Northeast Enjoying a Boom So Far in '07

By Michelle Kaske, Ted Phillips, Peter Schroeder, Jonna Stark, and Humberto Sanchez Increased sales in the education, development, and health care sectors helped push total long-term debt issuance in the Northeast to nearly $56 billion for the first half of 2007, a 28% increase from the $44 billion sold during the same period last year. The Northeast saw the second-highest increase in issuance for any region, following the Far West, which experienced a 60% boom during the first half. New issuance nationally is on course to set a new record in 2007, with $231 billion of bonds sold in the first half and about $261 billion for the year to date. The Northeast saw five bond transactions that tipped the $1 billion mark. The New Jersey Tobacco Settlement Finance Corp. sold $3.62 billion on Jan. 23, the Puerto Rico Highway and Transportation Authority sold $2.18 billion on Feb. 15, the Puerto Rico Electric Power Authority sold $1.94 billion on April 19, the Massachusetts School Building Authority sold $1.5 billion on March 14, and Massachusetts issued $1.05 billion on May 29. The education and health care sectors jumped by $3.89 billion, or 36%, and $3.32 billion, or 123%, to reach $14.65 billion and $6.02 billion, respectively. Bonds sold for long-term development showed the largest increase percentage-wise, up 417% to $1.12 billion compared to $218 million sold during the first half of 2006. General purpose bonds continue to be the largest sector for the region, bringing in $15.1 billion of total sales, up 18% from last year. Citi moved to the top of the region’s senior manager list, with $10.654 billion in deals, up $7.03 billion compared to the first half of 2006 when it placed fifth among underwriters. Citi’s increase in business is due in part to large bond transactions in Puerto Rico, where it worked on $3.38 billion of bonds, some 57% of the island’s debt for the first half of this year. Bear, Stears & Co, Merrill Lynch & Co., and Lehman Brothers followed Citi in the total amount of deals, working on $6.43 billion, $5.37 billion, and $5.20 billion, respectively. JPMorgan also experienced increased business, underwriting $5 billion of debt compared to $1.88 billion last year, making the firm the fifth most active underwriter in the Northeast compared to last year, when it placed eighth. UBS Securities LLC fell to sixth place from its first place position during the first half of 2006. Public Financial Management Inc. topped the financial adviser list with $6.74 billion of debt compared to $5.63 billion that the firm worked on last year. First Southwest Co., Public Resources Advisory Group, and Acacia Financial Group followed with $5.65 billion, $2.4 billion, and $1.62 billion of debt, respectively. Hawkins Delafield & Wood LLP again ranked number one among the region’s bond counsel, working on $5.80 billion of debt during the first half of this year. Nixon Peabody LLP followed with $5.08 billion of bonds, up from $914 million for the same period in 2006 when the firm placed 10th among bond counsel. Arthur McMahon Jr., who heads Nixon’s public finance practice, said the increase in the firm’s volume in the Northeast was the fruit of years of effort to expand its reach. He also cited the firm’s November hiring of Peter Johnson, a seasoned public finance attorney who previously worked for McCarter & English LLP. “[Johnson] was a recognized name in Massachusetts, New Hampshire, and other parts of New England as both bond and underwriter’s counsel,” McMahon said. McManimon & Scotland and Orrick Herrington & Sutcliffe LLP followed with $4.86 billion and $4.42 billion, respectively. New York was the most active borrower in the region. Volume there rose a modest 4.6% to $14.51 billion in the first half of 2007 compared to the same period last year. Tax-exempt issues rose by 10.6%, to $12.86 billion while taxable debt tumbled 60.8% to $439 million. Education sector issuers sold $3.97 billion of bonds in the first half, a $2.11 billion increase over the same period last year. Part of this was due to the New York City Transitional Finance Authority’s $650 million sale of building aid revenue bonds backed by state aid for school construction. The Dormitory Authority of the State of New York was the state’s top issuer, marketing $3 billion of debt. DASNY’s issuance more than doubled compared to the same period last year. DASNY spokesman Marc Violette said the change was due to early 2006 being slower than normal. “The first half of 2007 was really business as usual, with a lot of deals that have been in the works for some time making it to market,” Violette said. New York City was the state’s top issuer in the first half of 2006 with its general obligation credit, but the city’s GO issuance fell in 2007 to a single $100 million deal. The city issued most of its debt, $2.14 billion, through the TFA. The TFA, which was the state’s second largest issuer in the first six months of 2007, did not sell debt during the same time period last year. “The big reason for shifts between GO and TFA is the TFA’s statutory issuance cap,” New York City deputy comptroller for public finance Carol Kostik said in an e-mail. “The TFA reached its $11.5 billion issuance cap for regular TFA personal income tax-secured bonds in 2004, and was precluded from new issuance until the cap was raised by $2 billion after June 30, 2006. So for the first six months of 2006, GO was the only game in town for typical city capital expenses.” The Empire State Development Corp., which did not sell bonds at all in 2006, returned to market with a single issue of $356.8 million. Volume in Pennsylvania rose by 20% to $9.43 billion during the first half of 2007. Health care bonds contributed to this increase as the state absorbed $1.84 billion more in such debt, which accounts for more than half of the region’s $3.32 billion increase in the sector. Contributing to the large volume jump was a $752.4 million bond sale in May by the Allegheny County Hospital Development Authority for West Penn Allegheny Health System, the 10th largest bond sale in the region for the first half of 2007. Bond sales in New Jersey rose to $7.30 billion in 128 deals for the first half, up from $5.48 billion in 141 sales during the same time frame the year before. The Tobacco Settlement Finance Corp. with its $3.62 billion deal was the largest issuer in the state and the region, followed by the New Jersey Educational Facilities Authority, which sold $894 million of long-term debt on behalf of colleges and universities throughout the state, up from $258 million it issued during the same period in 2006. Bond sales in Massachusetts also increased, with the commonwealth seeing a total of $7.57 billion of debt in 143 issues during the first half of 2007, up from $4.62 billion sold in 95 issues the year before. Part of the boost is due to the School Building Authority’s $1.5 billion sale, the commonwealth’s biggest sale so far this year. The state itself was Massachusetts’ second-largest issuer, increasing its borrowing by $488 million to a total of $1.26 billion in two sales for the first half of this year. The Massachusetts Health and Educational Facilities Authority followed with $1.174 billion of debt sold, more than double the $484.7 million of bonds issued during the first six months of 2006. A year after its fiscal crisis, when the government experienced a partial shutdown, Puerto Rico’s volume boomed to $5.88 billion in seven issues for the first half of 2007, compared to $2.60 billion sold in eight sales during the same period last year. Three issuers, the Electric Power Authority, with $2.5 billion of total volume, the Highway and Transportation Authority, with $2.48 billion, and the Puerto Rico Aqueduct and Sewer Authority, with $900 million, account for the bulk of the volume. Vermont saw the Northeast’s highest percentage of volume increase in the first half of 2007. The state’s volume rose 193% with a total issuance of $624.8 million, which was up from $213.5 million of bonds issued in the first half of 2006. “There can be a swing of sort of modest changes, and it can have a major effect in terms of percentage change,” said J. Chester Johnson, chairman of Government Finance Associates, the state’s financial adviser. Johnson noted that a number of large state issuers came to market in the first half, including the Vermont Student Assistance Corp., the Vermont Municipal Bond Bank, and the state itself. Additionally, the University of Vermont and State Agriculture College had a $175 million sale in June, which added to the increase in debt. Rhode Island’s issuance decreased by 23.1%, the largest decrease by percentage in the Northeast, having issued $695.2 million in the first half of 2007, down from $905 million issued in the first half of 2006. While the amount of bonds issued was down 18% in Connecticut, with the state, state agencies, and college and universities issuing less than they did for the first half of 2006, Connecticut’s districts saw a 1,413% increase, having issued $24.2 million, up from $1.6 million issued at the same time a year earlier. Bond issuance in Maryland increased by 19% in the first half of 2007 compared to a same period in 2006. A total of $3.47 billion has been issued this year in 52 transactions, up from $2.92 billion issued last year in 48 transactions. The top two deals included a $325 million Maryland GO issue that was sold competitively on Feb. 28 and a sale by the Maryland Transportation Authority, which sold $325 million of grant and revenue anticipation bonds on May 23, the state’s first Garvee deal. Volume in the District of Columbia increased as well, with the city showing $2.25 billion of debt sold during the first half of this year, a $1.07 billion increase over 2006. In June, the district completed its largest ever GO sale, totaling $827 million and included $527 million of refunding bonds. The bonds will be used to finance a variety of projects across the district. The sale came one month after the district received an upgrade from Moody’s Investors Service and Fitch Ratings to A1 from A2 and A-plus from A, respectively. At the same time, Standard & Poor’s affirmed its A-plus rating. The Washington Convention Center Authority in January sold $492.5 million of senior-lien dedicated tax revenue and refunding bonds. The Series 2007A bonds will go towards financing a 50,000-square-foot convention center expansion, as well as the development of an adjacent 1,400-room hotel. The district also had previously issued $187 million of tax increment financing bonds to aid in building the hotel.