Midwest’s 2021 refunding slide deeper than growth in new money deals

Municipal bond issuance in the Midwest reversed course last year, falling by 7.4% to $77.5 billion from $83.7 billion a year earlier, according to Refinitiv data, as a decline in refundings buried a 13.4% hike in new money issuance.

Midwest refunding volume tumbled by 38%, accounting for nearly $20 billion of the region’s volume.

That overshadowed the positive uptick in new money that rose 13.4% to account for $50.2 billion of total borrowing declining in 2020. Deals classified as combined new money and refunding held steady at $7.3 billion, according to Refinitiv data.

“Rising interest rates sharply suppressed 2021 refundings in the second half of the year,” said Richard Ciccarone, president of Merritt Research Services. “With slower-growing economies and flat demographics, capital improvement programs were more about maintaining and updating existing infrastructure rather than accommodating expansion projects.”

Refunding volume had swelled in 2020 by 53% to $32.1 billion, marking a second year of steep growth as rates hovered at new lows. As borrowers focused more on their recovery from the COVID-19 pandemic’s hardest blows, the region saw a 2.2% dip in new money issuance in 2020.

The 2020 jump and 2021 fall also underscore the impact one deal can have on an entire region’s numbers as the Ohio Buckeye Tobacco Settlement Financing Authority $5.4 billion refinancing in the first quarter of 2020 pumped up volume that year.

The number of issues sold last year also fell, landing at 4,032 compared to 4,208 the year before.

Market dynamics and the economic and budgeting impacts of massive amounts of federal relief from the $350 billion that began flowing to states and local governments in the American Rescue Plan Act signed last March influenced borrowing decisions but they varied by sector, market participants said.

Borrowers are expected to confront higher rates through 2022 with the Federal Reserve poised to implement multiple rate hikes so that could push some to speed up plans and jump into the market but looming mid-term election could hold some back.

“The political mood in front of midterm elections, concerns about higher costs for everyone doesn’t bode well for raising taxes or fees to support new bond issues,” Ciccarone said. “Higher Ed and Hospitals seem to be in a mood to take a breather until their conditions improve too but capital projects that do get the green light might accelerate or increase some of the bond issues to try to lock in interest rates available now rather than take the chance that they might even be higher later.”

A handful of states raised their borrowing levels last year than in 2020, including Illinois, Indiana, Iowa, North Dakota, South Dakota, and Wisconsin while Michigan, Minnesota, Missouri, Nebraska, and Ohio declined.

Michigan and Ohio’s lackluster volume drove the region’s overall decline as Michigan recorded a 30.3% drop to $8.3 billion from $11.9 billion and Ohio tumbled 38.2% to $11.2 billion from $18.1 billion.

The two other states with more than $10 billion of debt sold – Illinois and Wisconsin – landed in positive territory with Illinois rising a modest 3% to $14.5 billion and Wisconsin growing 17.5% to $10.7 billion.

Education led among sectors but fell 14.5% to $24.1 billion from $28 billion followed by general purpose borrowing that fell 22.5% to $18.8 billion from $24.2 billion. The other leading sector for issuance was healthcare which rose 38.7% $9.9 billion from $7.1 billion as hospitals emerged from the pandemic’s deepest wounds suffered in 2020.

With the use of taxable structures to advance refund debt driving the 2020 surge, taxable paper fell off by 27.3% to $16.1 billion in 2021 while tax-exempts dropped just 1.2% to $59.9 billion.

For higher education borrowers, last year marked a return to a more normal school year after remote learning in 2020 and that influenced both borrowing levels and issuance of taxables. In 2020, the sector’s borrowers, particularly the larger, wealthier institutions, issued record levels of taxable bonds due to operating cash flow needs as the grappled with the pandemic’s toll and looming uncertainty, said Dennis McNulty, a managing director at Blue Rose Capital Advisors.

Operating concerns eased last year as students returned to campus, vaccines offered promise for recovery and normalcy, and the new federal administration signaled a conciliatory tone that subsequently resulted in material distributions of stimulus aid across the sector, McNulty said. Extraordinary returns on endowed and invested assets also created unexpected wealth for many institutions.

“As a result, to some degree borrowers took a pause to digest and reassess their financial situation in 2021,” McNulty said. The New Year “brings new urgency for many borrowers faced with a relatively sudden rising interest rate environment. We do expect more institutions to consider large taxable borrowings in 2022, particularly for institutions who did not bring large offerings in 2020.”

Revenue backings came attached with $43 billion of volume compared to $34.5 billion of debt supported by a borrower’s general obligation pledge. Insurance wrapped $6.2 billion of paper last year, a 13.3% decline over 2020 and fixed-rate structures accounted for most of the debt at $72.7 billion

State agencies issued the most debt at $23.2 billion up 29.5% from $17.9 billion a year earlier followed by district borrowing at $18.7 billion down 15.4% from $22.1 billion. Cities and towns provided the next major source of borrowing with $12.4 billion sold for a 3.2% decline from $12.8 billion a year earlier. State government issuance rose 2.2% to $7.9 billion.

Illinois offered the largest single largest financing for the year with its $1.2 billion new money and refunding general obligation sale in March followed by the region’s only other billion-plus transaction – the Chicago’s Sales Tax Securitization Corp. $1 billion issue to close out the year in December.

Michigan followed with its $854 million deal in August, the state’s second issuance of trunk line bonds under a $3.5 billion Rebuilding Michigan program. The Metropolitan Pier and Exposition Authority followed with its $811 million refunding and restructuring issue that provided salve for the agency’s ongoing COVID-19 pandemic-related wounds from lost convention and trade business.

Several big deals have already priced this year including Chicago Public School’s $872 million new money and refunding deal in January. Chicago is planning billion dollar deals for both O’Hare International Airport deal and Midway International Airport, $1.2 billion of water and wastewater borrowing, and a new money GO sale.

Two conduits led among borrowers with the Indiana Finance Authority offering the most volume of $2.8 billion in 24 transactions followed by the Public Finance Authority which is based in Wisconsin and offered $2.7 billion of paper in 89 transactions.

Ohio followed with $2.4 billion in 30 deals, Illinois at $2.15 billion in six sales, the Illinois Finance Authority at $1.76 billion with 25 issues, and Wisconsin at $1.6 billion in nine deals.

The Missouri Higher Education Loan Authority, the Iowa Finance Authority, the Chicago STSC, and Minnesota Housing Finance Agency rounded out the top 10.

The Wisconsin Health and Educational Facilities Authority said activity picked up some steam last year after 2020 levels plummeted and it expects growth this year.

“We saw the biggest drop in 2020, and that low volume continued through the first quarter of 2021. Since then, we have seen a steady volume of both refinancing and new money borrowings,” said WHEFA’s head Dennis Reilly. “And this steady trend has reached another level of high activity in the last few months, and we expect the first six months of 2022 to be one of our busiest periods in our 43-year history.”

“I believe some of the new money borrowings that have occurred in 2022, and will occur later this year, are projects that were put on hold during the pandemic,” Reilly said.

BofA Securities led the pack of senior managers running the books on $10 billion of debt in 84 deals. Robert W. Baird & Co. Inc., Stifel Nicolaus & Co. Inc., JP Morgan, RBC Capital Markets, Morgan Stanley, Citi, Piper Sandler & Co., Barclays, and Goldman Sachs LLC rounded out the top 10.

PFM Financial Advisors LLC led among advisors providing guidance on 342 deals valued at $12 billion. Baker Tilly Municipal Advisors, Acacia Financial Group Inc., Columbia Capital Management, Ehlers & Associates, Swap Financial Group LLC, Public Resources Advisory Group, CSG Advisors Inc., Baird, and Ponder & Co. rounded out the top 10.

Chapman and Cutler led among bond counsel provided legal services on 313 of deals valued at $7.1 billion. Kutak Rock LLP, Gilmore & Bell PC, Ice Miller, Quarles & Brady LLP, Dorsey & Whitney LLP, Squire Patton Boggs, Bricker & Ecker LLP, Miller Canfield, and Katten Muchin Rosenman LLP rounded out the top 10.


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