States and municipalities in the Northeast sold $58.9 billion of debt in 1,062 issues during the first six months of 2010, eking out a 2% increase over the first half of 2009.
The modest increase in volume was due in part to the success of the taxable Build America Bond program, which is credited with opening up the muni market to a wider buyer base. The stimulus bonds offer issuers a 35% federal subsidy on interest costs. Volume also was bolstered by large refinancings as issuers continued to unwind troubled floating-rate debt issues and found fixed rates attractively low.
States and local governments began selling BABs in April 2009 and flocked to the taxable security during the entire first half of 2010. Issuers in the Northeast sold $13.853 billion of BABs in the first half, compared with $2.785 billion in first half of 2009.
As a result, taxable debt issued in the region totaled $15.9 billion for the first six months of 2010, $9.8 billion more than was sold during the same period last year.
There were 162 taxable transactions in the first two quarters of 2010 compared to 49 such deals in the first six months of 2009.
New-money issuance in the Northeast dropped by 12.9% to $33.4 billion during the first half. But refundings were up by $6.9 billion in the first half of 2010, reaching $17.3 billion.
Alan Schankel, director of fixed-income research at Janney Montgomery Scott, said issuers have been converting floating-rate debt into fixed rates to address derivative or credit enhancement issues and to take advantage of lower interest rates.
“I think some I’ve seen are refinancings to get out of variable-rate debt and replace it with fixed-rate debt,” Schankel said. “Also, of course, when interest rates are so low, this is the time to lock in long-term yields. When you can get down, depending on the maturity, in the 3% range or the 4% range, who needs floating rate?”
Issuance of short-term variable rate debt with a put option dropped by $1.3 billion in the first half to $3.1 billion of debt, while borrowers used fewer letters of credit. About $2 billion of debt in the first half was enhanced with LOCs, down from $3 billion last year.
States and municipalities used a lot less bond insurance in the first half, insuring $3.7 billion of debt in 313 issues. That was less than 7% of total issuance, reflecting the downfall of big bond insurers in the wake of the financial crisis.
Sales of variable-rate debt with no put option increased to $2.1 billion in 2010 from $1.2 billion in 2009.
That change is due in part to about $800 million of Massachusetts Department of Transportation refinancing debt.
MassDOT refinanced $800 million of fixed-rate debt into variable rate to better match the bonds with floating-to-fixed-rate swaps attached to the debt.
The first half of 2010 reflected a gradual return to the municipal market by investors who were shell-shocked for much of 2009 by the credit market crisis.
“It was tough to sell anything,” Schankel said. “All the [arbitrages] and hedge funds had crashed and there wasn’t much liquidity in the market and the only real buyers, the only real support for the market was retail. And now we’re in a different environment where institutions are back in and they’re a part of the market, and you’re also beginning to see some of the [tender option bond] programs start up and the hedge-type players get more involved in the market.”
The largest transactions in the Northeast during the first half include two Puerto Rico Sales Tax Financing Corp. deals, one for $1.8 billion and another for $1.6 billion, that Citi priced on Jan. 28 and June 24, respectively.
A May 19 MassDOT refinancing of $1.09 billion with Citi and JPMorgan as senior managers was the third largest deal. Pennsylvania sold $1 billion of debt, including $548.9 million of taxable BABs on May 19 with Bank of America Merrill Lynch and JPMorgan as underwriters. Morgan Stanley priced $900 million of New York City bonds, including $748.6 million of taxable BABs on June 9.
Pennsylvania issued a similar amount on Jan. 13 with Barclays Capital as book-runner. That transaction included $604.1 million of BABs.
Puerto Rico’s sales tax credit, called COFINA by its Spanish acronym, and the New York State Dormitory Authority again placed first and second among the region’s largest issuers, respectively selling $3.6 billion and $3 billion of debt during the first half.
The Puerto Rico Electric Power Authority sold $2.5 billion of debt and the New York City Transitional Finance Authority and the Metropolitan Transportation Authority sold $2.06 billion and $2.03 billion of debt, respectively.
Bank of America Merrill priced the most municipal debt for the region during the first six months of 2010, underwriting $10.7 billion of debt compared to the $7.2 billion it priced during the same period last year.
That increase boosted the investment bank to first place from its third-place seat for the first half of 2009. Bank of America declined to comment on this increase in municipal business.
Citi dropped to second place from first, pricing $8.7 billion of Northeast debt. JPMorgan came in third with $6.3 billion.
Barclays municipal business increased by $3 billion during the first half, pricing $5.6 billion of Northeast debt and raising the bank to fourth place from its seventh-place seat during the same period in 2009.
Barclays bought Lehman Brothers’ municipal bond department after Lehman filed for bankruptcy protection in 2008.
The firm has been very active in the BAB market, according to Rob Taylor, head of public finance at Barclays.
“It has taken us time to explain to our clients our ability to access Barclays global platform,” he said. “Barclays didn’t make its entrance into the muni space until 2009. The legacy Lehman Brothers munis team was part of the acquisition. I think the combination of communicating who and what we are, along with the good hires we’ve made, has helped contribute to our growth. We’ve had tremendous hires across many different areas, which has been helpful in increasing our volume.”
Nixon Peabody LLP shot to first rank among bond counsel firms, more than doubling its volume in the first half to $8.3 billion compared to its third-place ranking in the same period last year.
A large part of the increase is attributable to the work the firm did on the PREPA’s eight deals that totaled $2.53 billion in the first half.
Nixon Peabody partner Virginia Wong said the increase was due to larger deals and a long-term strategy to grow its muni business throughout the country.
“We’ve tried to identify some of the larger transactions earlier and gone after them,” Wong said. “Given the breadth of our experience, and in particular our tax expertise, we tend to see larger, more complicated transactions.”
Nixon has added three attorneys in the past two years to a municipal finance team that numbers more than 40 nationwide, she said.
Hawkins Delafield & Wood LLP dropped to second place from first place, having worked on $5.9 billion of Northeast debt. Edwards Angell Palmer & Dodge LLP was third, while Sidley Austin LLP fell to fourth from second.
Public Financial Management Inc. again topped the list of financial advisers, consulting on $12 billion of Northeast debt during the first half.
The Government Development Bank for Puerto Rico, the commonwealth’s fiscal agent, advised on $6.1 billion of debt this year compared to $5.9 billion of debt it worked on in the first half of 2009.
Public Resources Advisory Group served as adviser on $4.4 billion of debt during the first six months of 2010, down slightly from $4.9 billion last year.
Lamont Financial Services Corp. jumped to fifth place from eighth last year. The firm served as consultant on $2.8 billion of debt compared to $1.6 billion during the same time last year.
New York issuers sold $18.2 billion of bonds in the first half of 2010, a $2.22 billion drop from last year.
Competitively priced debt more than doubled in the state during those periods— from $1.82 billion to $4.02 billion this year.
The increase was, in part, due to two deals sold by the state and New York City that typically would have gone negotiated.
In February the New York City TFA competitively sold $356.5 million of bonds as part of $751.5 million deal that included a private placement with the state lottery. The Dormitory Authority in May competitively sold $800 million of state personal income tax bonds.
“While New York City typically negotiates its bond issues because of the size and complexity of our transactions and the value of our presale retail order periods to the transaction and to our individual investors, from time to time we have a bond sale that lends itself to competitive bidding,” the city’s deputy comptroller for public finance, Carol Kostik, said in an e-mail.
“We were placing a large portion directly with the New York State Lottery and so structured the overall bond issue ourselves around Lottery’s needs,” she wrote. “Competitively bidding out the balance was straight forward and we used the competitively bid yields to set the yields on the directly placed bonds.”
Pennsylvania’s volume totaled $9.7 billion during the first half, about $200 million less than the $9.9 billion of debt sold during the first six months of 2009. The state sold $2 billion of taxable BABs during the first half of 2010.
Massachusetts borrowers sold $3 billion more debt, with $7.8 billion of total debt compared to the $4.8 billion issued in the first half of 2009, an increase of 62%. MassDOT refinanced nearly $2 billion of debt during the second quarter of this year and the commonwealth sold $538 million of general obligation refunding bonds in March.
New Jersey’s volume totaled $6.7 billion during the first half, up about 0.4% from last year.
New-money and refunding issuance of $1.4 billion for school construction, issued through the New Jersey Economic Development Authority, accounted for much of the volume, along with $859 million of New Jersey Transportation Trust Fund Authority debt.
Puerto Rico borrowers sold $6.1 billion of debt in 12 issues, about the same amount sold during the first half of last year in six transactions. Sales tax and electric power deals account for $4.8 billion of the $6.1 billion of total debt for the first half of 2010.
Connecticut’s volume increased by 32%, or $900 million, to total $3.4 billion. Maryland borrowers sold $500 million more debt this year compared to 2009. The state’s first-half volume totaled $1.7 billion.
Debt issuance in the District of Columbia dropped by $800 million to $1.5 billion. New Hampshire borrowers issued $598 million, a $34% increase. Rhode Island’s volume decreased by $169 million to $555 million, a 23% drop.
Maine issuance totaled $482 million compared to $592 million of debt sold during the first half of 2009.
Delaware and Vermont borrowers issued $434 million and $240 million of debt, respectively, during the first six months of 2010.