing accounted for $53.1 billion of the region's issuance last year.
Bond insurers only wrapped 81 transactions totaling $1.3 billion.
Tax-exempt issuance represented $49.2 billion of Midwestern issuance for 2013 with taxable borrowing making up $9.2 billion. Taxable securities actually rose by 43.2% as some borrowers especially in the higher education sector found taxable rates and the lack of tax-exempt rules attractive. The taxable numbers were also bolstered with some state of Illinois issuance, a Missouri student loan deal, and the inclusion of a taxable piece in the $1.5 billion JobsOhio deal.
Midwestern borrowers favored the use of negotiated sales which accounted for $42.5 billion of borrowing, over competitive sales which made up $12.9 billion. Private placements were increasingly used, accounting for $4.9 billion of borrowing, which was up 33.4%.
The region's largest single bond sale last year came in late January in the JobsOhio sale for $1.5 billion, a controversial deal that financed a long-term lease of the state's lucrative liquor distribution system. Illinois followed with a $1.3 billion general obligation sale in June.
Posey County, Ind., and the Iowa Finance Authority followed, with their refundings of short-term securities under the Midwestern Disaster Area bond program deals for new fertilizer plants. The Indiana deal was for nearly $1.3 billion and the Iowa deal nearly $1.2 billion.
The Ohio Turnpike & Infrastructure Commission also came to market with a billion-dollar-plus deal in July followed by the Missouri Higher Education Loan Authority sold $956 million in May and Chicago came to market with a $897 million O'Hare sale in October.
Illinois was the top issuer in the region borrowing $3.4 billion in a series of new money and refunding GO and sales-tax backed bonds to fund capital projects and economic savings. The state recently sold $1 billion and plans several more deals this year but borrowing could taper off as it wraps up its ongoing $31 billion capital program. Gov. Pat Quinn has said he hopes to pass a new infrastructure program this year but budget issues could dominate the session.
The Iowa Finance Authority came in a distant second among issuers with $1.7 billion, followed by the JobsOhio Beverage System on its single $1.5 billion deal, and then Chicago with $1.5 billion.
JPMorgan took the top spot among senior managers on Midwestern issuance, credited with senior managing $6.2 billion. Bank of America Merrill Lynch followed with $6.1 billion, Citi with $5.8 billion, Stifel Nicolaus & Co. Inc. with $3.1 billion, and Barclays with $3 billion. Robert W. Baird & Co. Inc., Piper Jaffray & Co., Morgan Stanley, Wells Fargo & Co., and RBC Capital Markets rounded out the top 10.
Public Financial Management Inc. was the clear leader among financial advisors in the region aiding borrowers on borrowing valued at $6.9 billion. Public Resources Advisory Group came second, advising on $2.4 billion and Acacia Financial Group Inc. was third advising on $2.36 billion. Peralta Garcia Solutions LLC came in fourth with $1.6 billion and Kaufman Hall & Associates Inc. was fifth with $1.5 billion.
Squire Sanders topped the field of bond counsel working on $5.2 billion of issuance, followed by Chapman and Cutler LLP with $4.6 billion, Kutak Rock LLP with $3.9 billion, Quarles & Brady LLP with $3.3 billion, and Gilmore & Bell PC with $3.2 billion.
Detroit dominated headlines after it filed for bankruptcy on July 18, a few months after the state appointed corporate bankruptcy attorney Kevyn Orr to take over the city. The case could set precedents that ripple throughout the national bond market, experts said.
But in the Midwest, the impact, at least in the near term, is expected to remain largely in Michigan. The Chapter 9 filing, and the city's decision to treat its general obligation bonds as unsecured, rattled the market in the weeks after the filing, forcing several local Michigan issuers to pull planned sales.
Most of them eventually came back in late 2013, with some paying what local issuers called Detroit and Michigan penalties. Issuance in Michigan in 2013 was still down 42%, to $5.9 billion from $10.2 billion in 2012. Private placements were up 290% in Michigan to $1.5 billion, driven in part by Oakland County's decision to privately place a $316 million bond issue in September.
