Southeast Bond Volume Hit by Drop in Taxable, Refunding Deals

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BRADENTON, Fla. — Southeast municipal bond issuers sold $21.78 billion of debt in the first six months of 2014, a 31.4% decline over the same period last year, driven by fewer taxable and refunding deals.

Volume in the 11-state region was down $9.97 billion compared to the same period in 2013, according to Thomson Reuters. It was the largest drop in borrowing of the nation's five regions.

Georgia was the only state in the Southeast on the plus side with $3.08 billion in sales, a 4.7% increase over the prior year. The most debt sold was in Florida with $6.24 billion, a 17.2% decline in volume compared to the first half of 2013.

North Carolina had $1.74 billion in sales, and the region's the biggest year-over-year drop in issuance at 67%. Tennessee saw sales fall off 48.5% to $1.14 billion.

Southeast Midyear Review

The education sector saw the highest volume of sales in the Southeast with $5.27 billion, down 31%. Bonds sold for transportation needs surged by 80.2% to $4.1 billion.

Issuers brought $19.6 billion of tax-exempt bonds to market in the first half, down 19% over the previous year. Some $9.7 billion of new-money bonds were issued for a decline of 18.8%.

Taxable bond issuance saw one of the steepest declines of any category to $1.28 billion from $7.06 billion last year, an 82% drop.

"I think the whole story revolves around the taxable issuance for the Southeast," said Peter Delahunt, managing director for municipal fixed income at Raymond James & Associates Inc.

If the $5.77 billion difference in taxable sales were to be removed from this year's statistics, overall bond issuance in the Southeast would be down by about 16%.

"That's pretty much the industry average for issuance being down this year to date," Delahunt said, noting that last year's taxable sales were boosted by a single $2 billion bond deal by the Florida Hurricane Catastrophe Fund.

A drop in refundings so far this year also helps explain some of the overall decline in volume.

Straight refunding deals totaled $9.34 billion, a drop of 32% from last year, while combined new money and refundings were down 55% to $2.72 billion — a combined loss of $5.7 billion in volume.

Delahunt said borrowing is down throughout the country because of austerity, a slow-growing economy, and the growing realization that pension obligations are part of issuers' debt profile.

"That may be, in part, the reason why we seeing not just the Southeast but everyone else cut back on debt," he said. "I think everyone is a little reticent to invest" in infrastructure.

In Georgia, where volume increased in the first half, three Peach state issuers were among the top 10 sellers in the region.

The state brought the largest single offering with $982.9 million of bonds on June 17, a deal that made the state the region's largest issuer during the first half. Of that transaction, $823.5 million was new money for capital needs.

Atlanta was the second-largest issuer with two sales totaling $867.5 million — nearly all of which was a refunding for Hartsfield-Jackson Atlanta International Airport bonds. The Metropolitan Atlanta Rapid Transit Authority came in 10th place with $386.7 million sold for capital needs and to refinance commercial paper notes.

The Georgia and MARTA deals helped propel Holland & Knight LLP to become the No. 1 ranked bond counsel firm in the Southeast, credited with a total of $1.46 billion in sales.

"The firm has made a strong commitment to our bond practice in the Southeast, resulting in a tremendous increase in our volume of work," said partner Woody Vaughan, who worked on the Georgia and MARTA financings with senior counsel Allison Dyer.

The two joined Holland & Knight in Atlanta in February to lead the firm's push into Georgia public finance. Both previously worked in King & Spalding's public finance group.

Vaughan said 2014 has been a challenging year in the Southeast so far, and most advance refundings have already come to market.

This is also an election year for many local governments, and that seems to have depressed borrowing for infrastructure, he said.

"However, we are seeing more forward refundings than in the past, which may be a developing trend for the second half of 2014, especially in Florida," said Vaughan. "As we move beyond the election cycle, we also hope to see more infrastructure financings in the market."

Notable offerings of size were brought to market in the first half. The state of Louisiana, the third-largest overall issuer in the region, sold $815.8 million in three transactions.

Florida's Jacksonville Electric Authority was the region's fourth-largest issuer with $813.3 million in sales.

Issuers in South Carolina placed $1.9 billion in bonds into the market during the first half, a slide of only 5.7% in sales over last year. The South Carolina Public Service Authority, known as Santee Cooper, sold $642.3 billion in bonds on June 13 — the third-largest single sale in the region.

Virginia issuers sold $2.97 billion in debt, a drop of 32% over the prior year. The fifth-largest transaction in the region was the $347.1 million offering brought by the Virginia College Building Authority on May 1.

In Kentucky, issuers sold $1.66 billion for a decline of 25.2%.

Among the deals sold in the Bluegrass state was University of Kentucky's $239 million transaction on March 4 for new construction and renovation. The deal was rare because the bonds were secured by funds from the intercollegiate athletic department and other sources.

Issuers in Alabama priced $652 million of bonds, down 59.7%. In West Virginia sales totaled $227.8 million, a decline of 38.2%.

Of all the deals that priced in the first half of this year, $11.75 billion were negotiated, $7.9 billion were sold by competition, and $2.1 billion were private placements. Bank-qualified bonds, at $693.8 million, were down 43.2%.

Some $14.89 billion of sales were revenue bonds, while $6.9 billion were general obligation bonds. Issuers preferred the fixed-rate mode selling $20.3 billion in bonds, a drop of 29% in deals over last year.

Variable-rate short put debt was up 82.8% to $695.7 million, while long variable-rate no put mode was off 60.4% to $100.2 million. Linked-rated debt totaled $638.6 million, a drop of 74%.

The use of insurance was up by 24.6% to $707.8 million, while letters of credit soared by 1,162% to $268.8 million.

Cities and towns was the only issuer category in the Southeast increasing borrowing in the first half, at $4.05 billion, up 17%. State agencies sold $4.38 billion in bonds, a decrease of 52% compared to first-half 2013.

Local authorities issued $3.8 billion, a drop of 44%, while districts sold $3.2 billion, down only 1.2%. Colleges and universities sold a total of $826 million, a drop of 38% over the prior year.

Public Financial Management Inc. retained the No. 1 slot as financial advisor in the Southeast, credited with $4.3 billion in deals.

Public Resources Advisory Group rose to second place from fifth in the first half of last year with $2 billion in transactions. First Southwest Co. slipped to third place, from second, advising on $1.5 billion in deals. Davenport & Co. LLC came in fourth, and Lamont Financial Services Corp. came in fifth.

Bank of America Merrill Lynch moved into first place on the first-half underwriting table, from second last year, credited with $2.96 billion in sales. JPMorgan rose to second place from fourth with $2.82 billion in sales. Citi dropped to third from first with $2.39 billion. Morgan Stanley rose to fourth place from seventh with $1.74 billion.

Raymond James, which bought Memphis, Tenn.-based Morgan Keegan in April 2012, maintained its fifth-place book-running rank for a second year with $1.7 billion.

"The acquisition of Morgan Keegan has just had a big effect in terms of putting us on the map in terms of public finance," Delahunt said.
Kutak Rock LLP, which was not ranked in the Southeast's top 10 last year, rose to the second place as bond counsel with $1.16 billion in par amount of bonds. Bryant Miller Olive PA ranked third with $1.1 billion in deals. Foley & Judell came in fourth, and Haynsworth Sinkler Boyd PA was fifth.

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