New money sales drove Far West volume up in 2017

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LOS ANGELES -- The Far West rode a wave of new money bond sales in 2017 to a 5.6% year-over-year volume increase.

Issuers in the nine-state region sold $95.8 billion of municipal bonds, according to Thomson Reuters data.

They sold more debt over fewer deals: 1,574, down from 1,658 in 2016

New money bond sales were up 81% year-over-year to $44 billion while refundings fell 22.4% to $30.2 billion. Deals classified as combining new money and refundings were off 22% to $21.4 billion.

The strong economy likely played a large role, particularly in California, in making “issuers more comfortable going to voters with referenda and with issuing non-voter debt as they feel more comfortable with their budget outlooks and capacity to take on debt service costs,” said Tom Schuette, partner and co-head of portfolio management for Gurtin Municipal Bond Management in Solana Beach, Calif.

Growth in California’s suburbs also has driven demand for new school facilities, road projects and infrastructure, Schuette said.

“As housing issues continue to be a concern within the core of California’s population centers, you have had development occurring further out into suburbs as people look for affordable housing — this has resulted in those areas needing to issue debt to finance infrastructure demands,” he said.

Volume was up year-over-year in every quarter but the third, which saw a 24.5% drop to $18.6 billion. As with the other four regions, fourth-quarter issuance rebounded, seeing a 23.6% year-over-year bump, amid fears that pending tax reform legislation would eliminate private activity bonds and advance refundings. PABs ultimately survived.

The third quarter drop-off could be attributed to a combination of concerns over the Federal Reserve’s evolving position, changes to interest rates in general and the length of the economic recovery, said Tim Schaefer, California’s deputy treasurer for public finance.

The length of the economic expansion might have some questioning whether the music will stop sooner, rather than later, and thinking that maybe it might not be a good time to take on new debt, Schaefer said.

Volume in the Far West trailed only the Northeast, where issuers sold $121.3 billion in 2017.

California was responsible for more than two-thirds of the region’s issuance at $68 billion, up 5% from 2016.

New money issuance from the Golden State was up 74.6% to $29.5 billion while refundings fell 19.2% to $22.6 billion. Combined sales fell 19.6% to $16.3 billion.

Schaefer attributed the increase in California sales to a recognition of the state's economic strength, the improvement in state revenues and growth in reserves.

Years of low interest rates meant there are fewer bonds to refund, but Schaefer said had he known in the spring that advance refundings were on the federal tax bill's hit list his office might have sold more. The state does twice-yearly general obligation bond sales in the spring and fall.

California state government refunded $5.4 billion last year compared to $6.2 billion in 2016 and sold $3.3 billion in new money bonds last year compared to $2.6 billion in 2016, according to the treasurer’s office.

California’s state government was credited by Thomson Reuters with selling $8.9 billion of debt in 2017, making it by far the Far West’s biggest issuer.

The state’s bond issuance is primarily spread between education, transportation and the clean water program, Schaefer said. The transportation numbers include funding for high-speed rail.

“High-speed rail is moving ahead and is at the point where it will need more money to build, rather than spending to acquire right-of-ways, and pay for soft costs and engineering,” Schaefer said. “We are in the building phase, which would account for why high-speed rail became more prominent in 2017 and possibly could this year.”

Deals classified as being for education dropped slightly in the Golden State from the prior year, but were still the largest category with $21.2 billion. Transportation sales more than doubled to $10.3 billion.

Refundings fell in every state except Alaska where they grew by 9.5% to $311.4 million, even as the state’s overall volume slipped 15% to $996 million.

Overall volume was also down in Washington, Nevada, Hawaii and Wyoming.

Nevada saw the biggest jump in new money issuance throughout the region with a 295% increase to $1.3 billion over 30 sales versus 17 sales for $330 million a year earlier.

Washington remained the Far West state with the second-most municipal bond volume at $10.3 billion, despite a 3.9% drop in sales. Oregon issuance experienced 60% growth to $7.2 billion.

Education and transportation appeared to drive Oregon’s growth. Deals classified as education grew to $3.4 billion from $1 billion while transportation rose to $1.2 billion from $109 million.

“The bottom line is that several factors – mostly inside Oregon but also at the federal level — coalesced to create a busy year for bond financing issuance in Oregon,” said James Sinks, the Oregon Treasury’s spokesman.

“Based on our Bond Tracker system, there was a sharp increase in both state and local bond issuance in 2017 compared to 2016,” Sinks said.

In the case of the state, the 2015 Legislature wrote the 2015-17 bond authority legislation in such a way that the bulk of the bond and lottery bond issuance occurred in 2017, near the end of the budget biennium.

The Oregon Treasury sold a large chunk of revenue bonds for the Oregon Department of Transportation in 2017, and issued a new round of short-term floating rate notes, Sinks said. The Treasury also stepped up issuance of single family mortgage revenue bonds compared to the previous year out of concern that the state might lose accessibility to this program under federal tax reform.

“As for local governments in Oregon, there was a big jump in issuance of GO bonds for school districts, and smaller increases in the amount issued for ports,” he said. “The amounts issued by cities, community colleges, and counties actually went down in 2017.”

California GO deals were the region’s two largest with a $2.8 billion pricing on March 7 and a $2.5 billion pricing on Aug. 29. Bay Area Toll Authority came in third with $1.95 billion pricing on Aug. 1.

A Hawaii’s GO transaction was the largest Far West deal outside of California, with $854.8 million sold May 10 to be the region’s 13th largest of 2017.

The Far West region’s education sector, which grew by 8.5%, remained the largest at $29.4 billion. Transportation was second with 97% growth to $13.9 billion. Healthcare declined by 2.2% to $9 billion.

BA Merrill Lynch topped the regional senior manager table, credited by Thomson Reuters with $12.7 billion and 115 deals. Citi trailed with $11.8 billion on 115 issues, followed by $11 billion in 118 issues for Morgan Stanley.

Public Resources Advisory Group led the rankings of financial advisors for the third year with $15.7 billion in 54 issues. Public Financial Management secured second again, with $13.2 billion in 153 issues. KNN Public Finance came in third with $10.6 billion in 95 issues.

Orrick Herrington & Sutcliffe continued its position atop the bond counsel rankings, credited with $36.4 billion. Stradling Yocca Carlson & Rauth came in second with $9.2 billion in volume. The third slot went to Hawkins Delafield & Wood with $8.4 billion.

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