WASHINGTON — Investors interested in taxable munis were confronted with less supply in the first half of 2012 as issuance of the bonds fell more than 20% compared to the same time last year.
Issuance of taxable bonds totaled $12.46 billion for the first six months of the year, a decrease of 21.4% from the $15.86 billion sold in the first half of 2011.
The $12.46 billion included: $7.06 billion of new-money taxable bonds, down 35.4% from $10.92 billion in the first half of last year; $3.45 billion of taxable refunding bonds, a decrease of 5.8% from $3.66 billion; and $1.96 billion of combined new-money and refunding issues, up 53.8% from $1.27 billion.
Tom Kozlik, municipal credit analyst with Janney Capital Markets, said he was surprised there hasn’t been a big jump in taxable refundings due to the low interest rates and overall rise of refundings in the municipal market.
Peter DeGroot, head of municipal research at JPMorgan, agreed with Kozlik.
“One takeaway is that the lower yield environment and the austerity measures have created refunding opportunities for municipal bond issuers and has taken some focus away from new-money issuance,” DeGroot said. “This may have contributed to the lower proportional issuance of taxable muni securities over the first half of 2012.”
The budgetary scenarios at state and local levels are still fairly tight and issuers have been putting off intensive, long-term projects that are to be bond-financed, he said.
Traditional taxable municipal debt is sold on a limited basis by state and local governmental entities when certain projects do not qualify for tax-exempt status, such as pension bond obligations.
The credit quality of taxable debt is generally very high and the bonds have very low default rates, making them attractive to investors, experts said. They noted that the level of credit quality is often difficult to obtain in the corporate credit market.
The relatively strong issuance of taxable bonds may reflect the fact that state and local governments still face fiscal challenges and are turning to pension obligation bonds and unemployment bonds for some relief.
For example, Colorado issued $625 million of special taxable revenue bonds in June to replenish its unemployment compensation fund. Many states have been issuing debt to cover unemployment costs and reimburse the federal government for extended jobless benefits.
State and local governments also have issued pension obligation bonds to fund their public pensions with the understanding that they would be able to earn more on their investments, said Bart Mosley, co-president of Trident Municipal Research LLC.
“The basic problem that the market is looking at is that the causes of the pension-funding gap should be addressed before borrowing,” Mosley said. “The gap should stop getting bigger before you use borrowing to cover the gap.”
Natalie Cohen, a senior analyst at Wells Fargo, said the taxable Build America Bond program served as a “graduate school” for the corporate investor to learn about the municipal market.
BABs were created in 2009 as part of the American Recovery and Reinvestment Act but expired in 2010. Issuers received subsidy payments from the federal government equal to 35% of their interest costs.
At the end of 2010 there was a surge in taxable bond issuance as issuers rushed to take advantage of the BAB program before it expired. At the beginning of 2011, issuers were still allowed to refund BAB deals.
However, most such issues were noncallable, which helps explain the 5.8% decline in refunding in the first half of 2012. Refundings dropped to $3.45 billion with 226 deals from $3.66 billion with 83 deals during the same period last year.
“Without new issuance coming into the market from the BAB program, issuance will continue to dwindle,” Mosley said.
Five of the 10 muni sectors saw double-digit declines of taxable debt, according to Thomson Reuters. The biggest decline in taxable issuance was in health care, where it fell 69.1% to $106.4 million in 15 deals this year from $344.1 million and seven deals in the same period last year.
Issuance in the development sector was down 47.1% to $331.7 million in 19 offerings from $627.1 million and 45 deals. In the education sector, taxable bond issuance decreased 42.9% to $3.48 billion in 204 deals from $6.09 billion in 340 deals.
“It makes sense that there is a drop in education because for a lot of issuers there is a certain amount of uncertainty about what enrollment and what funding is going to be,” Kozlik said. “It does make sense that there are certain issuers that might be holding off on issuing certain types of debt.”
Utilities saw the largest increase in taxable bond issuance, soaring 368.8% to $1.23 billion in 52 deals for the first six months of this year from $262.8 million in 19 deals over the same period last year.
Taxable bonds for public facilities followed with a 141.5% jump to $238.1 million in 20 issues, up from $98.6 million and 9 deals. In housing, issuance increased 79.3% to $423.7 million in 25 deals, up from $236.3 million and 17 deals.
Environmental facilities saw a marginal increase to $29.1 million from only one issue in the first half of 2012 compared with no deals the first half of the previous year.
State agencies, the largest issuers of taxable bonds by dollar amount, sold 32.9% less of the bonds in the first half of 2012, compared to the same period last year. Overall volume in the sector declined to $2.98 billion and 67 deals from $4.44 billion in 64 deals.
Taxable sales by states declined 68.5% to $1.38 billion via 19 deals from $4.38 billion and 12 deals. But issuance by cities and towns jumped 133% to $2.72 billion in 165 deals from $1.17 billion in 87 offerings.
Colleges and universities had the largest increase in taxable bond issuance among issuers, up 910.4% to $1.33 billion in 25 deals from $131.3 million and 12 deals in the first half of last year.