March pick-up raises hopes for springtime issuance

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Municipal bond volume picked up in March, prompting speculation that a drought in deals is about to ease.

Though volume for the month dropped 28.1% from a year earlier to $25.08 billion, it was up from $17.19 billion in February, according to Thomson Reuters data. Issuers completed 653 transactions in March, down from 958 in March 2017. It was the lowest March volume since 2011.

First quarter volume fell to $62.82 billion from $91.98 billion in the first three months of 2017– a 31.9% decrease. However, March was the biggest volume month of the year so far.

“Issuance seasonally picks up in this period,” said Tom Weyl, director of municipal research at Wasmer, Schroeder & Company. “January and February are historically the lowest issuance months. March is typically the second-most active month, with June being the most active.”

The low and slow pace of volume so far this year comes as no surprise, given the flurry of deals during the tax reform rush of 2017.

“We are about where we expected to be at this point,” said Vikram Rai, head of municipal strategy at Citi. “At the beginning of the year, we called for about $335 billion of issuance this year. As of now, we are on pace for about $300 or $310 billion, volume has underwhelmed our expectations, but we are not going to drastically modify our prediction.”

Rai added that he believes things should pick up in the second quarter.

“The second quarter should be better,” he said. “Based off of the cannibalization we saw take place at the end of 2017, knew it would have the biggest impact on the first quarter. We are not expecting a huge increase and turnaround, but at this point a small increase in volume is better than nothing.”

Refundings were few and far between, sinking to $3.09 billion in 107 deals from $9.37 billion in 247 deals a year earlier.

“2018 was going to be bad for refundings anyway – as 10 years ago issuance was way down,” said Rai. “And that is being compounded by higher interest rates and no longer being allowed to do advance refundings” under the new tax law.

New money issuance increased 15.1% to $16.97 billion in 514 deals to account for the majority of the month's issuance. This is up from $14.74 billion of new money volume in 619 deals a year earlier.

Combined new-money and refunding issuance dropped to $5.01 billion, while issuance of revenue bonds was down 26% to $13.12 billion, and general obligation bond sales fell to $11.95 billion from $15.15 billion.

Negotiated deals sank 23.5% to $16.54 billion and competitive sales decreased by 9.1% to $8.28 billion.

Taxable bond volume fell to $1.74 billion from $2.26 billion, while tax-exempt issuance decreased by 23.7% to $22.66 billion. Minimum tax bonds dropped to $676 million from $914 million.

“Despite reports of taxable issuance being up, it is actually down,” said Rai. “Taxable issuance with corporate CUSIPs is slightly up but there seems to be a misconception about taxable issuance right now.”

Long-term variable rate with no put rose to $454 million from $282 million.

“This could stem from issuers experimenting with other options without having the ability to advance refund, as well as the thought that investors may pay more for this structure in a rising rate environment,” Weyl said.

The volume of deals wrapped with bond insurance fell 13.9% to $1.62 billion in 105 deals from $1.88 billion in 140 deals a year earlier.

Only three of the 10 sectors saw year-over-year increases, as public facilities more than tripled to $929 million from $303 million, electric power rose to $588 million from $500 million and development deals climbed to $977 million from $949 million.

The other seven sectors declined at least 10.1% with the biggest drops coming from housing, which was at $724 million compared with $1.61 billion, transportation, at $1.65 billion compared with $2.63 billion, and utilities which was at $2.29 billion compared with $3.41 billion.

One type of issuer was in the green this month. Direct issuers gained 42.8% year-over-year to $80.8 million from $56.6 million. All others dropped at least 5.1%. State agencies' issuance plunged 32.2% to $7.28 billion from $10.75 billion, counties and parishes volume fell to $1.49 billion from $2.21 billion and issuance from districts declined to $4.28 billion from $6.66 billion.

California continues to have the most issuance among states so far in 2017. The Golden State has issued $9.08 billion, while New York is second with $8.22 billion. Texas is third with $5.71 billion, while Pennsylvania is next with $3.19 billion and Ohio rounds out the top five with $2.42 billion.

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