Bonds

In a year marked by shrinking issuance, the electric power and utilities sectors showed the smallest volume contractions.

Electric power declined 3.4% and utilities declined 10.1%, compared to 2021 levels.

Overall municipal volume was down 19.5%.

All data is from Refinitiv and all percentages are for changes in dollar issuance volume in 2022 compared to 2021 levels.

Issuers in the electric power sector sold $12.2 billion of securities in 2022 while utilities offered $47.9 billion. Across all sectors $389.1 billion was issued.

Electric power and utilities fared better than most since most of their issuance is related to long-term system improvements, said John Hallacy, president of John Hallacy Consulting LLC. “The rationale for these projects does not vary much with short-term economic considerations.”

Further, federal tax credits support electric power sector volume, he said.

Fitch Ratings Managing Director Dennis Pidherny said there were three large bond deals in the electricity sector in the year’s first half that contributed the sector’s relative strength: one each from the California Community Choice Finance Authority, the New York Power Authority and the Intermountain Power Agency.

While utilities declined 10.1%, the natural gas subsector went up 19%, the telephone subsector increased 55.7%, and combined utilities expanded by 57.5%.

“Gas-fired projects are still easier to accomplish than many others,” Hallacy noted, since alternatives to gas require foreign parts and supplies.

With few telephone projects, the increase represents just five projects compared to 14 in 2021, he noted.

The sectors with the biggest issuance were general purpose with $103.3 million, education with $91.3 million, and transportation with $56.9 million, the same as in 2021.

The sectors that shrank the most were public facilities which dropped 54.9% and development which slumped 41.5%.

Projects in “these sectors may be deferred and delayed because they are not as critical to operations as the [electric power and utilities] projects,” Hallacy said. “These projects are also more sensitive to budgetary considerations.”

Looking ahead, Hallacy expects transportation to be a big issuer while the housing sector may be challenged.

In 2023, “transportation should expand from the effects of the infrastructure act,” Hallacy said. “Some of the general government projects will accelerate due to the fact that the economy is performing relatively well despite recession fears. Housing continues to deal with a lot of crosscurrents and will be stressed.

“Healthcare margins are under pressure and some of the megaprojects of pre-pandemic times are slow to return even though consolidation is ongoing,” Hallacy said.

Another consideration for issuance might be term limits, with officials trying to launch projects before they leave office, Hallacy said.

While the development sector declined 41.5%, the industrial development subsector increased 49.4%. Hallacy said the gain in the industrial development subsector year-over-year was about $1 billion and was probably due to a handful of projects that needed completion.

“Environmental mitigation is top of mind these days for most communities,” he said.

Education issuance declined 21.3%, with the student loan subtype plunging 77.5%.

“There still is a great deal of uncertainty about the [Biden administration’s student loan forgiveness] program since it has been tied up in the courts,” Hallacy said. “It is hard to structure a student loan transaction when you do not know what the working parameters will be.”

While tax-exempt issuance declined 9.9% overall last year and taxable 55.4%, in education tax-exempt issuance grew 1.7% while taxable shrank 72.1%.

Hallacy said tax-exempt school issuance is driven primarily by demographics.

“The need is there so bond issues go forward,” he said.

But with rising interest rates, he said, “taxable refundings were no longer working mathematically.”

In the general purpose category, which declined 18.7%, alternate minimum tax bonds increased 640.9% to $1.6 billion.

Healthcare sector issuance declined 16.2%, led by the pediatric hospital subsector, which plunged 75.9%. The general medical subsector increased 293.4%.

Since many pediatric hospitals were built in the years before the pandemic the need had been “largely satisfied,” Hallacy said. “The pandemic exposed shortcomings in emergency rooms and other adult services such, as pulmonology, that needed to be improved.”

The public facilities sector slumped 54.9%, with the libraries and museums subsector dropping 78.5%, the government buildings subsector plunging 78.1%, and civic and convention centers subsector declining 86.4%.

These subsectors’ projects “are considered less essential than others in a pandemic period,” Hallacy said. “Conference attendance has picked up considerably of late but it has not been better than 2019 levels. Most of these projects may be deferred to a better time.”

In the transportation sector, projects sponsored by cities and towns increased 73.2%. “Some of the local conditions are so stressed that the projects cannot be delayed,” Hallacy said.

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