Refunding boom drove most of Midwest's 2019 volume increase

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By Yvette Shields and Nora Colomer

Issuers in the Midwest sold $71.5 billion of municipal bonds in 2019, a 19% year-over-year increase fueled by modest new money growth and a much healthier stream of refundings that saw more issuers turning to taxable structures.

“Midwestern borrowers were more motivated to issue debt but it was more by desire to reduce debt costs rather than to finance new projects,” said Richard Ciccarone, president of Merritt Research Services.

The volume came in 3,498 transactions, according to Refinitiv data, up from $60.1 billion sold in 2018 in 3,168 deals. The region’s 19% gain exceeded the Northeast's 16.8% but lagged the Far West, Southeast, and Southwest, which experienced more robust growth.

The region’s growth marked a turnaround after Midwest volume fell the most among The Bond Buyer's five regions in 2018.

Borrowing of $14.1 billion in the first quarter and $18.4 billion in the second was up by 33% year-over-year in the first quarter and 41% in the second, but it was the fourth quarter that saw the most issuance at $24.9 billion, a 14% hike over the previous year. Issuance of $14.1 billion in the third quarter marked a 3.4% drop.

New money issuance was up 8% to $45 billion and refundings swelled 77.7% to $20.7 billion with combined issues totaling $5.8 billion, a 14.9% drop. Tax-exempt issuance accounted for $56.5 billion of deals, up 9%, while taxables ballooned by 103.8% to $12.9 billion.
With interest rates in low territory, the opportunity to take advantage of the market to spend on infrastructure was mostly overlooked, which Ciccarone attributes in part to the conservative nature of the region. Ciccarone also ascribes numbers that lag national figures in sectors like transportation to the “maturity of the economy” in the region with governments more focused on moderating taxpayer burdens than making future investments.

The use of taxable structures “may be here to stay” as investors have grown more accustomed to the differences between the municipal and taxable market adding to demand, he said. Whether the current market conditions that are driving the appeal of taxable structures for advance refundings such as narrow spreads remains in place is uncertain. “I all depends on the market,” Ciccarone said.

New money did rise and Patrick McGow, a principal and public finance group leader at Miller Canfield PLC, sees the numbers remaining in positive territory this year as the market benefits from new interest rate lows in recent weeks.

“I think the low interest environment helps and people are deciding to move forward on financing now and we are seeing a lot of activity in what has traditionally been slowest quarter of the year. So far 2020 seems to be off to a good start with new issue volumes,” McGow said.

The year saw many first-time users of taxable paper for advance refundings as borrowers got more comfortable joining the crowd.

Wisconsin did its first taxable advance refunding as did Ann Arbor Public Schools in Michigan. The district, which had a billion-dollar bond proposal approved by voters last November is geared to issue $130 million of tax-exempt bonds this year as part of the program.

Revenue-backed borrowing accounted for $43.2 billion of volume compared to general obligation-backed paper at $28.3 billion. Bond insurance was used on $3.1 billion of sales, down 23.7%, while guaranties enhanced $6.6 billion, up 11.3%.

Negotiated transactions gained in favor rising by 30.2% to $52.4 billion compared to competitive transactions at $15.8 billion for a gain of 7.3% with private placements falling by 35.8% to $3.3 billion.

Ohio-based issuers led among the states with $12.6 billion sold for a 47.7% hike over the prior year. Illinois followed accounting for $10.9 billion of volume, a 17.2% decline. Michigan-based borrowing followed in third place at $10.6 billion, a 41% increase.

Indiana recorded the most significant gain with issuance swelling by 83.6% to $6.5 billion. Iowa, Missouri, Nebraska, and Wisconsin also saw growth while Minnesota, North Dakota and South Dakota joined in Illinois in negative territory.

Refunding in Indiana grew 142% while new money rose 54%.

“Property tax value has not only stabilized but they have been rising and so once again reserve balances are up so I think from a fiscal standpoint people feel in a much better position and feel that they have the capacity to issue new debt improving revenue streams and/or tax basis,” said Diana Hamilton, president of Sycamore Advisors.

Hamilton said she expects taxable bonding will continue citing one example.

“In certain instances it really works for Indiana University it enabled them to bring in much larger investor base and they were able to get a very attractive rate,” Hamilton said. “They were able to on a taxable bases which gives a lot of flexibility on the refunding in the structuring side and very importantly it brought in a large group of new investors and further enhanced their pricing.”

Kari Blanchett, a managing director at PFM Financial Advisors, said pent-up infrastructure demands served as a primary new issue volume driver in Michigan after communities deferred spending during the last recession.

“We expect an increase in financing of deferred infrastructure and other capital needs will continue to drive strong bond volume in 2020,” Blanchett said in an email. “Taxable refundings are likely to continue but are not expected to reach the same level as 2019.”

Education-related borrowing led among sectors accounting for $22.6 billion of issuance, up 23.6%, followed by general purpose issuance at $12.9 billion, slightly down from the prior year, then healthcare at $10.6 billion, up 12.7%. Borrowing in other sectors also grew with gains seen in electric power, housing, environmental facilities, and public facilities. The development and transportation sectors declined.

State agency borrowing surged by 52.1% to $23.9 billion, the most among borrowers. Issuance by districts followed at $16.2 billion, a 19.9% gain; cities and towns at $10.4 billion, a 17.7% decline; local authorities at $9.1 billion, a 31.3% gain; state governments at $4.2 billion, a 16.8% drop.

The region’s largest single transactions during the year offered a mix of refundings and new money using tax-exempt and taxable structures.

The region’s largest deal for $1.1 billion came in December from Trinity Health Credit Group. The taxable refunding issue sold through the Michigan Finance Authority.

The region's second-largest deal came from the Kansas City, Missouri, Industrial Development Authority for $886 million sold in June to finance a new terminal at Kansas City International Airport.

The Metropolitan Pier and Exposition Authority of Illinois’ December refunding for $882 million marked the third largest transaction. Central Plains Energy Project’s $782 million refunding in November followed, with Illinois’ $750 million new money issue in November coming in at number five.

The Michigan Finance Authority led among issuers bringing to market $3.5 billion last year, followed by the Wisconsin Public Authority with $1.95 billion and the Indiana Finance Authority with $1.85 billion. The PFA is based in Wisconsin but issues debt for borrowers across the country.

The Illinois Finance Authority followed with $1.5 billion, the Illinois State Toll Highway Authority with $1.22 billion, and Ohio Water Development Authority with $1.21 billion. Ohio, Illinois, the Indianapolis Local Public Improvement Bond Bank and Wisconsin rounded out the top 10 all with more than $1 billion of borrowing for the year.

BofA Securities led the pack of senior managers, credited by Refinitiv with underwriting $8.3 billion, followed by Citi with $6.4 billion and Stifel Nicolaus with $5.3 billion. Robert W. Baird & Co. Inc., RBC Capital Markets, JPMorgan, Morgan Stanley, Goldman Sachs, Barclays, and Piper Jaffray rounded out the top 10.

PFM Financial Advisors took the top spot among advisors, credited with working on $12.4 billion worth of deals. Baker Tilly followed advising on $4.4 billion of borrowing and Ehlers & Associates with $2.8 billion. Melio & Co., Columbia Capital Management LLC, Acacia Financial Group Inc., Hilltop Securities, CSG Advisors Inc., Baird, and PMA Securities Inc. rounded out the top 10.

Kutak Rock LLP took the top spot among bond counsel, credited with deals valued at $5.1 billion, then Chapman and Cutler LLP with $4.8 billion, and Miller Canfield Plc with $4.8 billion. GilmoreBell PC, Squire Patton Boggs, Ice Miller LLP, Quarles & Brady LLP, Dinsmore & Shohl LLP, Dorsey & Whitney LLP, and Bricker & Eckler LLP rounded out the top 10.

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