Natural gas deals boosted Southeast's new money volume in 2018
Southeast issuers brought $54.6 billion of municipal bonds to market in 2018, a number boosted by the return of major prepay natural gas deals.
The region of 11 states had the lowest combined sales volume of The Bond Buyer's five regions, though all experienced double-digit volume dips.
Year-over-year, Southeast volume decreased by 22.6%, with sales declining in all four quarters, according to data from Refinitiv.
On the positive front, the Southeast’s new money deals increased by 29% to $41.1 billion in 995 deals, compared to $31.9 billion in 867 deals the prior year.
The largest year-over-year drop came in the fourth quarter as issuance slid by 46% compared to the same period in 2017 when issuers stepped up borrowing when it appeared the under-negotiation federal Tax Cuts and Jobs Act would eliminate private activity bonds and advance refundings.
Private activity bonds survived in the final version of the act, but advance refundings didn’t. As a result, refundings last year plummeted to $9.4 billion, a decline of 67.1%, while combined refundings and new money deals plunged to $4.1 billion, a drop of 59.6%.
Refundings should pick up this year, according to David Moore, a partner and managing director at PFM Financial Advisors LLC.
“While [refunding] volume has not picked up materially yet, we see favorable market conditions as we get closer to the call dates, and at the same time, bankers are developing more efficient/effective forward refunding structures,” Moore said in an email.
The year ended with a total of $8.5 billion in prepay natural gas deals that bolstered the utilities sector, an area of borrowing that saw the largest year-over-year increase with a 65.4% gain on $12.4 billion in total volume.
Issuers also sold $10.68 billion of bonds for general purposes, a 17.1% decline, and $10.04 billion for educational needs, down 35.1%.
Only Alabama, Kentucky and West Virginia recorded an upswing in volume.
Kentucky saw a 40.2% hike in borrowing to $5.04 billion thanks to prepay gas bonds. The Public Energy Authority of Kentucky, or PEAK, sold seven gas deals totaling $2.73 billion to become the region’s most prolific issuer.
The Southeast’s 10 gas deals and other financings helped pushed Texas-based Municipal Capital Markets Group Inc. to the top of the Southeast’s financial advisor league table, credited by Refinitiv with $8.48 billion in 27 deals.
John Norman, a managing director with Municipal Capital, said he was surprised at his firm's top ranking.
Pent-up demand and favorable market conditions helped drive large deals from natural gas acquisition authorities last year, he said.
“I wouldn’t expect 2019 by dollar and par amount to exceed last year,” he said, adding that it’s hard to say if the economics supporting issuance will remain favorable. “Last year there was a good deal of pent-up demand for these deals for local companies. This year I would expect it to back off somewhat.”
Norman said he expects more public power utilities that typically use a mix of generation facilities will enter the market for prepay natural gas, instead of just nonprofit natural gas focused companies.
“We’ve already seen municipal public power entities beginning to participate in some of the deals,” Norman said.
Municipal Capital closed Tuesday on another $383.5 million prepay gas bonds for PEAK, a smaller deal that he said was needed to fulfill the authority’s needs.
PFM, the Southeast’s top FA for well over a dozen years prior to 2018, came in second place as financial advisor on $7.2 billion of bonds in 98 issues. Public Resources Advisory Group ranked third with $3.1 billion over 31 issues.
Moore, who is based in Orlando, Florida, said this year PFM expects a positive trend in volume as issuers move from planning projects to making them become a reality.
“We see clients becoming more and more focused on addressing infrastructure needs — everything from smaller localized projects like parks, streets and sidewalks, all the way to major infrastructure like toll roads and airports,” he said.
Last year, issuers sold $48.9 billion of tax-exempt bonds, a drop of 20.8%; $4.4 billion in taxable debt, down 4.9%; and $1.27 billion subject to the alternative minimum tax, a decrease of 69.4%.
Issuers preferred to sell deals by negotiation with $35.4 billion in sales, a drop of 17.6%. Competitive deals comprised $14.7 billion in volume, also a 17.6% drop. Private placements were down 53.6% to $4.5 billion.
Florida was the largest source of municipal bond debt in the region last year, although supply from the Sunshine State was off 40% to $12.3 billion. Sales were bolstered by $1 billion of bonds marketed by Miami-Dade County in five deals, and the state Department of Transportation’s $809.3 million in four deals.
Georgia came in with the second-highest amount of issuance selling $7.2 billion, a drop of 21.8% in volume. The state of Georgia sold the region’s largest single deal in June, a $1.23 billion general obligation transaction to finance infrastructure improvements statewide.
The Peach State’s volume was boosted by two of the region’s largest prepay gas deals. Main Street Natural Gas issued $1.02 billion of bonds in January and $1 billion in April, making them the second and third-largest single deals in the region.
Issuers in North Carolina brought $5.92 billion of bonds to market, a decrease of 10.6% in volume compared to the prior year. The city of Charlotte was one of the largest issuers with a $409.9 million refunding deal on April 13. The North Carolina Turnpike Authority issued $401.2 million in refunding bonds on Nov. 20 and the state sold $400 million of GOs on July 18.
Issuers in Virginia sold $5.57 billion of bonds, a 43.4% drop. One of the largest deals was brought Jan. 30 when the Hampton Roads Transportation Accountability Commission, in its inaugural issuance, sold $500 million of senior lien revenue bonds.
Tennessee issuers borrowed $5.28 billion last year, a 9% decline. The Tennessee Energy Acquisition Corp. issued $516.8 million in prepay gas bonds Aug. 14, while the city of Memphis issued $309.3 million of GOs on April 17.
Issuers in Alabama boosted borrowings by 16.1% to $4.6 billion. Deals in the Yellowhammer State included $721.8 million from the Southeast Alabama Gas District and $687 million from the Black Belt Energy Gas District.
Although issuance in South Carolina was down 3.2% to $3.77 billion, supply was bolstered by the Patriots Energy Group selling $832.4 million in three prepay gas deals.
West Virginia volume nearly doubled to $2.09 billion. The state government added to the supply with an $800 million general obligation deal on May 22 that kicked off a voter-approved $1.6 billion “Roads to Prosperity Program” to fund bridge and highway construction and infrastructure projects.
Louisiana issuance fell 73.4% to $1.5 billion; and Mississippi issuance dropped 42.4% to $1.3 billion.
Citi was the Southeast’s top senior manager credited with $7.77 billion in 98 deals. Bank of America Merrill Lynch came in second with $6.89 billion in 81 deals. Morgan Stanley was third with $5.98 billion in 45 deals.
For the second year in a row, Kutak Rock was the top bond counsel with $3.43 billion in 29 deals. Alston & Bird was second with $2.79 billion in 10 deals. Greenberg Traurig was third with $2.44 billion in 50 deals.
Across the region, issuers sold $41.14 billion in revenue bonds, down 23.7%, while $13.5 billion of GOs were issued, a 19% decline.
Fixed-rate bond issuance was down 32.2% to $42.67 billion, while variable-rate long/no put issuance declined 55.4% to $7.8 billion.
Debt wrapped with bond insurance declined 32.3% to $2.6 billion.
Bank-qualified bonds were down 36.6% to $867.3 million.
State agencies once again issued the most debt at $14.3 billion, down 26.9%, while local authorities issued $13.5 billion, a drop of 18.6%.
Cities and towns issued $7.4 billion, down 20.1%; districts sold $6.9 billion, off 11.1%; while counties and parishes issued $6.25 billion, off 37.2%.
State government issuance was down 25.6% to $3.37 billion and colleges and universities sold $1.54 billion, a drop of 32.2%.