California keeps refunding, sending Far West to big volume gain

Far West issuers sold $116.2 billion of municipal bonds in 2021, a 17.1% increase from 2020, marking the region’s second year of double-digit growth, according to Refinitiv data.

The first quarter came on strong with sales rising 82% year-over-year to $27.9 billion, though first quarter 2020 was an outlier, because the market froze in March 2020 as the pandemic took hold. Sales flattened out in second quarter, fell 12.7% the third quarter, and then rebounded, soaring by 36.1% in the fourth quarter to reach $33.9 billion.

California continued to be the main driver of sales for the Far West.

The Golden State, by far the nation’s largest with more than 39 million residents, surpassed all other states in 2021 bond sales, hitting $86.4 billion, a 22.3% year-over-year increase. Texas was second with $52.6 billion, New York third with $48.2 billion and Florida fourth with $18 billion.

California’s capitol in Sacramento. The Golden State topped the nation in 2021 as issuers there sold $86 billion of municipal bonds.

Bloomberg News

The state diverged from the region in the split between new money sales and refundings.

In contrast with the national trend, refunding volume in California was up 13.7% to $22.2 billion in 2021.

“There was a tremendous interest in refundings, including taxable advanced refundings to achieve savings from low interest rates,” said Sara Oberlies Brown, co-head of Stifel California. “Issuers were looking at bonds that had call dates out two or three years. We were refunding 2014 bonds because we were finding that those were economic.”

New money growth was even stronger in California than nationally, up 40.7% to $56.1 billion.

Across all nine states of the Far West, new money sales volume increased 26% while refundings declined by a bit more than 1%. Deals Refinitiv classifies as combining new money and refunding increased 15.6% to $16.8 billion.

Tax exempt debt regained some ground across the region with volume growing by 25% to $74 billion, and taxable debt stayed positive with volume up 2.7% to $37 billion amid a national downturn.

General purpose sales topped the categories across the region, growing 35.4% to $30.7 billion, while education fell 16.9% to $30.1 billion snagging the No. 2 spot among sectors, followed by transportation posting 65% growth year-over-year to $16.4 billion, according to Refinitiv data.

“There were a lot of big airport and wastewater projects and large issuers taking advantage of the low interest rates, especially since they are expected to rise,” Brown said. “For airports, the reduced traffic enabled them to get more done faster,” she said, citing effects of the pandemic.

Though Los Angeles World Airports has taken a very conservative approach to budgeting, it continued the momentum on its $15 billion capital improvement program through the pandemic, because city leaders have a list of projects they want to complete ahead of the 2028 Olympics that L.A. is hosting, Tatiana Starostina, the airport’s chief financial officer, said during S&P Global Ratings online transportation sector conference last week.

The San Diego County Regional Airport Authority had the biggest single California airport bond deal in a $1.9 billion combined tax exempt new money and taxable refunding revenue deal priced in November by BofA Securities and Siebert Williams Shank.

Pension obligation bonds continued to gain traction, both in California and nationally, which Brown said “is very much a function of low taxable interest rates. We were doing those in California with true interest costs of 2.50 to 3.50, well below the [California Public Employees Retirement System] discount rate.”

She also saw a bump in essential housing credits, which was “somewhat new to the market in 2021,” Brown said. “Workforce housing financings were also higher in 2021 than prior years. That was more a function of interest rates in the vein of what the borrowing rates were for the owners of those complexes.”

The California state government issued $26.3 billion last year, a 23% increase from a year prior, according to the State Treasurer’s office.

Refinitiv ranked California as the region’s top issuer, selling almost $6.9 billion.

In 2020, 64% of the state government’s debt issuance was new money and 36% was refunding, but in 2021, that reversed and 42% was new money and 58% was refunding, said Tim Schaefer, deputy treasurer for public finance.

“The majority of that increase can be accounted for in the tobacco state securitization sales,” Schaefer said.

The municipal bond market’s largest 2021 deal was the $4.2 billion taxable refunding priced Dec. 8 by Jefferies and Citi for the Golden State Tobacco Securities Corp.

Jefferies and Citi also had priced a $1.8 billion in Golden State Tobacco taxable GO refunding on Sept. 8, the Far West’s eighth largest deal.

That made Golden State Tobacco the region’s number-two issuer at $6.5 billion.

The state originally securitized its Master Settlement Agreement revenue in the early 2000s as it sought revenue to plug state budget holes.

The tobacco bonds are a mix of shorter duration current interest bonds and capital appreciation bonds with longer maturities, Schaefer said.

“It was time to go through and adjust them, because you can’t cherry pick the offering and just refund the 2040 maturities, but not the 2043 maturities,” Schaefer said. “To do so could introduce timing errors into the application of the tobacco master settlement agreement.”

The deal involved two offerings, one of enhanced bonds that have a backdoor pledge of the state’s general fund, and then bonds that are completely unsecured, Schaefer said. The bonds have to work in harmony with each other, which is why both bond sales had to come last year, he said.

The state decided to refund the tobacco bonds last year “because of the compression of spreads and interest rates,” Schaefer said. “With tobacco, you pay attention to rates … and we concluded that rising interest rates were in store, based on advice from the Department of Finance and our financial advisors.”

The second largest deal in the region was a $2 billion combined new money and refunding sale of California state general obligation bonds priced by Morgan Stanley and Wells Fargo on Sept. 14. The San Diego Regional Airport Authority deal came in third.

Hawaii had the largest deal outside California snagging the fourth spot with $1.8 billion combined new money and refunding taxable state GO deal priced by BofA Securities and Morgan Stanley.

The Aloha State also had the distinction of seeing the largest decline in bond issuance from all its issuers, down 38% to $3 billion. The only other two states to see declines in bond volume were Nevada dropping 20% and Oregon falling 14.6%.

Washington’s state government was the region’s fifth-ranked issuer and largest outside California at $2.5 billion. All the state’s issuers sold $12.95 billion in municipal debt, the second most in the Far West and 29% ahead of 2020.

In 2022, Schaefer expects that the popularity of refundings will decline, and there may be reluctance to issue debt in general.

“We now have many economists and market participants saying that we could have as many as seven hikes in Fed fund rates this year and that they are trimming the purchases of long-dated bonds, which will also put upward pressure on interest rates,” Schaefer said. “The other big wild card is inflation, and the uncertainty over Russia and the Ukraine combined with the [Federal Reserve Board] taking a more hawkish stance. All of which adds up to stiff headwinds for anyone thinking about issuing debt.”

JPMorgan has indicated two-year rates could be higher by 100 basis points in the fourth quarter and the 10-year could be 150 basis points by the end of the year, Schaefer said.

For the Far West, BofA Securities topped the senior manager rankings, credited by Refinitiv with $15.6 billion in 103 deals, followed by Citi and Morgan Stanley.

PFM Financial Advisors snagged first place among financial advisors, credited with $15.8 billion in 130 deals followed by Public Resources Advisory Group and KNN Public Finance.,

Orrick, Herrington & Sutcliffe retained its lead among bond counsel, credited with $49.5 billion on 304 deals, trailed by Stradling Yocca Carlson & Rauth and Kutak Rock.


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