DALLAS - The cross currents buffeting the municipal bond market caught up with the Southwest region in the first half of 2009, with volume falling 29.3%.

Southwest State-by-State Mid-Year 2009 Data

The sharp drop compares to a 3.8% increase in the first half of 2008 and a 5.1% gain for all of last year, according to Thomson Reuters.

Texas, where issuers sold $14.83 billion of debt in the first half of 2009, accounted for more than half of the $28.62 million issued in the eight-state region. That still represented a 33.4% decline from the same period last year.

One of the key factors in Texas was the loss of Permanent School Fund backing for new school district issuance throughout the state. Bonds sold for education purposes fell 30.6% as districts could not obtain the triple-A rated PSF guarantees after declining investment results and capacity limits sent the fund to the sidelines.

While Texas school districts with ratings in the double-A category were able to issue under their own credit, those in the single-A category and below generally delayed issuing debt.

For the region, bonds sold for education were down 18.4% at $9.77 billion.

The volume of insured issues in all of the Southwest was cut nearly in half - to $4.51 billion - as major bond insurers saw their once gilt-edged ratings fall deeper into junk-bond territory. The use of bank letters of credit fell 93.5%, to $367.1 million from $5.61 billion, in the first half of 2008, as the cost for liquidity soared. Standby bond purchase agreements, which measured $2.42 billion in the first half of 2008, disappeared completely.

Southwest market conditions appeared to worsen slightly in the second quarter despite the arrival on the scene of taxable Build America Bonds authorized under the federal stimulus program. Volume dropped 30.5% in the second quarter compared to a 27.7% drop in the first. But taxable bond sales for the first half, including the new BABs, rose 19%, as tax-exempt issues fell 25.8%.

Large issuers of BABs included Dallas Area Rapid Transit with $829 million, San Antonio's CPS Energy at $590 million, and the University of Texas with $330 million. Those issues accounted for more than half of the $2.8 billion of taxable debt sold in the region.

Under new federal rules expanding the market for bank-qualified bonds, issuance of such bonds soared 113% to $3.51 billion from $1.65 billion in the same period last year.

The troubled housing sector also reflected national trends, with bond issuance down 60.8%, from $1.35 billion to $528.4 million.

The impact of stimulus funds for transportation failed to register in the first half of the year, with issuance down 68.4%.

Revenue bonds took a bigger hit than general obligation issues, falling 37.1% compared to 15.2% for GOs.

Refundings fell 43%, compared to a 19.6% drop for new-money issues. Fixed-rate issues were down 6.1%. Variable-rate bonds with a short put fell 88.8%, to only $1.06 billion.

Issuance by state governments rose 46.8%. Counties sold 65.8% more in debt while colleges and universities increased issuance by 23.5%. Local authorities issued 57.4% less volume while state agencies retreated by 55.1%. Tribal governments, which issued $50 million in the first half of 2008, offered no debt.

Only one issue in the Southwest, sold in June by DART, hit the $1 billion mark in the first half. The deal included $829 million of BABs.

The deal lifted Siebert Brandford Shank & Co. to the number eight spot among senior managers with an 4.3% market share achieved with three deals. JPMorgan led the underwriters with 26 issues worth $3.55 billion and a 12.5% share, followed by RBC Capital Markets at $2.9 billion and a 10.2% share from 100 issues, the most of any underwriter in the top 10.

The DART deal also boosted Estrada Hinojosa & Co. to the number two position among financial advisers in Texas behind First Southwest Co., the perennial leader with 176 issues worth $5.39 billion and a 18.9% market share.

First Southwest also bumped off RBC as the top financial adviser in the region. Public Financial Management Inc. was third.

McCall Parkhurst & Horton, which also worked on the DART deal, retained top ranking among bond counsel in the region with 121 issues worth $4.32 billion and a 15.2% market share. Vinson & Elkins retained the number two spot as Fulbright & Jaworski held its third-place ranking.

In total volume from all issuers, three states rose while five fell. Arkansas notched the largest increase on a percentage basis with a gain of 85.7% to $825.8 million from $444.7 million in the first half of 2008. Kansas saw a healthy 56.4% gain to $1.94 billion, while Oklahoma issuers increased volume 12.6% to $922.1 million.

Colorado sales posted the biggest percentage decline among the Southwest states, down 57.2% to $2.36 billion, followed by Texas, down 33.4% and New Mexico, down 32.5% at $1.38 billion. Utah fell 27.5% to $1.79 billion, followed by Arizona, down 20.1% to $4.57 billion.

Denver's $232 million deal was the largest in Colorado in a lean first half, with George K. Baum & Co. as top underwriter, James Capital Advisors as top financial adviser, and Sherman & Howard as leading bond counsel.

Salt River Project issued Arizona's largest deal at $744.2 million, representing 16% of the state's market. Goldman, Sachs & Co. led senior managers with more than $1 billion from two issues, followed by Piper Jaffray & Co. with $575.6 million and five deals. PFM was top financial adviser on two deals worth $1.28 billion.

Arkansas saw growth in a number of sectors, including school districts, state agencies, and higher education. Bond issues by the state government fell to $15.3 million from $25.4 million in 2008. However, Arkansas agencies issued $72.9 million of debt, up from $7.7 million in 2008, for an increase of almost 900%.

Pulaski County's $112.1 million sale made it the biggest issuer in the state for the first six months of 2009, followed by the Pulaski County Special School District with $81.4 million and the Benton County School District with $76.8 million.

The most prolific issuer in the state was the Arkansas Development Finance Authority, with five sales totaling $67.5 million.

Kansas sales were particularly strong in the second quarter, with $1.49 billion, compared to $454.2 million in the first quarter. Almost all the issues were fixed-rate debt. GOs accounted for more than 60% of the total debt sold, with $1.17 billion from 103 sales. Revenue bonds totaled $772.2 million in 37 sales. The Kansas Development Finance Authority topped the issuer activity list, with 16 issues totaling $460.9 million. Wichita was second, with $232.5 million in seven issues.

New Mexico's state government led all issuers there with $414.8 million of bonds. Barclays Capital led senior managers with $321 million from two deals, while RBC Capital ranked first among financial advisers with 16 deals worth $361.9 million. Sutin Thayer & Browne topped bond counsel ranks with $414.8 million from two deals.

Oklahoma over the two quarters was relatively stable, with $427.8 million issued in the first quarter and $494.3 million in the second. The total includes $513.1 million of GO bonds and $409 million of revenue debt.

The largest issuer in the first half of the year was the University of Oklahoma Board of Regents with $87.3 million in three issues. Oklahoma Development Finance Authority followed with $81.1 million in three issues.

The state of Utah accounted for about a third of bond volume there in the first half. Morgan Stanley was top senior manager with five deals worth $1.07 billion, with Zions First National Bank as top financial adviser on 16 deals worth $1.09 billion. Ballard Spahr Andrews & Ingersoll was leading bond counsel with 24 deals valued at $1.02 billion.

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