Tax-exempt note issuance rose less than 5% in the first half of 2017, indicating that municipalities required less short-term borrowing and shouldered a lot of their own financial needs compared to last year.

Municipalities sold a total of $20.08 billion of notes to supplement their short-term cash flow needs within 1,097 issues in the six-month period ending June 30, an increase of 4.6% according to data from Thomson Reuters. That compares with $19.19 billion among 1,195 issues in the first half of 2016.

Short-term rate expectations impacted note volume in the first half of 2017, according to Jeffrey Lipton, head of municipal research and strategy and fixed income research at Oppenheimer & Co.

Jeffrey Lipton
Jeffrey Lipton

“Throughout the first six months of the year, note issuance was not only typically cash-flow driven, but it was also heavily influenced by Federal Reserve Board monetary policy,” Lipton said.

Monthly issuance was highest in May when notes rose by 91.7% to $4 billion among 381 offerings, compared with last year’s $2.09 billion of issuance among 189 deals.

“January and February showed a sharp increase in note issuance over the same period last year given expectations that the FOMC would raise the Fed Funds rate by 25 basis points at the March meeting,” Lipton explained. “Issuers acted to lock in what were believed to be lower rates.”

March saw a 43.4% decline, as issuance dropped to $1.62 billion among 146 issues this year, versus $2.86 billion among 192 issues last year.

March note volume was down significantly year over year given the presence of the FOMC meeting and the rush to market in January and February,” Lipton added.

The fall-off in April also reflected the heavier issuance earlier in the year, according to Lipton. “The almost doubling of May volume year over year took account of expectations for another rate increase at the June FOMC meeting, and June note issuance was down because of this,” he explained.

Issuance rose most notably in the utilities and health care sectors in 2017’s first half.

With an increase of 251.7%, note issuance in utilities grew to $3.5 billion with 65 transactions over the $995.4 million in 49 issues the prior year.

Though the health care sector saw just two deals fewer than last year, the sector’s note issuance increased by 167.6% in 2017’s first half to $410.2 million among four transactions, versus $153.3 million among six deals last year over the same time period.

“Heavy advances in health care note issuance year over year could be attributed to the uncertain pathway of health care reform and the approximate two and a half times rise in utility note issuance (non-electric power) may reflect a focus on “bedrock” essential service projects,” Lipton said.

Electric power, meanwhile, saw the largest decline in issuance among sectors as it dropped 96.3% to $14.8 billion among six issues, compared with $395.6 billion among a dozen issues during the first six months of 2016.

Though overall note issuance seemed to have plateaued with little growth in the first half of 2017, tax-exempt note issuance remained in positive territory with an 11.7% increase to $19.06 billion among 1,012 deals, versus the taxable note market counterpart, which dropped 50% from January to June of 2017 to $970.7 million among 82 deals, compared with last year’s 99 transactions totaling $1.94 billion.

New-money note sales inched up by 5.2% to $20.04 billion among 1,075 deals, from 1,180 deals totaling $19.05 billion last year, while refundings declined by 66% to $30.2 million in 15 deals, from the previous first half’s $88.7 million in 11 deals.

Notes for private placements, those with letters of credit, and zero-coupon notes showed noticeable growth.
A 68.9% increase in private placements saw note issuance in the sector to rise to $1.55 billion in 25 deals, even though last year’s $922.1 million was achieved in 58 deals.

Notes with zero-coupons grew by 58.8%, even though issuance remained very low at $2.7 million over one deal, compared with last year’s four deals totaling $1.7 million.

Issuance in the letters of credit segment of the note market increased by 64.5% to $1.64 billion in seven transactions, compared with $1 billion in 10 deals in the first half last year.

Among issuers, districts sold 56.2% more notes, increasing volume to $4.52 billion in 312 deals, up considerably from $2.89 billion in 305 deals previously.

Colleges and universities' note issuance declined substantially in the first half, dropping 93.2% to $80 million in two deals, compared with the prior half’s $1.17 billion among nine deals.

While the current credit cycle has largely plateaued and we are witnessing a decline in state revenue growth with mixed recovery performance throughout the broader municipal asset class, Lipton said overall municipal credit quality is strong.

“Many issuers that needed to access the note market over the past two years are in better credit shape and are not necessarily pressed to pursue cash flow financing,” he added.

“As interest rates rise and the ongoing uncertainty of a national fiscal policy agenda may weigh on state and local credit, we could see an increase in short-term, cash flow borrowings,” Lipton said.

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