Taxable bond surge boosts Northeast volume
The Northeast's municipal bond issuers sold $113.3 billion of debt last year, a 16.8% increase from 2018 that was fueled by a surge in taxable deals.
The region saw a 91.3% year-over-year rise in taxable bond volume in 2019, to almost $19.7 billion, compared to a more modest 8.2% jump in tax-exempt issuance, according to data from Refinitiv.
The taxable spike was also experienced in other areas of the country as state and local governments implemented new borrowing strategies in a low interest-rate environment where tax-exempt advance refundings are no longer permitted.
“The increase in taxable issuance is directly related to the elimination of advance refundings in the tax-exempt municipal market in 2017 Tax Cuts and Jobs Act and record low yields on the long-end of the yield curve,” said Dan Scholl, head of municipal fixed income at Wilmington Trust. “The elimination of advance refundings through the tax-exempt market in advance of the first call date is forcing municipalities to look to the taxable municipal market to refinance existing debt if it is refunded 90 days before the call date.”
The Northeast region encompasses 11 states stretching from Maine to Maryland, as well as the District of Columbia, Puerto Rico and the Virgin Islands. The region had experienced a 21.3% year-over-year issuance drop in 2018 compared to 2017 following federal tax changes that axed tax-exempt advance refundings.
The top five states for 2019 Northeast volume were New York with $45.8 billion, Pennsylvania with $17.9 billion, Massachusetts with $13.8 billion, New Jersey with $11.7 billion and Maryland with $6.9 billion. All 11 states saw issuance increases from 2018 with the exception of Connecticut, which had a slight 4.1% drop.
Issuance in Massachusetts was up 66.3% compared to 2018 including a more-than-ninefold increase in taxable debt. The commonwealth government was the biggest issuer with $4 billion sold in 15 issues, which included an $858 million taxable refunding sale in August and $458 million of new GO taxable debt.
Craig Brandon, co-director of municipal investments at Eaton Vance Management in Boston, said Massachusetts was ahead of the curve compared to other states with the taxable trend. He credits the Commonwealth’s public finance leaders with being innovative in deciding to sell taxable bonds given how low interest rates were and the wider investor pool for taxables.
“Massachusetts tends to be a little more leading edge,” Brandon said. “They continue to be focused on finding ways to save money for the state.”
Issuance in Pennsylvania was up 34.4% aided by 136.9% jump in taxable volume. The Pennsylvania Turnpike Commission was the Keystone State’s biggest issuer selling $1.5 billion through five transactions including a $237.9 million sale on Oct. 25 comprised of $151.1 million in taxable securities. The Commonwealth of Pennsylvania had the largest single deal of $896.9 million in GOs on June 12.
Janney Capital Markets analyst Erin Ortiz noted that Pennsylvania’s volume spike was driven largely by school district issuances going up “dramatically” compared to 2018. She said colleges like the University of Pittsburgh, Penn State and University of Pennsylvania also fueled the state’s taxable increase through advance refunding deals.
“The increased issuance of taxable debt was a game changer in 2019, which, in particular, issuers capitalized on after the dip in rates in the second half of the year,” Ortiz said. “The Commonwealth and [Pennsylvania Turnpike Commission] also were large taxable issuers in 2019, both funding new money projects and advance refundings.”
Taxable volume in New Jersey rose more than sevenfold, which enabled a 3.8% overall increase in issuance despite a 16.6% drop in tax-exempt borrowing volume. The New Jersey Transportation Trust Fund Authority led the way with $3.3 billion sold in five deals including a $1.69 billion taxable sale on Dec. 4. Rutgers University sold $962.3 million of bonds through three deals with the bulk of the debt taxable.
New York's taxable issuance doubled, propelling the Empire State to an overall 7.4% bond volume increase. The state had the nation's largest individual deal of 2019: $3.4 billion by the Dormitory Authority of the State of New York on Dec. 18 that included $1.394 billion of personal income tax revenue bonds. The New York State Thruway Authority was credited with the second-largest deal, a $1.7 billion offering in October.
Maryland volume was up 17.2% aided by an 86.6% jump in taxables. The state government issued $1 billion in GOs through five deals. The Maryland Department of Housing was also busy, selling $936.3 million through 21 transactions while Baltimore County was the state’s third-place issuer at $625.2 million.
Last year’s volume momentum at the state level was also reflected in the District of Columbia, which had its largest bond offering ever of $1.3 billion on Nov. 13 as part of an active 2019 where overall issuance in the district rose 162% with taxable debt up 450.2%. The D.C. government issued $3.1 billion in 13 transactions followed by the Metropolitan Washington Airports Authority with $2.1 billion. The D.C. Water and Sewer Authority sold $605 million in bonds with more than half comprised by a $343.2 million taxable deal on Oct. 9.
“Taxable municipal issuance was 20% of total issuance last year,” said Scholl of the national trend. “I suspect that as long as yield conditions persist, total taxable issuance will surpass the 20% total mark this year. The demand continues for taxable municipals driven by inflows into taxable bond funds and continued interested by overseas buyers looking take advantage of the yields compared to corporates, Treasury and other taxable alternatives – as they contend with negative yields or extremely low yield in their local markets.”
Bank of America kept its hold as the Northeast’s top senior manager, credited by Refinitiv with more than $22.3 billion on 145 transactions. Morgan Stanley rose from fourth to second with $14.4 billion followed by Citi with $11 billion. JPMorgan Chase moved up a spot to fourth and RBC came in fifth place.
Hawkins Delafield & Wood reclaimed the region’s top bond counsel position it lost last year, credited with over $12.8 billion on 206 deals. Nixon Peabody soared to second place from 10th while Orrick, Herrington & Sutcliffe finished in the three spot for the third straight year. Locke Lord and Ballard Spahr rounded out the top five.
Public Resources Advisory Group retained the top spot in the Northeast financial advisor rankings, credited with more than $21.1 billion of business on 90 bond sales. PFM again placed second credited with $20.98 billion on 356 deals. The rest of the region’s top five remained the same with Acacia Financial in third followed by Frasca & Associates and Hilltop Securities.