Note issuance declines by nearly 30%

Note volume fell by 28.9% overall in 2021 as some municipalities were less dependent on short-term funding and more reliant on federal government stimulus in the second year of the COVID pandemic.

Notes issuance fell to $33.26 billion among 1,934 issues in 2021, compared with $46.78 billion among 2,254 issues in 2020, according to Refinitiv data.

The federal aid provided by the American Rescue Plan Act propped up municipalities’ already strong revenue and credit conditions, making them less apt to need short-term funding in 2021, sources said.

In addition, the uncertainty over the political, economic, and overall market conditions temporarily delayed issuers from accessing the market to finance their short-term financial needs last year, they noted.

Note issuance declined in the second and third quarters by 21.9% to $11.04 billion among 603 issues, down from $14.13 billion, and by 59% to $8.39 billion among 631 issues from $20.49 billion among 716 issues, respectively.

Issuance rose slightly in the first and fourth quarters, by 19.3% to $6.01 billion among 362 issues, up from $5.04 billion in 356 issues, and 9.8% to $7.80 billion in 338 issues, compared with $7.109 billion among 490 issues, respectively.

“Although a backdrop of favorable revenue collections and an overall improving credit profile has enabled many traditional note borrowers to avoid the short-term market for cash flow purposes — relying instead upon stronger budgetary performance to align revenues and expenditures — a higher rate bias would on the surface seem to support the final quarter surge,” said Jeff Lipton, head of municipal credit and market strategy and municipal capital markets at Oppenheimer & Co. Inc.

Jeffrey Lipton, Oppenheimer & Co.

“Whereas the declines in muni short-term issuance during the second and third quarters of last year relative to the same period of 2020 were directly tied to stronger-than-anticipated tax and other revenue receipts coming into municipalities as well as to ample stimulus from the Federal government, the resurgence in quarter four issuance may yield some counterintuitive conclusions.”.

State governments, for example, saw an 85.4% decline in note issuance for the year, to $1.78 billion among nine deals, compared with $12.2 billion in 12 deals in all of 2020.

The attractive long-term bond market, Lipton said, likely offered some alternatives to municipalities considering their best borrowing options.

“One could logically argue that concerns over higher rates may motivate issuers to bond-out long term to lock in currently more attractive borrowing terms,” Lipton said.

Still, note issuance grew by 59% in December to $5.27 billion among 82 deals, compared with $3.29 billion among 120 deals a year prior , the data showed.

The only other month that saw an increase in issuance was March when note issuance soared by 96.3% to $2.63 billion among 148 deals, up from $1.34 billion among 99 deals previously.

“Parsing the short-term issuance data through the fourth quarter of 2021 may seem to demonstrate issuer preferences for preserving short-term flexibility rather than evolving perceptions regarding Central Bank monetary policy and the trajectory of interest rates,” Lipton said.

There was also a noticeable uptick of note issuance in particular sectors throughout the year that was likely prompted by economic need to finance major projects in those sectors, such as housing and transportation, sources said.

“We would suggest that there are certain geographic areas of the country that prefer the flexibility of staying short for various reasons, construction schedules and timing of funding being a key factor, and so rolling their outstanding notes may be more suitable,” Lipton said.

Housing, for instance, saw note issuance rise by 599.1% to $650.9 million in 11 issues compared to $93.1 million in seven issues the prior year. Transportation, meanwhile, rose by 628.2% to $4.309 billion in 39 issues, versus $591.7 million among 57 issues in 2020.

“A perfect storm for new-money transactions had emerged with advancing property values and many school systems in need of capital for site expansion and rehabilitation against a backdrop of very desirable rates and some clarification on the use of American Recovery Plan funding allocations,” Lipton said.

In other sectors with notable activity, new-money note issuance dropped by 29.5% to $32.57 billion in 1,903 issues, compared with $46.22 billion in 2,182 deals the previous year. Meanwhile, refunding note volume grew by 358.3% to $489.9 million in 10 deals versus $106.9 million in 20 deals in 2020.

Overall taxable issuance bested tax-exempt issuance, growing by 135.4% to $7.884 billion in 202 deals, up from $3.349 billion among 188 deals in 2020. Tax-exempt notes, meanwhile, dropped 41.6% to $25.33 billion among 1,903 issues, compared with $43.36 billion among 2,063 deals.


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