DALLAS – For the second year in a row, bond volume in the Southwest set a record, rising 7.2% to $83.4 billion in 2016, according to data from Thomson Reuters.
The year's total shot past the $77.78 billion reported for 2015 with a 24% surge in the fourth quarter. The 2016 Southwest peak coincided with a national volume record of $450.3 billion.
Texas, which accounted for nearly 68% of the Southwest volume, also set a second consecutive record of $52.57 billion, a 7.8% increase over the 2015 total. Texas ranked second in the U.S. behind California, whose state and local issuers combined for $65 billion.
Of the eight states in the Southwest, four had higher issuance volume, led in percentage terms by the second-largest issuer Colorado with a gain of nearly 42% to a record $8.89 billion. Oklahoma's volume grew nearly 18% to a six-year high of $3.36 billion, followed by Arizona's 11% increase to $7.54 billion, the highest total in eight years.
"Refundings contributed to the significant increase in volume over 2015, with two power authorities accounting for almost $600 million of the state total," said Oklahoma State Bond Advisor James Joseph. "I expect the total for this year to be a little lower than 2016."
Of the four states that saw declines, Kansas notched the biggest drop of nearly 27% to $3.76 billion. New Mexico recorded a 14% decrease to $1.87 billion, followed by Arkansas's 7.1% decrease to $2.35 billion and Utah's 6% drop to $3.08 billion.
Deals were almost evenly split between new money and refunding after a post-recession stretch of low interest rates. In 2015, refunding increased twice as fast as new money, a pace that is expected to continue slackening in 2017.
"In 2017, we're sort of curious to see where the new money is going to come from," said Noe Hinojosa Jr., chief executive of Estrada Hinojosa & Co.
At $30.97 billion, new money increased almost 5%, refunding volume of $33.98 billion grew more than 6%, and deals that Thomson Reuters classed as combined new money and refunding were up 13% to $18.46 billion.
After starting the year with a nearly 13% year-over-year drop to $18.83 billion in the first quarter, Southwest volume grew compared to 2015 in the final three quarters culminating in a 24% surge in the fourth quarter to $20.11 billion. The fourth quarter included the surprising election of Donald Trump and the Federal Reserve Bank's second rate increase in a decade.
In dollar terms, the second quarter was the strongest at $24.44 billion.
Seven issuers sold more than $1 billion each into the bond market.
The University of Texas System ranked first with $2.63 billion on 15 deals. The Texas Transportation Commission, which has dwarfed other issuers in recent years, ranked second in 2016 with $1.89 billion on four issues and is not expected to return to its record pace this year. Houston ranked third with two deals valued at $1.51 billion, followed by San Antonio's $1.5 billion on seven deals, and Tarrant County Cultural Education Facilities Finance Corp. with $1.35 billion on seven issues.
For the UT System, the 2016 volume was a record for a variety of reasons, according to Terry Hull, vice chancellor for finance. One factor was the availability of state-supported tuition revenue bonds, authorized for the first time in nearly a decade by the 2015 Texas Legislature.
"Given historically low interest rates, the UT System financed all of the new tuition revenue bond projects in 2016, refunded multiple series of outstanding bonds to achieve significant debt service savings, and refunded outstanding commercial paper notes with long-term bonds to lock-in very attractive long-term financing costs," Hull said.
"The system expects significantly lower issuance in 2017 with no bond issues currently planned," he added.
Statewide, bond issues for colleges and universities grew 61% to about $4.3 billion. In 2015, the Texas Legislature authorized more than $3 billion of tuition revenue bonds for all 45 state colleges and universities.
Among senior managers, JP Morgan ranked first in the region, credited by Thomson Reuters with 76 deals valued at $8.66 billion, followed by Citi at $7.29 billion on 127 deals. RBC Capital Markets ranked third at $7.08 billion, followed by Raymond James at $6.7 billion and Bank of America Merrill Lynch & Co. with $5.69 billion.
Hilltop Securities again topped the financial advisor ranks with $23.93 billion on 662 deals, more than the next five firms combined. Second-ranked Estrada Hinojosa & Co. advised on 97 deals worth $5.74 billion, followed by RBC with $5.42 billion on 153 deals, Public Financial Management with $4.39 billion on 63 deals, and Samco Capital Markets with $3.29 billion on 141 deals.
"It was a great year for us, though 2010 was still our best because of the availability of Build America Bonds," said Hinojosa.
McCall Parkhurst & Horton, the perennial leader among bond counsel, was credited with 485 deals valued by Thomson Reuters at $15.36 billion, followed by Norton Rose Fulbright with 267 deals worth $8.94 billion and Bracewell with 133 deals valued at $7.7 billion. Andrews Kurth Kenyon ranked fourth with $7.53 billion on 162 deals and Kutak Rock with 136 deals worth $3.62 billion.
At The Bond Buyer's 2016 Texas Public Finance Conference in Austin last week, industry officials were doubtful that the record volume would be repeated in 2017.
"I would not expect that again," said John Bonnell, portfolio manager for USAA Growth & Tax Strategy Fund. "The amount of refunding will be down without a doubt."
Uncertainty about how the Trump administration will affect the bond industry and infrastructure dominated discussions at the conference.
"There's probably more pessimism than optimism," said Bart Fowler, partner at McCall Parkhurst & Horton. "People don't know what to expect."
Among the sectors regionwide, education accounted for the lion's share of growth, up 16% to $35.3 billion. In Texas, where public school enrollment has grown 17% in the past decade, education bond issuance grew 18% in 2016 to $24 billion.
In Arizona, the Maricopa County Industrial District was top issuer with $1.04 billion, making it the Southwest's largest issuer outside Texas. JPMorgan was top senior manager, and RBC Capital Markets led financial advisors. Gust Rosenfeld ranked first among bond counsel.
The University of Arkansas' $300 million of bonds led that state's issuers, with Stephens Inc. as top senior manager. Crews was top FA, while Friday Eldridge led bond counsel.
The Colorado Health Facilities Authority's $1.03 billion of bonds led the Centennial State's issuers with RBC as top senior manager. Hilltop was top FA, while Kutak Rock was top bond counsel.
The Kansas City suburb of Johnson County led the issuer ranks in Kansas with $388 million of bonds. Piper Jaffray was top senior manager, with Springsted as leading FA. Gilmore & Bell ranked first among bond counsel.
The state government was New Mexico's top issuer with $348 billion of bonds, and JP Morgan was top senior manager. RBC, the second-ranked senior manager, was top financial advisor. Modrall Sperling led the bond-counsel ranks.
Oklahoma's Grand River Authority was the Sooner State's top issuer with $496 million of bonds, while Citi led senior managers. Stephen H. McDonald was first among financial advisors, with the Floyd Law Firm as top bond counsel.
Raymond James led Texas senior managers with $5.94 billion of deals, with Hilltop Securities as top FA and McCall Parkhurst as top bond counsel.
The Utah State Board of Regents led the Beehive State's issuers with $698 million of bonds, with Wells Fargo leading senior managers. Ballard Spahr ranked first among bond counsel. Zions Bank led among financial advisors.
