New Deals Strengthen In Oc­to­ber

The Bond Buyer - - Front Page - BY AARON WEITZ­MAN

More states and lo­cal­i­ties moved ahead with in­fra­struc­ture projects in Oc­to­ber, as bond is­suers gained con­fi­dence the mu­nic­i­pal tax ex­emp­tion will re­main in place.

Mu­nic­i­pal bond vol­ume for the month was the third big­gest this year, though it fell 33.5% from the same month in 2016, as the pick-up in new money wasn’t enough to off­set a drop in re­fund­ings.

Data from Thomson Reuters shows monthly vol­ume dropped to $36.09 bil­lion in 811 trans­ac­tions from $54.31 bil­lion in 1,269 deals in Oc­to­ber 2016.

Natalie Cohen, man­ag­ing di­rec­tor of mu­nic­i­pal se­cu­ri­ties re­search at Wells Fargo Se­cu­ri­ties said the year-over-year com­par­i­son may ex­ag­ger­ate the de­cline in is­suance.

“Oc­to­ber 2016 was very un­usual,” she said. “It was right be­fore the elec­tion and ev­ery­one as­sumed [Hil­lary] Clin­ton would win and rates were low. So you had is­suers rush in to not only get re­fund­ings done but also get deals done be­fore the hol­i­days and the elec­tion,” she

said. Re­fund­ings crashed 71.1% from a year ear­lier to $6.73 bil­lion in 249 deals from $23.26 bil­lion in 547 deals. New money deals in­creased 22.5% to $21.65 bil­lion in 511 trans­ac­tions from $17.68 bil­lion in 575 deals in Oc­to­ber of 2016.

“Re­fund­ings, as I thought they would in 2017, have re­ally lagged past years’,” said Tom Ko­z­lik, man­ag­ing di­rec­tor and mu­nic­i­pal strate­gist at PNC. “Re­fund­ing is­suance fell for the month (and this year) most likely be­cause the pool of can­di­dates dried up. New money is hang­ing in there, al­though it might seem low to some who ex­pect is­suers to take ad­van­tage of the rel­a­tively low rate en­vi­ron­ment. I still think is­suers are try­ing to repair their bal­ance sheets, so credit is driv­ing this.”

Ko­z­lik said he ex­pected a lit­tle more new money is­suance this year and still thinks the same of 2018, though it will not be as ro­bust as some would ex­pect.

“I took the near record num­ber of 2016 elec­tion ref­er­en­dums in sup­port of bond is­sues as a pos­i­tive in­di­ca­tor for the near term,” he said. “My fore­cast for 2017 was/is $365 bil­lion and it looks like we are pretty close to hit­ting that for the year. In all I ex­pected slightly higher than av­er­age new money is­suance and lower re­fund­ings. This has been the case so far this year. I don’t ad­just my fore­cast from the be­gin­ning of the year.”

Cohen said the mar­ket en­vi­ron­ment has changed, with new-money up not only month-over-month but also year-over-year, as state and lo­cal gov­ern­ments con­tinue to get projects done. The industry has re­ceived re­as­sur­ances from the Trump ad­min­is­tra­tion that the mu­nic­i­pal tax ex­emp­tion would be re­tained in the tax re­form pack­age be­ing worked out in Wash­ing­ton.

“I think new-money will con­tinue to stay up for the rest of the year, as those en­ti­ties should con­tinue to fix and bor­row where and when [they] can,” she said. “Un­cer­tainty has done a lot of dam­age to is­suance, in terms of rate hikes and tax ex­emp­tion, but now it is clear that the tax ex­emp­tion will sur­vive, so sell­ing new money is eas­ier.”

Dur­ing the month, the State of Cal­i­for­nia came with roughly $1.59 bil­lion of var­i­ous pur­pose GO and re­fund­ing bonds back in three sep­a­rate com­pet­i­tive sales, with new money por­tions go­ing to­ward high-speed rail. The Los Angeles County MTA also came with $479.7 mil­lion of first tier se­nior sales tax rev­enue green bonds.

Ne­go­ti­ated deals dropped 46.9% to $22.29 bil­lion and com­pet­i­tive sales in­creased by 41.2% to $13.37 bil­lion. Tax­able bond vol­ume dipped to $2.37 bil­lion from $2.90 bil­lion, while tax-ex­empt is­suance de­creased by 35.3% to $32.88 bil­lion.

Deals wrapped by bond in­surance fell 54.6% year over year to $1.23 bil­lion in 102 trans­ac­tions from $2.70 bil­lion in 190 deals.

As far as the sec­tors go, only two were in the green. De­vel­op­ment was up 40.5% for the month to $1.17 bil­lion from $834.2 mil­lion. Gen­eral pur­pose deals rose 32.7% to $15.34 bil­lion from $11.56 bil­lion.

All oth­ers were in the red, with elec­tric power fall­ing 81.8% to $279 mil­lion from $1.54 bil­lion and health care plum­met­ing 74% to $2.35 bil­lion from $9.04 bil­lion. Util­i­ties fell 52.9% to $3.35 bil­lion from $7.12 bil­lion and education sank 59.6% to $5.86 bil­lion from $14.52 bil­lion.

“With the elec­tric power sec­tor, con­sump­tion has come way down with ev­ery­one try­ing to con­serve more and that is lead­ing to less big­ger deals within the sec­tor,” said Cohen.

As for the dif­fer­ent types of en­ti­ties that is­sue bonds, only one was in the green. State gov­ern­ment is­suance was up 63.7% to $8.64 bil­lion from $5.28 bil­lion. All oth­ers took a step back­wards, with state agen­cies fall­ing 55.8% to $8.73 bil­lion from $19.76 bil­lion, cities and towns drop­ping 50% to $2.96 bil­lion from $5.91 bil­lion and districts dip­ping 48.4% to $5.17 bil­lion from $10.03 bil­lion.

Cal­i­for­nia re­mained the state with the most is­suance, as it has all year. Is­suers in the Golden State are way ahead of the pack, hav­ing sold $55.52 bil­lion so far this year. New York came in sec­ond with $37.56 bil­lion, fol­lowed by Texas with $32.30 bil­lion. Illi­nois is next with $14.43 bil­lion and Penn­syl­va­nia rounds out the top five with $14.32 bil­lion.

“I’d say the two main con­cerns the muni mar­ket has right now re­lated to vol­ume, as there is not enough to sat­isfy de­mand and also what the course of in­ter­est rates will be in December and be­yond. And there will be not short term res­o­lu­tion to them,” said Ko­z­lik.

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