Hidden in the October volume decline: a gain in new money issuance

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More states and localities moved ahead with infrastructure projects in October, as bond issuers gained confidence the municipal tax exemption will remain in place.

Municipal bond volume for the month was the third biggest this year, though it fell 33.5% from the same month in 2016, as the pick-up in new money wasn't enough to offset a drop in refundings.

Data from Thomson Reuters shows monthly volume dropped to $36.09 billion in 811 transactions from $54.31 billion in 1,269 deals in October 2016.

Natalie Cohen, managing director of municipal securities research at Wells Fargo Securities said the year-over-year comparison may exaggerate the decline in issuance.

“October 2016 was very unusual," she said. "It was right before the election and everyone assumed [Hillary] Clinton would win and rates were low. So you had issuers rush in to not only get refundings done but also get deals done before the holidays and the election,” she said.

Refundings crashed 71.1% from a year earlier to $6.73 billion in 249 deals from $23.26 billion in 547 deals. New money deals increased 22.5% to $21.65 billion in 511 transactions from $17.68 billion in 575 deals in October of 2016.

“Refundings, as I thought they would in 2017, have really lagged past years'," said Tom Kozlik, managing director and municipal strategist at PNC. "Refunding issuance fell for the month (and this year) most likely because the pool of candidates dried up. New money is hanging in there, although it might seem low to some who expect issuers to take advantage of the relatively low rate environment. I still think issuers are trying to repair their balance sheets, so credit is driving this.”

Kozlik said he expected a little more new money issuance this year and still thinks the same of 2018, though it will not be as robust as some would expect.

“I took the near record number of 2016 election referendums in support of bond issues as a positive indicator for the near term,” he said. “My forecast for 2017 was/is $365 billion and it looks like we are pretty close to hitting that for the year. In all I expected slightly higher than average new money issuance and lower refundings. This has been the case so far this year. I don’t adjust my forecast from the beginning of the year.”

Cohen said the market environment has changed, with new-money up not only month-over-month but also year-over-year, as state and local governments continue to get projects done. The industry has received reassurances from the Trump administration that the municipal tax exemption would be retained in the tax reform package being worked out in Washington.

“I think new-money will continue to stay up for the rest of the year, as those entities should continue to fix and borrow where and when [they] can,” she said. “Uncertainty has done a lot of damage to issuance, in terms of rate hikes and tax exemption, but now it is clear that the tax exemption will survive, so selling new money is easier.”

During the month, the State of California came with roughly $1.59 billion of various purpose GO and refunding bonds back in three separate competitive sales, with new money portions going toward high-speed rail. The Los Angeles County MTA also came with $479.7 million of first tier senior sales tax revenue green bonds.

The value of combined new money and refunding deals for the month dipped 43.3% to $7.71 billion from $13.37 billion a year earlier. Issuance of revenue bonds declined 45.5% to $18.71 billion, while general obligation bond sales fell 13% to $17.38 billion.

Negotiated deals dropped 46.9% to $22.29 billion and competitive sales increased by 41.2% to $13.37 billion. Taxable bond volume dipped to $2.37 billion from $2.90 billion, while tax-exempt issuance decreased by 35.3% to $32.88 billion.

Deals wrapped by bond insurance fell 54.6% year over year to $1.23 billion in 102 transactions from $2.70 billion in 190 deals.

As far as the sectors go, only two were in the green. Development was up 40.5% for the month to $1.17 billion from $834.2 million. General purpose deals rose 32.7% to $15.34 billion from $11.56 billion.

All others were in the red, with electric power falling 81.8% to $279 million from $1.54 billion and health care plummeting 74% to $2.35 billion from $9.04 billion. Utilities fell 52.9% to $3.35 billion from $7.12 billion and education sank 59.6% to $5.86 billion from $14.52 billion.

“With the electric power sector, consumption has come way down with everyone trying to conserve more and that is leading to less bigger deals within the sector,” said Cohen.

As for the different types of entities that issue bonds, only one was in the green. State government issuance was up 63.7% to $8.64 billion from $5.28 billion. All others took a step backwards, with state agencies falling 55.8% to $8.73 billion from $19.76 billion, cities and towns dropping 50% to $2.96 billion from $5.91 billion and districts dipping 48.4% to $5.17 billion from $10.03 billion.

California remained the state with the most issuance, as it has all year. Issuers in the Golden State are way ahead of the pack, having sold $55.52 billion so far this year. New York came in second with $37.56 billion, followed by Texas with $32.30 billion. Illinois is next with $14.43 billion and Pennsylvania rounds out the top five with $14.32 billion.

“I’d say the two main concerns the muni market has right now related to volume, as there is not enough to satisfy demand and also what the course of interest rates will be in December and beyond. And there will be not short term resolution to them,” said Kozlik.

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