Southwest's first-half volume falls to five-year low
DALLAS – Issuers in the Southwest sold $29.76 billion of municipal bonds in the first half of 2018, as volume fell nearly 16% from a year earlier after federal tax law changes eliminated advance refundings, according to data from Thomson Reuters.
“It’s been lean,” said Jorge Rodriguez, managing director at FTN Financial in San Antonio. “I think there are some issues waiting in the wings, and hopefully we’ll see volume pick up.”
The first half of 2017 was not exactly a banner year either, with volume down 19% from the first half of 2016.
Among The Bond Buyer’s five regions, the Southwest ranked third in volume, and Texas ranked third among states behind California and New York.
Volume from Texas issuers, who generate more than half the Southwest’s business, dropped at about the same 16% rate as the region to $16.35 billion.
The total number of issues for the region shrank to 1,163 from 1,407 as Texas issuers sold 495 deals, off 204 from the same period last year.
Texas muni industry veteran Drew Masterson, who launched his advisory firm Masterson Advisors in Houston this year, said the first half could have been worse.
“We are actually pleased that year-to-date volume is only off 16%,” he said. “With higher rates, the acceleration of deals into last year from tax reform and the loss of advance refundings, we thought it would be off 20-30%. Our new money supply has been robust all year and continues through year end.”
Indeed, new money rose a healthy 21% regionally to $22.5 billion while refunding issues plummeted 59% to $3.4 billion. Combined new money/refunding issues sank 55% to $3.9 billion.
After tax reform deliberations that dragged into December, Congress terminated advance refunding bonds that issuers have relied on for years. Uncertainty around advance refunding and the possible demise of private activity bonds brought a flood of transactions at the end of 2017. Unlike advance refundings, private activity bonds survived the last-minute flurry of activity.
On the buy side of the equation, Douglas Benton, senior credit manager at Cavanal Hill Investment Management, noted that the tax cuts have had an impact on institutional investing but that his firm’s individual investor base “continues to value the wealth preservation aspect of high quality munis, and we have seen asset growth.”
From a conservative investor perspective, the Federal Reserve’s steady increase in interest rates provided some support for fixed income, Benton said.
“The first half of the year the rise in interest rates was a welcome change for investors particularly on the short end of the curve,” he said. “In the second quarter, that trend decelerated, and we are hopeful rates will increase across the curve throughout the remainder of 2018.”
Taxable debt of $1.55 billion fell nearly 50% year over year. Tax-exempt issues at $27.7 billion dropped more than 11%.
Bonds subject to the alternative minimum tax accounted for just a $491 million sliver of the volume after falling 54%.
Of the eight states in the region, five recorded lower volume, led on a percentage basis by Colorado’s 37% drop, while three – Arkansas, New Mexico and Oklahoma – saw increases, led by Oklahoma’s 40%.
The region’s largest issuer, the Grand Parkway Transportation Corp. that is building an outer loop around the Houston metro area, sold $1.48 billion.
The Texas Water Development Board, which has become the state’s largest debt issuer with new programs approved by the Legislature, ranked second in the region, selling $1.18 billion of bonds.
The Oklahoma Development Finance Authority rounded out the top three with $1.178 billion.
Negotiated volume of $20.5 billion was about three times higher than competitive sales volume of $6.5 billion, though both categories were down for the year. Private placement volume rose 27% to $2.8 billion.
JPMorgan topped the senior managers in the Southwest, credited by Thomson Reuters with $3.22 billion of deals, followed by Bank of America Merrill Lynch & Co. with $2.86 billion and Citi with $2.57 billion.
Hilltop Securities remained the leading financial advisory firm, credited with $6.79 billion of business, followed by Estrada Hinojosa & Co. with $2.54 billion and RBC Capital Markets at $1.42 billion.
McCall Parkhurst & Horton easily retained its supremacy among the region's bond counsel, credited with $5.2 billion, followed by Norton Rose Fulbright with $3.56 billion and Bracewell with $3.11 billion. Orrick Herrington & Sutcliffe, a new arrival to the region, broke into the top five with $1.38 billion of transactions behind fourth-place Gilmore & Bell’s $1.49 billion.
Among the sectors, education accounted for the largest share of volume at $10.13 billion, down 39% from the same period last year. Texas accounted for roughly 60% of education bonds issued in the region.
Utilities represented the second-largest sector at $4.97 billion, up 32%, with the third-largest sector, transportation, increasing more than 7%. Healthcare’s 35% increase brought volume to $3.44 billion.
Among the states, Arizona recorded a 26% drop in volume to $1.91 billion with an 11% decline in the first quarter and a 34% falloff in the second. Phoenix priced $218 million of bonds to lead issuers, while Stifel Nicolaus led senior managers, credited with $426 million. RBC Capital Markets led financial advisors with $252 million. Gust Rosenfeld’s $809 million of deals put the firm atop Arizona's bond counsel ranks.
Arkansas’ $739 million of deals represented a less than 1% increase, with Benton County at $198 million ranking as the largest issuer. Crews & Associates led senior managers with $265 million of deals and also financial advisors with $318 million. Friday Eldredge & Clark’s $610 million was far ahead of other bond counsel firms.
Colorado issuers sold $3.43 billion of bonds, down 37% from last year’s first half. Top issuer was the Colorado Health Facilities Authority with $400 million. JPMorgan earned top spot among senior managers with $570 million of underwriting. Hilltop Securities led financial advisors with $575 million of deals, while Kutak Rock ranked first among bond counsel with $791 million of transactions.
Kansas’ first-half volume of $987 million dropped 22% year-over-year. Sedgwick County with $108 million was the Sunflower State’s top issuer. George K. Baum’s $193 million gave it top spot among senior managers, while Springsted led financial advisors with $148 million. Gilmore & Bell dominated the bond counsel ranks with $664 million.
New Mexico volume rose 27% from last year to nearly $1.2 billion on 22 deals. The New Mexico Finance Authority’s $599.5 million made it the state's top issuer. Goldman Sachs’ $420 million landed it top spot for senior managers, and PFM Financial was top financial advisor. The Rodney Law Firm’s $486 million of bond counsel made it the state leader.
Oklahoma’s $3.38 billion of bonds was boosted by the Oklahoma Development Finance Authority’s $1.16 billion deal, the Southwest's largest of the first half. BAML led senior managers and KeyBanc Capital Markets topped financial advisors. Norton Rose Fulbright at $1.16 billion finished well ahead of other bond counsel in the Sooner State.
In Texas, Citi was credited with top spot among senior managers with $1.69 billion, followed by the regional leader JPMorgan with $1.48 billion. Hilltop Securities remained dominant among financial advisors with $5.82 billion of deals. McCall, Parkhurst & Horton led the state’s bond counsel with $5.13 billion of transactions.
Utah’s 33% decline in bond volume left the statewide total at $1.77 billion. Utah County, with $350 million, was top issuer. JPMorgan was the Beehive State’s top senior manager, credited with $593 million of deals. Zions Bank remained top financial advisor with $853 million of business while Chapman and Cutler led bond counsel with $812 million.