CHICAGO - Issuers in the Midwest sold $37.5 billion of municipal bonds in the first half of 2015, up 17.5 % from the same period of 2014 due solely to refunding opportunities, with new money issuance shrinking.
The overall hike in Midwest issuance was the lowest of all regions in a year of higher municipal primary activity nationwide.
The Midwest saw 2,319 transactions, up from 1,840 over the same period last year, according to data from Thomson Reuters. Of the total, 1,077 deals valued at $17.2 billion sold in the first quarter and 1,242 deals valued at $18.4 billion sold in the second quarter.
New money accounted for $14.8 billion of the debt sold in the first half, a 13.1% drop, while refunding shot up 88% to $16.7 billion. The remaining $4.1 billion was sold in combined deals.
"Overall the numbers are better than they've been the last couple years but it's due to refunding," said Richard Ciccarone, president of Merritt Research Services, adding that the share new money makes up of the overall total is the lowest since 2012. "There's a carryover of the Midwest conservatism in the numbers with governments being careful about issuing new debt."
That means many governments are falling short on "addressing the serious aging of infrastructure," Ciccarone said. "It's not that we don't have a demand for new debt to repair and replace infrastructure but right now, from a political standpoint, there's reluctance to take on new debt."
Borrowing was up in every state except Illinois and Missouri. Michigan-based issuers led the pack accounting for $6.5 billion of issuance, an 89% year-over-year increase. Illinois followed at $5.5 billion, down 34% from the year before, while Ohio came in third with $5.2 billion of volume, an 18.3% increase.
The decline of Illinois-based borrowing marks a sharp dropoff from recent years as the state government's $31 billion infrastructure program nears its end with the state mired in a budget impasse.
The impasse clouds the finances and in some cases the borrowing plans of schools and local governments.
"The state's fiscal challenges have stifled their ability to issue for replacement programs," Ciccarone said. "I don't see a new, major debt program at the state level for a couple years."
Chicago's pension woes and those of overlapping governments like Chicago Public Schools and Cook County add to the tensions holding back new money issuance. CPS and Chicago's recent issues have focused on restructuring their debt.
Volume for the remainder of the year is unclear as issuers face the prospect of rising rates due to the expected Federal Reserve rate hike which could prompt some to pull the trigger on refundings but it may not be enough to lure borrowers on new money, said several Midwest-based market participants.
Across sectors, education-related bonding led the way with $14.3 billion, a notable increase of 60% over the same period last year. Healthcare issuance followed with $6.1 billion for a 58.5 % increase. General purpose bonding recorded a slight drop to $5.7 billion while transportation issuance fell precipitously by 69.6% to $1.5 billion.
Direct state government borrowing fell off 64.5%, dropping to $1.5 billion.
Bond insurance continued its upswing, being offered on $1.77 billion of debt for a 41% increase that still represents less than 5% of the debt sold in the Midwest.
The hospital sector brought some of the region's largest deals, led by a $900 million from Trinity Health in February. The deal, which was a mix of new money and refunding, was the largest borrowing to date for the nation's second-largest non-profit health care provider, and the first since it merged with Catholic Health East in 2014.
Refunding made up much of the sector's volume, but new money borrowing is also expected to rise, said Fitch health care analyst Jim LeBuhn.
With health care capital spending at near historic low levels, hospitals have started to indicate that they're expecting to increase their capital spending over the next one to five years, said LeBuhn.
"Also, volumes got better in the second half of 2014," said LeBuhn. "This is giving guys confidence, [and they're saying] 'We are going to need some higher capital spending because all of a sudden our volumes have stabilized a bit,'" he said.
The Michigan Finance Authority was the largest issuer in the Midwest for the first half, floating $2.3 billion of bonds. It has been a busy year for the state's main conduit issuer, which floated bonds on behalf of borrowers ranging from hospitals to schools, including Detroit Public Schools, to local governments.
The state government won an upgrade in July from Moody's Investors Service, which raised its rating one notch to Aa1 on the state's $1.9 billion of general obligation bonds. Standard & Poor's also in July revised its outlook on the state to positive from stable, affirming its AA-minus rating. Both ratings agencies praised the state for rebuilding its reserves. Fitch upgraded the state in 2014 to AA.
The state held its first GO bond sale since the upgrade in early August, and officials said the upgrade translated into interest cost savings.
"We saw a good, diverse amount of investors that were interested and the sale went really well," said May Martin, executive director of the MFA and director of the Bureau of State and Authority Finance.
"I think some of the investors were more interested and maybe had been a little shy about Michigan in previous years," she said, adding that Michigan paper is somewhat scarce as the state only tends to only come to market about once a year.
The MFA also brought hospital deals for the Sparrow Group, Beaumont, McLaren and other major Michigan providers. Health care issuance represented one of the most active areas for debt sales for the MFA, said John Barton, director of the authority finance division within the Department of Treasury.
"With rates being where they're at, it's an opportune time to launch a capital program or refund bonds," said Barton. "Usually we have these hospital conduit deals at the end of the year, but this time there was some carryover from 2014."
The Indiana Finance Authority followed the MFA as the region's second biggest issuer, accounting for nearly $1.2 billion of volume, and the Illinois Finance Authority followed with $1 billion.
Wisconsin came in fourth selling $915 million and then Chicago with $786 million.
Chicago's issuance was led by its restructuring of floating-rate debt to shed bank and interest rate swap contracts on about $800 million debt that marked the city's first step in solving a $2.2 billion liquidity crisis.
Rating downgrades gave banks the ability to demand repayment of floating-rate paper, interest-rate swaps, and credit lines due. The city's second phase in eliminating the risk came in July in the form of a $1 billion sale that is not reflected in data for the first half.
The deal was led by Bank of America Merrill Lynch, which led the region among senior managers, receiving credit for $4.4 billion worth of borrowing followed closely by JPMorgan with $4.2 billion. The third spot that went to Stifel Nicolaus accounted for $2.4 billion followed by Robert W. Baird & Co.
RBC Capital Markets, Piper Jaffray & Co., Citi, Fifth Third Securities, Goldman Sachs, and Wells Fargo Securities rounded out the top 10.
Public Financial Management topped the financial advisors' list advising on $6.1 billion of borrowing. Stauder Barch was a distant second with $1.8 billion and Ehlers & Associates was third with $1.4 billion. Baird, Springsted Inc., Acacia Financial Group, Columbia Capital Management, Umbaugh LLP, Kaufman Hall & Associates, and PMA Securities rounded out the top 10.
Chapman and Cutler led among bond counsel with $3.4 billion followed by Gilmore & Bell PC with $2.5 billion and Ice Miller with $2.2 billion. Quarles & Brady, Miller Canfield Paddock, Kutak Rock, Squire Patton Boggs, Thrun Law Firm, Dorsey & Whitney, and Dinsmore & Shohl rounded out the top 10.
