Refunding trend dragged Southwest volume down in 2017

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DALLAS – Municipal bond volume across the eight-state Southwest region in 2017 fell 9% below its 2016 record, according to data from Thomson Reuters, as refundings dropped.

At $76.05 billion, the annual volume was the lowest since 2014, as was the number of issues at 2,702, a drop of nearly 15% from 2016.

The number dropped despite a year-end surge from issuers rushing to market with deals they feared would become impossible under the tax bill then being deliberated in Congress.

The Southwest accounted for about 17% of the $435 billion of bonds and notes sold nationally in 2017.

“The most startling statistics in my mind were the number of issues,” said Dennis Hunt, manager of public finance at Stephens Inc. in Arkansas. “Some of it had to do with increasing rates. Most investors believe that finally there’s going to be some kind of increase in yields that they’re going to see after many years.”

In hopes of normalizing the interest-rate environment after nearly a decade of holding overnight rates at virtually zero, the Federal Reserve raised its benchmark fed funds rate three times amid little threat of inflation. At the same time, issuers and advisors were watching for an infrastructure proposal from the new Trump Administration that failed to surface in 2017.

Despite the overall volume drop, new money issues across the Southwest rose 17% to more than $36.5 billion, the highest total since Build America Bonds were available in 2010.

While tax-exempt issues fell nearly 15%, taxable volume increased more than 75% to $6.8 billion.

Refunding issues fell nearly 35% to a six-year low of $22.24 billion. Issues that combined new money and refunding were down 6% to $17.3 billion.

After three quarters of year-over-year declines, volume soared more than 26% in the fourth quarter as financial advisors, underwriters and bond counsel rushed to get their clients’ deals out the door before the new tax law took effect.

Uncertainty reigned in December as one version of the tax bill threatened to eliminate tax-exempt private activity bonds and another ended tax-exempt advance refundings. In the end, PABs survived but advance refundings did not.

The year-end rush created a vacuum in the first month of 2018. After a nearly 20% drop in 2017, bond issuance from Texas in January 2018 fell nearly 79% to $1.432 billion compared to the first month of 2017.

“Everybody had to take a few days just to catch their breath,” said Todd Brewer, vice chair for public finance at Orrick, Herrington & Sutcliffe in Houston. “We’ve seen this before since the last tax reform legislation in 1986. I’m cautiously optimistic that the slowness in January is not going to be a year-long thing.”

Texas’ $42.23 billion accounted for more than half of the region’s volume, but the Lone Star State’s total volume fell nearly 20% from its record $52.65 billion in 2016.

Three states managed to increase volume for the year. Utah’s rose nearly 52% to $4.66 billion. Oklahoma saw a nearly 34% increase to $4.49 billion, and Colorado registered a 27% boost to $11.33 billion.

Texas and four other states produced lower volume. Arkansas recorded the biggest drop of nearly 30% to $1.7 billion. Arizona’s volume fell nearly 13% to $6.58 billion, Kansas dropped 12% to $3.3 billion, and New Mexico slumped 6% to $1.75 billion.

Regionally, education remained the single largest sector at $30.9 billion, but that was down more than 12% from the previous year’s volume.

The region’s largest issuer was the North Texas Tollway Authority, on the back of the region’s largest issue of the year, a $2.5 billion October deal to implement a debt restructuring that led to ratings upgrades.

Houston, which issued $1 billion of pension obligation bonds at year’s end, ranked second among regional issuers with $1.83 billion for the year.

The Texas A&M University System’s $1.79 billion from eight issues ranked third, followed by the University of Texas System’s $1.18 billion on eight issues.

The Oklahoma Turnpike Authority ranked fifth among all issuers with $1.16 billion of toll revenue bonds.

Citi topped the ranks of senior managers in the Southwest, credited by Thomson Reuters with $8 billion on 116 deals, followed by RBC Capital Markets with $7.4 billion on 214 issues and Bank of America Merrill Lynch & Co with $6.63 billion on 77 issues. JPMorgan ranked fourth with 77 deals valued at $5.5 billion, followed by Morgan Stanley’s $4.1 billion on 56 deals.

Hilltop Securities, the perennial leader among financial advisors, stayed on top with 553 deals valued at $22.49 billion. PFM Financial Advisors was second with $4.75 billion, followed by Estrada Hinojosa & Co. at $3.3 billion. RBC Capital Markets ranked fourth with $2.63 billion, with Samco Capital Markets rounding out the top five with $2.6 billion.

Among bond counsel, McCall Parkhurst & Horton retained its long-held regional top spot, credited with 386 deals valued at $13.21 billion. Norton Rose Fulbright was runner-up with 216 issues valued at $7.35 billion, followed by Andrews Kurth’s $5.61 billion on 99 deals. Bracewell earned the fourth spot with $5.52 billion on 108 issues, followed by Kutak Rock with $4.9 billion on 131 issues.

In Arizona, the Phoenix City Civic Improvement Corp. was top issuer with six deals valued at $1.11 billion. JPMorgan outranked other senior managers in the state with nine deals worth $1.03 billion, while Frasca & Associates earned top spot among financial advisors with $874.8 million through four deals. Greenberg Traurig’s 46 deals valued at $1.9 billion lifted the firm to the top of the state’s bond counsel ranks.

In Arkansas, top-ranked senior manager Stephens Inc.’s 39 deals were credited at $302.4 million, and the firm also ranked first among financial advisors with 38 deals valued at $583.4 million. Crews & Associates ranked second in both categories. For top bond counsel Friday Eldredge, 109 deals were worth $1.39 billion.

The University of Colorado was the Centennial State’s largest issuer at $538 million. RBC Capital Markets topped senior managers with 27 deals valued at $1.93 billion. North Slope Capital Advisors edged out Hilltop Securities among financial advisors with 16 issues worth a combined $1.22 billion. Kutak Rock ranked first among bond counsel with 92 deals valued at $3.24 billion.

In Kansas, Piper Jaffray’s 31 deals combined for $812 million to land the top rank among senior managers. Financial advisor ranks were led by Springsted with $452.7 million on 32 deals. Gilmore & Bell topped bond counsel firms with 138 deals valued at $2.51 billion.

In New Mexico, JPMorgan was top senior manager with 10 deals valued at $576 million. RBC ranked first among financial advisors with 31 deals with a combined value of $579.7 million. Modrall Sperling was top bond counsel with 23 deals valued at $508 million.

In Oklahoma, RBC’s volume of $936 million pushed it to the top of senior manager ranks. Hilltop Securities’ 12 deals worth $1.46 billion far outpaced other financial advisors.

Bank of America Merrill Lynch & Co. rose from fourth place among Texas senior managers in 2016 to the top in 2017 with 62 deals valued at $5.64 billion. BAML’s volume rose more than 46% from $3.86 billion in 2016. Citi had 16 more deals than BAML but the total value was lower at nearly $4.2 billion, keeping the underwriter in second place in Texas for the second year in a row.

Hilltop Securities, the perennial leader among financial advisory firms in Texas, saw its volume fall about 10% to $19.1 billion on 514 deals.

McCall Parkhurst & Horton’s $13.2 billion of volume from 377 Texas deals gave it a long lead over No. 2 bond counsel Norton Rose Fulbright.

In Utah, Salt Lake City’s four issues of $1.09 billion gave it the state’s top rank among issuers. Citi was tops among senior managers, managing eight deals worth $1.4 billion. PFM Financial Advisors topped financial advisors on two deals worth a combined $1 billion. Gilmore & Bell’s 49 issues worth $1.69 billion earned first place among bond counsel.

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