BRADENTON, Fla. — Depressed revenues and real estate values kept some Southeast issuers away from the municipal bond market in the first half of the year and contributed to a decline of 38.1% in borrowing volume.
All 11 states in the Southeast saw a decline in issuance. The total volume was $21.5 billion compared to $34.7 billion in the first six months of 2010, according to Thomson Reuters data.
Most of the decrease occurred in the first quarter after the authorization to sell taxable Build America Bonds expired at the end of 2010.
Debt sales declined by 61.4% in the first three months compared to the year before on volume of $7.8 billion, while borrowing dropped only 4.9% in the second quarter when $13.65 billion of bonds were marketed, according to Thomson Reuters.
Florida remained the largest issuer, though its sales dropped by 44.7% to $5.78 billion.
Georgia, typically the second-largest issuer in the region, remained so though overall sales declined 24.6% to $3.58 billion. Issuance was bolstered by the state’s sale of nearly $1 billion — the region’s single largest transaction — in late June.
Two sectors bucked the decline: industrial and economic development deals increased by 57.8% with $1.1 billion of sales and education bond sales saw an uptick of 21.2% to $6.3 billion.
Getting deals done was a challenge because of the current market atmosphere, according to David Moore, a director with Public Financial Management Inc., the region’s long-time top financial advisory firm, which retained that position with $3.6 billion in 53 deals.
Public Resources Advisory Group came in second with $2.9 billion and First Southwest Co. was third with $914.5 million.
“Between credit ratings and credit spreads, and the interest rates going up and down, it’s just made every financing a truly unique project,” Moore said.
Revenues remain pressured and that has influenced the low issuance volume, he said, adding that he expects refundings to pick up in the second half due to low interest rates.
For some issuers, sales tax revenues have begun to turn around but depressed property assessments remain the big question, he said.
An increase in bank private placements in lieu of renewing expiring LOCs was a big change in the first half due to the fact that banks began to accept larger par amounts, Moore said.
Private placement volume more than quadrupled to $601.9 million in the first half though the use of LOCs increased by 46.8% to $585.4 million.
“Pricing has been pretty effective for the bank placements and they eliminate some of the risk,” Moore said, adding that they can also offset a mismatched swap. “You don’t have basis risk if a bank rating changes and you don’t have exposure to rates spiking up like we saw the last three or four years.”
New-money volume was down 53% to $10 billion while refunding transactions of $7.8 billion without new-money components were down 14.2%. Combined new money and refunding transactions were off 16.2%.
Negotiated deal volume slipped 49.1% while competitive deals were off 7.9%. Some $15.3 billion of revenue bonds were sold, a drop of 41%, while general obligation bonds were down by 29.6% to $6.14 billion.
Citi was the top senior manager with $3.7 billion in 46 transactions. JPMorgan followed with $3.2 billion in 40 deals and Bank of America Merrill Lynch was third with 25 deals totaling $2.4 billion.
Fixed-rate debt remained the most popular mode of issuance the region with volume at $18.14 billion, a decrease of 45.1% compared to the first half of 2010. Long-term, variable-rate debt more than doubled to $525.8 million while short put variable-rate volume was $788.8 million, an increase of 16.2%.
Tax-exempt sales were by far the biggest part of the volume with $18.1 billion, a decrease of 26.3%. Taxable bond sales in the first half dropped 70% to $2.9 billion likely reflecting the loss of the BAB program.
The Southeast’s lower volume suggests some issuers were tapped out after rushing to sell BABs before the end of last year, said Albert del Castillo, a partner at Squire, Sanders & Dempsey LLP, the top volume bond counsel with nine transactions totaling $1.63 billion. King & Spalding came in second with $1.5 billion of sales while McNair Law Firm PA was third with $1.46 billion.
Sales picked up significantly in the second quarter, del Castillo said, noting that the firm represents some of the Southeast’s biggest issuers such as the Miami-Dade County, the Florida State Board of Education, and Citizens Property Insurance Corp., Fla., which sold $645 million of bonds in the region’s second-largest transaction in June.
“What’s keeping me busy is still traditional tax-exempt public finance but we have seen direct purchase bond issues” by banks, he said.
One of Florida’s most active sectors has seen its demise in the wake of the real estate market meltdown, del Castillo said. “We used to do a lot of community development district work,” he said. “That’s all gone away.”
Many CDDs the last few years defaulted on billions in so-called dirt bonds, which are tied to assessments on the sale of land.
“In terms of when issuance might pick up, there’s no way to know for certain,” del Castillo said. “The low-interest-rate environment is a positive but the instability in the marketplace makes it difficult to predict when things will be back to the old normal. Maybe we’re seeing the new normal now.”
Louisiana was one of few states in the Southeast where debt volume in the first half kept a close pace with last year’s first-half sales, dropping only 4% to $1.43 billion this year from $1.49 billion in 2010.
Sales in the first three months fell 36% to $412 million from $646 million a year earlier, but Louisiana issuers came back strong in the second quarter with more than $1 billion of sales, up 20%.
Whit Kling Jr., director of the State Bond Commission, said Louisiana issuers are enjoying a strengthening economy in a period of low interest rates, which is getting a lot of refunding attention.
“We’re in a better financial situation than a lot of states,” he said. “It’s not great, but relative to others it is a fairly good position.”
The state will be looking at refunding some if its existing debt in the next six months, Kling said, noting that the state is in the process of appointing a new financial advisor.
Refundings accounted for more than half of the bond volume in the state. The state and its agencies issued $1.19 billion of debt in the first half, almost doubling the $542.4 million in 2010.
Sales for educational purposes posted a 58% increase, to $601.1 million. Much of the sector’s increase came from the region’s fourth-largest deal: a $509 million, triple-A rated taxable issue by Louisiana Public Facilities Authority on April 19 to acquire federal student loans.
North Carolina issuers saw volume decline 30% to $2.48 billion during the first six months. The North Carolina State Education Assistance Authority was the second-largest overall issuer in the Southeast with $961 million of sales in two transactions.
Though issuance was down 46.4% across Virginia to $2.23 billion, the total supply was boosted by the Virginia Transportation Board’s sale of $600 million of transit bonds in May, making it the third-largest single-day sale in the region.
In Kentucky, volume dropped by 41% to $1.65 billion. Sales were propped up by deals issed by state agencies: $367 million by the State Property & Buildings Commission in June and $270 million sold by the Kentucky Asset-Liability Commission in February.
The region’s sixth-largest amount of debt was issued in South Carolina where $1.48 billion of deals resulted in a 13.6% decrease in volume compared to last year. The South Carolina Public Service Authority brought $336.6 million to market in June while the state of South Carolina sold $316 million of general obligation bonds in February.
Alabama, typically a small issuer, saw only a 3.9% slip in issuance with $1.24 billion of debt. Notable transactions included a $226 million deal by Auburn University and a $225 million offering by the Mobile Downtown Redevelopment Authority.
Bond sales from Tennessee declined by 72% in the first six months — the region’s largest drop in volume by a state. Some $990 million of bonds were brought to market by state issuers compared to $3.53 billion in the same period a year ago. The Memphis & Shelby Counties Airport Authority was the state’s largest issuer with $170.7 million of sales in three transactions.
In West Virginia, issuers brought very small deals to the bond market with $312 million of sales, a decrease of 16.4%. The West Virginia Hospital Finance Authority was the top borrower with two tranches totaling $79 million.
Finally, Mississippi issuers sold the least amount of debt in the region with $307 million of bond sales, a drop of 48.6% over last year. The Mississippi Development Bank sold $142.5 million in 11 offerings, making it the state’s top borrower.