DALLAS – Southwest bond volume in the first half of 2017 skidded to its lowest level in three years, falling 19% to $35.05 billion, according to data from Thomson Reuters.
The contraction in the Southwest was greater than that of the nation, which saw volume fall 12%.
Only three states – Colorado, Oklahoma and Utah – saw growth in volume, with Utah gaining 96.5% and producing the region’s largest deal.
Texas, which accounts for more than half of the eight-state region’s volume, recorded a 36% drop in bond volume. The Lone Star State’s $19.1 billion first-half volume was the lowest since 2013 when it produced $16.2 billion of sales across all sectors.
Economists and bond industry executives saw several factors affecting the buy and sell sides of the business.
“Normally, the first quarters are pretty slow,” said Noe Hinojosa Jr., chief executive of the advisory firm Estrada Hinojosa & Co. “The first quarter this year (in Texas) was pretty miserable for us. The second quarter was pretty good.”
Region-wide, however, the second quarter showed the sharpest drop of 31% compared to the first-quarter slippage of 3.2%.
Hinojosa pointed out that bond volume in Texas usually drops in odd-numbered years when the state Legislature is in session and rises in even-numbered years after lawmakers have authorized new-money deals. The exception to that pattern came in 2015 when volume in Texas soared to a then-record $26.57 billion, a number surpassed by issuance in 2016.
Douglas Benton, vice president at Cavanal Hill Investment Management in Addison, Texas, said that declining volume and strong fund inflows to muni bond funds led to compressed spreads.
"In my opinion, an 80 basis point spread between AAA to BBB does not seem to be fair compensation for the incremental credit risk we are taking with our investor’s monies," Benton said.
Texas economist Ray Perryman, founder of The Perryman Group in Waco, interpreted the data as a reflection of “trouble behind,” more than “trouble ahead.”
“I think it is more trouble behind, as we finally seem to be getting through the hangover from the Great Recession,” Perryman said. “Higher interest rates certainly play some role, but they are still relatively low.”
Uncertainty around Trump administration policies and a stalemate in Congress may disrupt markets, but “the primary effect at present as the continuing expectations of lower marginal tax rates and, hence, less relative benefit from tax-free returns,” Perryman said.
“That may be creating some loss of appetite for municipal debt at the moment,” Perryman said. “The prospects for major reductions are likely somewhat less than they were a few months ago, but there is ample evidence in the debt and equity markets that a tax reduction measure remains anticipated.”
Another factor that put the squeeze on municipal bonds in 2017 was the pension crises in Dallas, Houston and Fort Worth, Perryman said. Dallas postponed an $800 million bond election in May due to the Police and Fire Pension Fund depletion, rescheduling the bond election for November after gaining legislative relief. Houston is asking voters for $1 billion of pension obligation bonds in November while limiting conventional general obligation bond proposals to less than half of that.
Refunding issues, which had accounted for a large share of volume over the past three years, fell 55% to $8.1 billion across the Southwest, while new money issues saw a 22% increase to $18.37 billion. Combined issues were down nearly 16% to $8.6 billion.
“I think all the refundings have been done already,” Hinojosa said. “I suspect interest rates will remain low. If there’s a correction coming, how would it affect rates? I think they’ll go down.”
Taxable bond volume was up 32%, while traditional tax-exempts fell 23%. Nonetheless, tax-exempts outsold taxable bonds in the region by a volume factor of 10.
Bonds wrapped by insurance fell nearly 21% to $2 billion.
RBC Capital Markets rose from third in the region for the period to first, credited by Thomson Reuters with $4.39 billion of deals, followed by Citi with $4.29 billion and Bank of America Merrill Lynch at $2.79 billion. Fourth-ranked JP Morgan had $2.65 billion of deals, followed by Raymond James with $2.09 billion. The volume for the top-ranked underwriter was 16% below that of the leader in the same period of 2016. The combined top five handled $16.2 billion of deals, a nearly 18% decrease from what the top five produced in 2016’s first half.
Hilltop Securities, which includes First Southwest Co., remained well atop the financial advisory ranks, credited with $11.36 billion of deals, down 21% from Hilltop’s first-half volume of 2016. Public Financial Management ranked second at $2.66 billion followed by Estrada Hinojosa at $1.7 billion. SAMCO Capital Markets and RBC Capital Markets ranked fourth and fifth.
McCall Parkhurst & Horton maintained its perennial lead among bond counsel firms with $6.3 billion of transactions, a 28% decline from 2016’s first half. Norton Rose Fulbright took second with $4.1 billion followed by Andrews Kurth with $3.34 billion and Kutak Rock at $2.6 billion. Gillmore & Bell rounded out the top five with $2.16 billion.
In something of a rarity, a Utah issuer ranked first in the region for volume. Salt Lake City, which issued $1 billion for its previously debt-free airport, was the only single issuer to reach the $1 billion threshold in the first half of 2017.
The February issue, the region's largest single deal of the first half, was the first for a nearly $3 billion plan to completely redevelop the airport that serves as the western hub for Delta Air Lines. It was the airport's first since a $62 million revenue bond sale in 2004.
"That was a refunding issue, so it's been even longer since we sold a new money issue for the airport," said Maureen Riley, executive director for the airport.
The Texas Transportation Commission, which is often atop the region’s issuer ranks, came in second with $920 million, followed by Texas A&M University with $885 million, and Harris County, Texas with $849 million. Texas Public Finance Authority ranked fifth with $514 million.
In Arizona, volume fell 12.8% to $2.54 billion, with the city of Mesa ranked first among issuers with $293.9 million. Credited with $689.5 million of deals in the Grand Canyon State, Stifel Nicolaus outranked RBC on the underwriting table. RBC had $485.4 million. Piper Jaffray topped financial advisors with $351 million, followed by Hilltop with $317.8 million. Gust Rosenfeld was the state’s leading bond counsel with $1.269 billion of deals, followed by Greenberg Traurig with $709.6 million.
In Arkansas, volume fell 31% to $732 million. Robert W. Baird was top senior manager with $148.9 million of deals, while Crews & Associates ranked first among financial advisors with $251.7 million. Little Rock-based Stephens Inc. ranked second among financial advisors and third among senior managers. Friday Eldridge was the state’s top bond counsel with $603 million of deals.
In Colorado, which saw volume rise nearly 42% to $5.36 billion, Denver was the top issuer with $512 million, and RBC was the top senior manager with $1.05 billion. Hilltop Securities ranked first among financial advisors with $674.4 million, and Butler Snow topped the bond counsel ranks with $1.9 billion.
In Kansas, volume was down 15% to $1.3 billion. Piper Jaffray was the top senior manager with $335 million of bonds, and Ponder was top financial advisor with $190 million. Gillmore & Bell was top bond counsel with $1.02 billion.
The New Mexico Hospital Equipment Authority was that state’s top issuer with $304.8 million of bonds as volume across the state fell 15% to $939.8 million. JPMorgan ranked first among senior managers with $565 million while RBC topped the state’s financial advisors with $322.4 million. Modrall Sperling was leading bond counsel with $354.5 million of deals.
Oklahoma volume rose 48% to $2.38 billion as Oklahoma Turnpike Authority’s $480 million of bonds led all issuers in the Sooner State. Wells Fargo’s $513 million led the senior managers. Hilltop Securities was leading financial advisor with $551.8 million. Hillborne and Weidman led bond counsel with $642.7 million.
“If the Turnpike Authority sells the balance of its authorization in 2017 (about $400 million), the state will probably end the year with a total volume close to the 2016 total,” said Oklahoma State Bond Advisor James Joseph. “Unless there are some more large refundings planned at the local level, I would expect the local issuer total volume in 2017 to be close to the $1.936 billion recorded in 2016.”
In Texas Citi led senior managers, credited with $2.4 billion. Hilltop Securities ranked first among financial advisors with $9.35 billion while McCall Parkhurst & Horton kept its place atop Texas bond counsel with $6.3 billion of transactions.
Citi was Utah’s top senior manager with $1.23 billion, and PFM Financial was top financial advisor with $1 billion. Kutak Rock led bond counsel with $1 billion.