Prepaid natural gas deals Southeast's first-half bright spot
Municipal bond issuers in the Southeast sold $25.9 billion of debt in the first half of 2018, a number buoyed by the return of prepay natural gas deals.
Volume was down nationwide after Congress took advance refundings off the table with its tax bill, but the 5.7% slide in the Southeast was the gentlest of any region.
Six tax-exempt prepay gas deals from issuers in Georgia, Alabama and Kentucky represented $5.2 billion in volume -- and six of the region's eight largest deals -- and helped boost new-money issuance in the Southeast by 44.4% to $20.7 billion. The deals also propped up sales in the utilities sector by 182.6% to $7.3 billion.
Issuers across the 11-state region brought 594 deals to market between January and June, after selling 675 transactions in the first six months of 2017, according to data from Thomson Reuters.
Prepay gas bond issuance had been compressed since the recession ended in mid-2009, according to financial advisor John Norman, a managing director with Texas-based Municipal Capital Markets Group Inc. Norman advised on all six deals with managing director Tyler Noble.
“Market dynamics have created spread between taxable and tax exempt bonds, and that spread created savings associated with the deals,” Norman said. “We now have spread and so we have deals.”
Pent-up demand also is driving natural gas prepay issuance.
“We haven’t had deals for 10 years to speak of because the federal government kept spreads artificially low,” he said. “That, of course, is magnified in the Southeast because there are more of these municipal utilities.”
Norman said he expects volume to slow a bit in the second half and into next year, although his firm has already advised on sales in the last two months – an $832.35 million deal issued by South Carolina’s Patriots Group Energy Financing Group July 25 and a $516.8 million deal sold by the Tennessee Energy Acquisition Corp. on Aug. 14.
“Everybody’s making hay while the sun shines,” he said.
Municipal Capital’s work on the $5.2 billion in gas deals drove the firm to the top of the Southeast’s first-half financial advisor table, bumping PFM Financial Advisors into second place.
PFM was credited with $3.62 billion of business, while Public Resources Advisory Group came in third with $2 billion.
Georgia was the top state for issuance, edging out Florida, the perennial top issuer in the region, with $4.7 billion of bond sales compared with $4 billion from the Sunshine State. Volume for both was down, 2.5% and 10%, respectively.
The Peach State’s volume was boosted by two of the region’s largest prepay gas deals. Main Street Natural Gas issued $1.02 billion of bonds in January and $1 billion in April, making it the largest issuer in the region. The state of Georgia also sold $1.2 billion of general obligation bonds June 19, the region's largest single transaction, which also made Georgia the Southeast's number-three issuer.
Bond volume in Alabama jumped 49.3% to $3.6 billion, propelled by three prepaid gas deals totaling a combined $2.38 billion from the Southeast Alabama Gas District and the Black Belt Energy Gas District.
The Public Energy Authority of Kentucky helped boost the Bluegrass State’s total volume by 10.9% to $2.05 billion with the sale of $833.1 billion in gas supply revenue bonds in January.
Alston & Bird was bond counsel on the Main Street Natural Gas and Black Belt Energy bond issues, propelling the firm to the top of the Southeast bond counsel table, credited with $2.7 billion in those three deals.
“The economic viability of prepay gas deals is very market dependent,” said Alston & Bird partner Peter Floyd, who works in the firm’s Atlanta office. “I expect more transactions before year-end assuming that relevant economic factors line up correctly.”
Floyd said low-cost natural gas is a very important part of the U.S.’s current economic growth and the current resurgence of tax-exempt prepayment transactions is “very welcome” after an extended period when markets didn’t make the transactions economic.
“There is still a great deal of demand from municipal gas distributors and public power for low cost, dependable natural gas,” he said.
Chapman and Cutler came in second on the bond counsel table with $1.7 billion and Gray Pannell was third with $1.5 billion.
“We hope to bring some additional pre-payment deals to market,” said Susan Reeves, chief financial officer at The Municipal Gas Authority of Georgia, the largest nonprofit natural gas joint-action agency in the country. Main Street Natural Gas is the authority’s financing arm.
Reeves said the prepaid gas deals are complicated, and it’s hard to predict how many will come to market, although demand is strong among municipal utilities.
“Market conditions are very good but we never know how long that will last,” she said. “If market conditions change we’ll have to sit on the sidelines.”
Among senior managers, Citi led the table, credited with $4.1 billion, followed by Bank of America Merrill Lynch with $2.85 billion. Morgan Stanley came in third with $2.83 billion.
West Virginia issuers sold $1.23 billion of bonds, 289.4% more than the year before, powered by the state of West Virginia’s $800 million general obligation deal on May 22. The GO deal kicked off a voter-approved $1.6 billion “Roads to Prosperity Program” to fund bridge and highway construction and infrastructure projects.
Issuers in Virginia sold $3.15 billion in the first half, up 0.2%; North Carolina issuers brought $2.68 billion of bonds to market, a 13.2% drop; and issuers in Tennessee sold $2.4 billion, down 0.1%.
South Carolina issuers sold $1.1 billion, a drop of 10.8%; Louisiana issuance fell 79.7% to $515.1 million; and Mississippi issuance dropped 65.9% to $408.6 million.
Tax-exempt issuance throughout the region fell 5.7% to $23.6 billion. Taxable bond issuance rose 8.9% to $1.74 billion. Bonds subject to the alternative minimum tax fell 33% to $554.2 million.
Refundings totaled $3.4 billion, down 60.1%, while combined new money and refundings also plunged 60.7% to $1.8 billion.
Issuers sold $16 billion of bonds through negotiation, up 0.7%. Competitive issuance slid 12.6% to $7.7 billion. Private placements fell by 20% to $2.2 billion.
Some $18.3 billion of revenue bonds were issued, a 0.1% decrease, compared with $7.6 billion of general obligation bonds, a decrease of 16.9%.
Fixed-rate bond issuance fell 21.4% to $19.6 billion, while variable-rate long/no put issuance rose 357.9% to $4.17 billion and variable-rate short put debt plunged 60.4% to $556.5 million. The use of linked-rate bonds rose 1,181% to $1.57 billion.
Debt wrapped with bond insurance fell 40.5% to $1.18 billion; debt with guarantees was down 15.5% to $1.12 billion.
Bank-qualified bonds were down 22.1% to $485.4 million.
Issuers classed by Thomson Reuters as local authorities issued the most debt at $6.8 billion, an uptick of 7.8%, while state agencies came in second with $5 billion, down 28.3%. Districts sold $4.3 billion, up 17.3%, while cities and towns issued $3.37 billion, a 2.6% drop.
Counties and parishes sold $2.8 billion, down 29.2%; state governments issued $2.3 billion, up 4.6%; and colleges and universities brought $1.19 billion to market, a 46.6% increase.