BRADENTON, Fla. — Boosted by the popularity of Build America Bonds and refunding opportunities, issuers in the 11 states that comprise the Southeast region sold $34.5 billion of municipal bonds in the first half of 2010, up 7.4% over the same period last year.
Most of the debt was sold in the first quarter with issuers pricing $20.36 billion, an increase of 39%, while issuance declined by 19% in the second quarter to $14.2 billion, according to Thomson Reuters.
While new-money issuance was up 6.7% to $21.14 billion, many refundings — made possible by historically low interest rates — increased by 18.3% to $9.17 billion. The volume of tax-exempt bonds was $24.4 billion, down 16%, while taxable bond issuance soared 226% to $9.6 billion.
Taxable BABs, made available under the federal stimulus program, were wildly popular despite the fact that two issuers at the state level stopped using them and another decided they weren’t useful.
Florida and South Carolina in March boycotted BABs over the potential intercept by the Internal Revenue Service of the subsidy rate as recourse for other payments owed to federal agencies. Triple-A rated North Carolina in March priced its first new-money bonds in three years but said BABs “did not generate significant cost savings” for the state.
Throughout the region issuers embraced stimulus debt, selling $8.3 billion of BABs, an increase of 505% over the same period in 2009. Of the total, $2.61 billion was sold by the Municipal Electric Authority of Georgia, making it the top issuer of BABs in the country.
MEAG sold BABs, plus a smaller portion of tax-exempt bonds, to support its cost of building two new nuclear power units at Plant Vogtle. The issuance helped propel debt sold for electric power in the region to a total of $4.07 billion, a 152% increase over the previous year.
The use of qualified school construction bonds in the Southeast also soared to $427.5 million, up 535.2% over last year. However, overall debt sold for education was down by 34.9% to $5.17 billion.
Bonds sold for industrial and economic development increased by 96.6% to $542 million while debt for transportation increased 42.4% to $4.47 billion.
Some $26.6 billion of bonds were sold by negotiation, up 2.4% over last year. There was also an increase in competitive sales to $8 billion, which rose 36.5%, while private placements plummeted 91% to $35.7 million. About $1.8 billion of bank-qualified bonds were sold by small issuers in the region, a decrease of 2.7%.
Revenue bonds were the most popular, with $25.8 million in sales, an increase of 14.7%. General obligation bond sales were down 9.4% to $8.7 billion. More than 95% of all debt sold in the region in the first half was fixed rate, with $32.9 billion coming to market, an increase of 16.7%.
Variable-rate sales dropped drastically with short put bonds at $1 billion, down 67.6%, and long-term variable-rate sales down 53.2% to $358.6 million.
The use of new letters of credit declined by 79.5% to $398.3 million, while standby bond purchase agreements dropped by 95.4% to just $18 million. The use of bond insurance dropped by half, with only $2.4 billion of insured debt sold.
State agencies sold the most debt in the region at $13.4 billion, an increase of 32%. That was followed by local authorities with $7.8 billion in sales, up 25.3%.
While six Southeast states managed to increase bond sales in the first first half of the year, five states saw declines in the amount of issuance.
Florida remained the largest issuer in the region with $10.4 billion, an increase of 39.4%. The largest amount of debt by an issuer in the region was $2.4 billion sold by Citizens Property Insurance Corp., while the Florida Hurricane Catastrophe Fund sold $676 million , the fourth-largest amount. Both issuers sold bonds for insurance liquidity or claims, which helped increased increase sales in the region’s general purpose sector by 1.5% to $9.7 billion.
Georgia issuers sold the second highest amount of bonds with $4.75 billion in volume, up 10.6%. Sales were bolstered by MEAG’s total issuance of $2.8 billion.
Issuers in Virginia sold the third largest amount of debt in the region with $4.14 billion, which was still a 25% decline over the previous year. Of that, $1.1 billion was BABs. The 10th-largest single deal in the region was sold by the Virginia Department of Transportation in May when it competitively priced $492.7 million of bonds, which included $407.2 million of BABs. The deal brought a true interest cost of 3.247%.
“We’re very pleased with the results of the sale,” said John Lawson, VDOT’s director of financial planning. “We certainly liked what we saw this time.”
Lawson said the BABs provided the state with a unique savings opportunity — one that might not be around when the department brings bonds to market again. “Of course, if the [BAB] subsidy gets smaller to the point that it is no longer a benefit, clearly that will be a concern,” he said. VDOT’s next sale will be in the spring and will be about $300 million.
While issuers in North Carolina offered the fourth highest amount of debt in the region with $3.5 billion, that represented a drop in volume of 15.6% over 2009. New-money issuance fell 36.9%. Volume for transportation more than quadrupled, but general-purpose debt volume slid 11.7%. North Carolina issuers priced $210 million of BABs in the first half.
Issuers in Tennessee increased sales in the first half by 32.2% to $3.53 billion. The Nashville-Davidson Metropolitan Government brought $1.2 billion of bonds to market, with more than half of the amount for a new convention center.
Debt issuance in Louisiana in the first half trailed the regional average with a 4.4% increase. Sales totaled $1.5 billion in 46 issues, up from $1.4 billion over 63 sales in 2009. State agencies sold $439.3 million of bonds, an increase of 857%, while the state government sold $103 million, a 78.8% decline.
The largest issuer in the state was the Louisiana Local Government Environmental Facilities and Community Development Authority, which issued $376 million as a conduit issuer for a number of state and local entities. The East Baton Rouge Parish Sewer Commission sold $375 million of debt in two issues.
Morgan Keegan & Co. was the most active senior underwriter in Louisiana, overseeing $398.3 million of public debt in 20 issues. With economic conditions the way they are, most issuers are wary of selling new debt, said Buck Landry, managing director of the firm’s offices in Baton Rouge and New Orleans.
“They are cautious, like everyone else in this country,” he said. “There are just not as many issuers in the market as we normally would see.””
BAB sales in Louisiana totaled $357.8 million, up almost 7% from the first half of 2009. The demise of the BAB program at the end of this year would have a negative affect on sales next year in Louisiana and the rest of the country, Landry predicted.
“I think, particularly in this upside-down crazy market, that BABs help beat the tax-exempt rate on the long end of the market,” he said. “I think it helped [issuance] this year.”
“With the end of BABs, the market in 2011 is going to look pretty bleak,” he said. “A lot of governments should be looking at BABs over the next several months, but I don’t see a big push on the horizon.”
Memphis-based Morgan Keegan was also the top senior underwriter in Tennessee and Virginia, and ranked in the top 10 in nine Southeast states.
In Kentucky, issuers sold $2.8 billion of bonds, down 2.3% from the prior year. The Kentucky Economic Development Finance Authority was the biggest seller with $602.3 million of bonds.
Debt issuance in South Carolina jumped 21.1% to $1.7 billion in the first half, boosted by two transportation deals totaling $349.9 million — a stark contrast to the first six months of last year, which saw only one $18.1 million transportation sale. New-money issuance increased 52.6% and general-purpose issuance increased 71.9%. Despite a state-level refusal to issue BABs, other issuers priced $148 million of BABs in the first half.
Alabama issuers priced $1.3 billion of bonds in the first half, down 5.9%, while local authorities sold $465.1 million of debt. In a state where many issuers rely on negotiated deals, the dollar amount of debt sold in competitive offerings jumped by 124% with 10 competitive issues, the same number as last year.
West Virginia’s first half dollar volume almost doubled to $373 million, a 96.2% increase in issuance by dollar volume, and the number of bond sales increased threefold to 12 in the first half from four a year earlier. Issuers priced $38 million of BABs in the first half.
Goldman, Sachs & Co. elevated itself to become the top senior manager in the Southeast with 23 issues and $5.56 billion in volume. The firm ranked seventh in the first half of 2009 with $2.1 billion of transactions. Bank of America Merrill Lynch dropped to second place from first as senior manager on 64 deals worth $5.37 billion while Citi dropped to third place from second, managing on 49 issues worth $5 billion.
Public Financial Management Inc. maintained first place as financial adviser on 66 deals with a volume of $5 billion, up from $3.4 billion in 46 issues in the same period last year. First Southwest Co. came in second advising on 34 issues worth $3.35 billion while Raymond James & Associates Inc. was third consulting on four deals worth $2.62 billion.
Squire Sanders & Dempsey LLP maintained the top spot as bond counsel on 25 issues worth $4.02 billion. Orrick Herrington & Sutcliffe LLP zoomed to second place from 11th last year, with $3.02 billion on nine deals. McGuireWoods LLP remained in third place with 30 issues and $2.01 billion in volume.