Fourth quarter gains push Far West muni bond volume out of doldrums

Bonds

Municipal bond issuance in the Far West region in 2023 was up 13.1% year-over-year to $75.2 billion, spurred in part by a fourth quarter rally, boosting sales 45% compared to the same period in 2022, according to data from LSEG, formerly Refinitiv.

“There has been a tremendous rally, starting in December when the Federal Reserve said they were done with rate hikes,” said Raul Amezcua, a senior director at Samuel A. Ramirez & Co. “The market has improved by over 100 basis points.”

California sales propelled the nine-state region as usual with $54.1 billion in bonds sold by issuers in the Golden State, compared to $9.3 billion from Washington and $4.9 billion from Oregon, the states with the second- and third-highest volume.

Idaho issuance grew nearly 50% to $1.3 billion, putting it in range of Hawaii, where issuers sold $1.7 billion. Nevada volume was up 17% to $2.7 billion.

In the region, only Alaska and Montana, neither big players in the muni market, were down year-over-year.

The Golden State was the second largest source of municipal bonds in 2023, behind Texas with $59 billion and ahead of New York issuers at $42.3 billion, according to LSEG data.

Refunding volume saw a resurgence in 2023, rising by nearly 25% to $13.56 billion, but as has been the pattern for the past few years, new money represented the vast majority of sales at $52.95 billion, while sales categorized by LSEG as combined new money/refunding dropped by 10.5% to $8.7 billion.

“It’s going gangbusters, it’s been great,” said Justin Cooper, head of Orrick, Herrington & Sutcliffe’s finance sector and co-head of its public finance practice. “I think there was a lot of pent-up need to borrow after the drop-off from 2022 to third quarter 2023 when people still believed there was free money. They finally got the memo that interest rates were not going back to 2% or 3%.”

Even with the rally, issuance remains low compared to recent history, as the region saw $116.7 billion in sales in 2021, according to LSEG data.

Amezcua said he thinks the pick-up that began in the fourth quarter could carry forward into 2024 and 2025.

“I have been doing this for 30 years, and we often see two or three years of below-average volume, and then shift to three or four years of higher volume — and I think we are starting toward higher volume,” Amezcua said.

The official Ramirez outlook produced by Peter Block, the firm’s managing director of credit strategies, is calling it pretty level to last year, Amezcua said.

In his outlook released in January, Block predicted total gross issuance for the nation of $375 billion in 2024, consisting of $300 billion in new money and $75 billion in refundings, with tax exempt representing 90% of the total and taxable at 10% of supply.

Current market conditions are also bringing back financial vehicles that had fallen out of favor. After what Cooper said was a 15-year dearth, issuers are asking if they can issue variable rate debt and swap it to fixed rate.

Variable rate debt in the Far West more than tripled rising to $6.4 billion in 28 issues for long-term/no put and grew more than half to $2.6 billion for short put, according to LSEG. Nationally, variable rate issuance rose 13.8% in 2023, increasing to $13.2 billion from $11.5 billion in 2022, according to LSEG Refinitiv data.

With tax-exempt rates materially lower than taxables, and taxable high enough for people to get deals, “it’s driving structured financing and things our market is good at,” Cooper said.

Creative financing is making up for what we are losing in plain vanilla,” Cooper said. “The margins people can make on plain vanilla is compressed.”

The increase is coming in deals that are less off the rack, and more custom fit, he said.

“We are definitely seeing a pickup in derivatives use by our muni clients.  It’s been slow but steady growth over the last four or five years,” said Nat Singer, a senior director with PFM Financial Advisors and PFM Swap Advisors, advising on both taxable and tax-exempt bond and derivative transactions.

“With interest rates higher, some clients that were using interest rate swaps aren’t seeing the large negative mark-to-markets that were prevalent when interest rates were lower.  In many cases they are seeing the MTMs get to zero or even positive on legacy swaps, which makes it easier for issuers to consider new swaps,” he said.

“Each year, we have seen a pick-up in execution,” Singer said. “Derivatives volume tripled for our firm in 2023 versus in 2022. That is definitely a positive sign.”

Education, housing and utilities have been popular sectors, Cooper said, adding that healthcare seems poised to come back.

“It’s going gangbusters, it’s been great,” said Justin Cooper, head of Orrick, Herrington & Sutcliffe’s finance practice and co-head of its public finance practice. “I think there was a lot of pent-up need to borrow.”

Orrick, Herrington & Sutcliffe

Deals LSEG classified as for education were up 27% in the region to $19.8 billion. Issuance for electric power doubled to $9.8 billion, transportation declined 15.9% to $7.1 billion and housing was up 31% to $6.1 billion.

The California state government was the top issuer in the nation, selling $8.6 billion in seven issues.

California Community Choice Financing Authority sold a total of $5.5 billion in 11 issues in 2003 making it the second largest issuer in the region, followed by the Washington state government at $3.7 billion in 17 issues.

CCCFA had five deals among the region’s 20 largest, topped by $1.01 billion priced by Goldman Sachs & Co. on Nov. 30.

The authority issues bonds to finance prepaid renewable energy purchases for local community choice aggregation agencies.

The three largest deals in the region were the $2.58 billion State of California general obligation bond deal priced in September by joint senior managers Citi and RBC Capital Markets; a February pricing of $2.2 billion Regents of the University of California bonds by lead managers Morgan Stanley and Goldman Sachs; and $1.8 billion of taxable State of California GOs priced in March by joint senior managers Wells Fargo and Siebert Williams Shank & Co.

Issuance for healthcare fell by 57% in the Far West to $2.4 billion.

Cooper said the sector pulled back on debt issuance over the past three years as it recovered from the hit to revenues at the height of the pandemic, but said hospitals always have massive capital needs and will need to get back to the capital markets.

Amezcua is seeing increased interest from the larger counties, cities and transportation clients he represents in pushing out new money deals.

He said 2022 brought a drop in volume and 2023 was relatively flat because issuers only wanted to borrow if needed.

Interest rates were high and inflation pushed the cost of projects higher, so everyone paused to reassess, Amezcua said.

“People were not feeling great about the higher borrowing costs, but I really think the tide has turned,” he said. “People have reassessed the cost of projects, they have run out of federal money and now we are seeing volume pick up.”

BofA Securities secured the Far West’s top underwriting ranking, credited by LSEG with $9.7 billion in 59 issues, followed by Morgan Stanley with $8.6 billion in 51 issues and Goldman Sachs with $6.3 billion in 20 issues.

Citi, which announced its exit from municipal bond underwriting in December, was fourth in the Far West at $5.9 billion.

PFM Financial Advisors topped the financial advisor rankings, credited with $15 billion in 97 issues, trailed by Public Resources Advisory Group with $13.5 billion in 31 issues and KNN Public Finance with $6.4 billion in 53 issues.

Orrick, Herrington & Sutcliffe continued its long reign atop the Far West bond counsel table, credited with $26.3 billion in 160 issues, followed by Stradling Yocca Carlson & Rauth with $9.4 billion in 148 issues and Hawkins Delafield & Wood with $7.1 billion in 54 issues.

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