State and local government revenue growth and expectations for higher interest rates last year were the main contributors to a 12.1% decrease in note issuance, municipal managers and analysts said.
"As state and local governments have rebounded from the recession and as revenues have continued to recover there is a reduced need for cash-flow financings," said Dorian Jamison, municipal analyst at Wells Fargo Advisors.
That drove volume down overall to 2,677 deals with a total par value of $53.49 billion from 2,922 deals with a total par value of $60.84 billion in 2012, according to data provided by Thomson Reuters.
2013's total issuance of notes was the least issued since 2006, when $44 billion was sold.
Notes are typically issued for cash- flow purposes to finance state and local government operations before tax collections or other anticipated revenues are received, such as tax and revenue anticipation notes.
Pamela Tynan, principal and head of short-term municipal fixed-income at the Vanguard Group, said governments benefitted from the stabilization of the housing market, handsome stock market returns, and solid gains in economic growth overall.
In turn, Tynan said, governments relied less on municipal note borrowing last year.
Some of the year-over-year decline can be attributed to California, whose annual note issuance was significantly reduced with the expectation that the trend will continue in 2014, Tynan noted.
California in 2013 reduced its traditional revenue anticipation note sale to $5.5 billion when the deal priced in August, from its $10 billion borrowing in 2012 due to the state's improved cash position, State Treasurer Bill Lockyer said in a statement.
Tynan also said some governments opted for other financing avenues, and that contributed to the decline.
"In this protracted, low-rate environment, issuers have sampled from a buffet of alternative financing options including fixed-rate bond issuance, floating-rate notes and direct loans to meet their funding needs," she said.
Indeed, state governments abandoned municipal note issuance in a noticeable amount compared with other issuers, as borrowing fell 23.6% to $21.96 billion in 25 deals, from $28.75 billion in 23 deals in 2012.
Besides strong revenues and the prospect for higher rates in the second half of the year, an improving economy and the intended tapering of the Federal Reserve Board's monthly stimulus program also kept some note issues out of the market, according to Richard Ciccarone, president and chief executive officer at Merritt Research Services LLC, an independent research and data provider.
Those circumstances made short-term borrowing and variable-rate capital improvement borrowing "less attractive to borrowers," he said, "particularly if the paper needed to be refinanced or remain outstanding."
However, that said, refunding volume did increase by 44% to $1.08 billion in 41 deals, from $654.4 million in just one deal the previous year.
Though the number of new-money deals increased to 2,629 from 99 the year before, volume fell to $52.26 billion from $60.11 billion.
David Litvack, managing director and head of tax-exempt research at U.S. Trust Bank of America Private Wealth Management, attributed much of the decline to state issuance, especially in August, when note volume overall declined 33.9% for the month to $15.89 billion in 278 deals, from $24.02 billion in 324 deals a year earlier.
"We believe that was because many states saw strong income-tax collections early in 2013, as taxpayers accelerated income into 2012 to avoid paying higher tax rates," Litvack explained.
Offsetting the decline in August, note issuance in April and July grew 40.7% and 47.9%, respectively.
Volume in April rose to $1.98 billion in 148 deals, up from $1.41 billion in 179 deals the previous year, while July volume increased to $6.45 billion over 298 deals, up from $4.36 billion in 310 deals in 2012.
Al Fleitas, managing director of the municipal note group at Oppenheimer & Co., attributed a constriction in the note market that he noticed over the last year to states' austerity programs initiated in 2012.
In addition to the improving finances, Fleitas said a growing trend that surfaced last year and may have contributed slightly to the decrease in volume was the arrival of note deals structured much shorter than the traditional one-year maturity.
For instance, he said there was an increase in bond anticipation notes with maturities in the four- to six-month range, which may have curtailed the volume of some of the standard, one-year securities.
While 2013's overall note decline was modest, municipal participants said the trend toward lower issuance was in line with declining volume in the municipal market at large last year.
"Whether it was for regular negotiated deals, competitive deals or negotiated note deals, issuance was down," a New York trader said
Though investor demand for note debt was strong as they sought safe, high-quality alternatives to riskier securities, rumors of higher rates caused some deals to fall by the wayside. "Issuing debt fell out of favor because issuers didn't need short-term cash," the trader said.
"Revenue growth and cash positions have improved for most governmental credits to their best levels since the credit crisis started in 2008," Ciccarone said. That made it "less necessary for most governments to tap the short-term market for cash flow."
