Refundings Rage Fuels 31% Bounce in Muni Debt

A dramatic increase in refundings, particularly in the first half of 2012, boosted volume for long-term municipal bonds last year.

Volume rose 31% in 2012 from a year earlier to $376.2 billion in 13,036 issues, up from $287.8 billion in 10,577 deals in 2011, Thomson Reuters numbers showed.

The low-yield environment for much of 2012 encouraged muni issuers to refinance their debt at lower rates. As a result, refundings vaulted 73% last year from 2011. They registered their biggest jumps during the first and second quarters, when they rocketed 160% and 137% higher, respectively, than refi issuance over the same periods in 2011.

“Clearly refundings were the champion,” said John Hallacy, manager of municipal bond research, Bank of America Merrill Lynch.

And they were. Refinancings rose to $156.5 billion in 6,158 issues in 2012, against $90.4 billion in 3,909 deals the previous year. New-money deal numbers, by comparison, actually fell 1% to $144.8 billion in 5,684 deals from $146.3 billion in 5,807 issues.

Low rates fueled the refunding boom. The triple-A 10-year yield reached historic lows in 2012 and averaged 1.80% throughout the year, according to Municipal Market Data numbers.

It opened 2012 at 1.88%, reached a peak of 2.33% on March 20, and closed out the year at 1.72%. It also hovered below 1.50% for nine consecutive trading sessions at the end of November and the beginning of December, a span during which it held an all-time low of 1.47% for three straight sessions.

Also of note, overall net issuance — defined as the net change in total new-issue muni bond supply after taking all maturing and called securities into account — closed out 2012 at insignificant levels, John Dillon, chief municipal bond strategist at Morgan Stanley Wealth Management, wrote in a research report.

“This dynamic fostered an environment conducive to constructive price action as well as spread compression,” he wrote, “as investors confronted a supply-demand imbalance when searching for securities to reinvest redemption monies.”

As with refundings, overall volume gains over 2011 jumped in the first half of the year, only to slow in the second half. Of the year’s total, the first two quarters saw jumps of 65% and 66%, respectively, over the same periods in 2011.

A 34-basis-point backup in rates between Dec. 10 and Dec. 18 played a noticeable crimp in issuers’ desire to bring deals to market.

“That really caused some pause there for a little bit,” Hallacy said. “So many deals that might have come to market either were delayed or postponed. Or in some cases, the numbers might not have worked as well.”

Among the industry’s largest sectors last year, education, transportation, utilities and general purpose saw the biggest increases in volume over 2011. Education issuance jumped 25% to $93.0 billion from $74.5 billion in 2011. Transportation saw a 67% leap in issuance to $54.9 billion last year from $32.9 billion in 2011.

Volume in utilities increased 44% in 2012 to $45.7 billion from $31.7 billion in 2011. General purpose bond issuance rose 27% last year, to $100.8 billion from $79.3 billion in 2011.

Tax-exempt issuance climbed 34% last year to $330.6 billion from $247.8 billion in 2011. By comparison, taxable volume rose just 2% for the year over the same period a year earlier, to $32.5 billion from $31.9 billion in 2011.

Negotiated issuance leapt 34% last year to $292.7 billion from $218.5 billion in 2011. Competitive offerings, by comparison, rose 24% to $74.1 billion last year from $59.6 billion in 2011.

Revenue and general obligation bond issuance both increased at about the same pace last year. Revenue bond volume rose 32% in 2012 to $240.2 billion from $182.4 billion a year earlier. GO issuance grew 29% last year to $136.0 billion in 2012 against $105.4 billion in 2011.

Fixed-rate volume jumped 35% in 2012, while variable-rate volume mostly fell. Variable-rate short put issuance was down a smidge, while variable-rate long put or no put fell 48%.

For the year, large state and local government sectors such as state agencies, cities and towns, districts, and local authorities all saw increases in volume. Among them, cities and towns saw the largest bumps in issuance with a 43% increase in 2012 over the preceding year.

A breakdown of refunding numbers for the year showed increases in most categories and sectors.

For large-issuing sectors, transportation and general purpose issuers saw the biggest jump in refundings — their issuance climbed 121% and 94%, respectively. Education also saw large gains in refundings, with an increase in 67% in issues over what they floated in 2011.

Revenue refunding issuance in 2012 rose 62%, to $94.0 billion from $58.2 billion the year before. General obligation refis climbed 94% to $62.4 billion in 2012 from $32.2 billion in 2011.

Negotiated refunding volume leapt 73% for the year to $125.5 billion from $72.5 billion in 2011. By comparison, competitive refinancings increased 77% in 2012 to $25.6 billion from $14.5 billion the previous year.

Fixed-rate refunding issuance increased 83% last year, to $144.6 billion from $78.9 billion. Variable-rate short-put refinancing volume was largely flat for 2012 against the previous year. But variable-rate long put and no put issuance dropped 39% to $729 million from $1.20 billion in 2011.

State governments, state agencies, and cities and towns all did a tremendous amount of refunding in 2012. Refis jumped at state governments by 136%, to $14.5 billion from $6.1 billion in 2011. For state agencies, the numbers were $41.3 billion in 2012, up from $23.3 billion one year earlier.

Cities and towns also did more refundings last year, to $25.7 billion from $14.2 billion in 2011.

“Almost all categories were affected, but some really saw it as a unique opportunity to lower costs,” Hallacy said. “And certainly some with budgetary issues looked at refundings for savings they could take up and help with their budget-balancing needs.”

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