SAN FRANCISCO - Municipal bond sales in the Far West dropped almost 19% to $73.7 billion last year from $90.7 billion in 2007, as California and other major issuers were stricken by budget woes, Lehman Brothers failed, and the auction-rate securities market imploded.
Issuers sold 1,256 deals in the region in 2008, down from 1,672 the year before, according to Thomson Reuters. The percentage drop-off in Far West issuance was more than double the 8.8% decline in volume nationally. The fourth quarter, unsurprisingly, was the worst three months of the year, with issuance down 57% compared to a year earlier.
"Most of the decrease in volume for the West is attributable to the decreases in the amount of bonds issued by the state of California," said Roger Davis, head of the public finance practice at Orrick, Herrington & Sutcliffe LLP, which was the region's and the nation's most active bond counsel in 2008.
The state of California was once again the region's and the nation's biggest issuer in 2008, selling $8.2 billion, but that was down a third from a year earlier. Several major state entities also issued less. The University of California's issuance dropped by half to $572 million, and the Golden State Tobacco Securitization Corp. sold no bonds in 2008 after selling $4.5 billion in 2007.
State issuance of long-term debt dried up in the second half, as lawmakers struggled to close a two-year, $41.6 billion budget gap. All three major rating agencies cut at least some of the state's long-term debt in recent months, leaving California with the lowest general obligation bond ratings among the 50 states.
The not-so-Golden State is now rated A by Standard & Poor's, A1 by Moody's Investors Service, and A-plus by Fitch Ratings. Both Moody's and Fitch have negative outlooks on the debt.
Overall, California municipal bond issuance - including local governments and nonprofit issuers - fell 20% last year. Still, issuers in the nation's biggest state accounted for 72% of the region's volume.
The Far West's largest deal in hindsight was an indicator of trouble ahead. California in February priced almost $3.2 billion in so-called economic recovery bonds, as the state used the remainder of a 2004 deficit-bond authorization to patch a sudden hole in its fiscal 2007-2008 budget.
The state priced the region's four largest deals of the year, with the fifth largest a $1 billion power revenue bond sale by the California Department of Water Resources, a deal done largely to extricate the utility from auction-rate securities.
The largest deal outside California was a $921 million competitive sale of Washington GO bonds, won by Merrill Lynch & Co. and Citi. Washington was the second-busiest state in the region with $8.7 billion of debt sold, down 9% from $9.6 billion in 2007.
"We did have a stretch there in the fall where market access was truly difficult," said Maud Daudon, president and chief executive officer of Seattle Northwest Securities Corp. SNW was Washington State's top-ranked financial adviser with $2.8 billion in deals.
"I wouldn't say it was impossible, but it was darn hard," Daudon added. "Certainly, that affected our results somewhat."
SNW ranked fifth in the league tables for financial advisers region-wide with $3.2 billion. The top spot went to Public Financial Management Inc., which was FA on $12 billion. The firm's market share jumped to 17% of Far West issuance in 2008 from 10% in 2007.
PFM took the top rank from Public Resources Advisory Group, which took an 11% market share, down from 18%.
They were fighting for slices of a shrinking pie across the region. All nine states in The Bond Buyer's Far West region saw issuance decline. The smallest percentage decrease was in Nevada, where volume fell 3% to $4.1 billion, and the biggest drop was in Montana, where volume fell 70% to just $254 million.
Much of the subdued volume in the Far West came from refundings that were rushed to market in order to fix auction-rate securities after the ARS market came to a grinding halt in the first quarter. Refundings jumped by more than 52%, while sales of new-money bonds fell 39% to $34.6 billion, the lowest such total since the $30.5 billion issued in 2000. The decline in new-money debt was the biggest ever in dollar terms and the largest since 1987 in percentage terms.
To fix their ARS, many issuers, including San Francisco International Airport and the Bay Area Toll Authority, used variable-rate demand obligations backed by letters of credit and standby bond purchase agreements that provide liquidity in case the investors want their money back on short notice.
Fixed-rate issuance dropped by almost 29%, while variable-rate or short-put issuance zoomed to almost $22 billion from about $8 billion in 2007. Auction-rate issuance fell to zero in 2008 from more than $7.4 billion during 2007.
Another sign of the severity of the 2008 market dislocation was seen in the credit enhancement market, where the issuance of insured bonds fell more than 70% and the volume backed by letters of credit more than tripled. The volume with standby bond purchase agreements more than doubled.
Despite all the turmoil and change, Citi retained its customary position atop the Far West senior manager table, credited with more than $15.8 billion in volume for a 22% market share. Second-place Merrill Lynch captured 12% of the market. San Francisco-based Stone & Youngberg was the highest ranked of the regional firms, coming in at eighth place with a 3.7% market share.
Orrick Herrington was the top ranked bond counsel with $23.4 billion of deals and a 32% market share. K&L Preston Gates Ellis LLP was second with 7.5% of the market.
Orrick's Davis said the Far West municipal bond market has recovered some since the fourth quarter, but he said it remains slow and fragile. He's watching to see if the California state budget deal reported this week and the passage of a federal economic stimulus plan - which includes provisions to improve muni market liquidity - can help end the lingering credit crunch.
"We're better than we were in November-December, but far from normal," Davis said. "In particular, lower-rated bonds and anything that is subject to the alternative minimum tax is much more difficult than normally."
Daudon sees a similar picture up in the Northwest, and she's still taking a glass-half-full approach to the tough times.
"We are certainly getting deals done," she said. "I think things are getting better this year, and we are fortunate in the municipal market to have a well-functioning market in many respects, even today. If you look at all the markets around the globe, the municipal market in the United States is actually doing far better than many other markets."