Q1 mega deals pushing 2024 issuance expectations higher

Bonds

A slew of mega deals helped push issuance in the first quarter of 2024 to over $100 billion, buoyed by favorable market conditions and a resurgence in refunding outstanding Build America Bonds, leading some firms to reconsider total issuance expectations for the year.

Sixteen deals topped $1 billion in the first quarter of 2024, double the number of deals above $1 billion in the first quarter of 2023, according to LSEG data.

These deals, along with others on the horizon, position 2024 to top the 24 billion-plus-dollar deals seen in 2023 if this pace of issuance continues.

The pace of the issuance and the increase of refundings, surging 59.6% to $20.3 billion in the first quarter, have also led some firms to up their overall 2024 issuance projections.

BofA Securities revised their predictions upward to $460 billion from $400 billion due to the first quarter’s “surprisingly strong primary market,” for which the larger-than-expected refunding volume was also a “surprise.”

CreditSights also raised its prediction to $450 billion from $400 billion, as the firm expects the pace of new-money borrowing to “remain ahead of last year’s pace” and the heavy pace of refunding bond issuance to “moderate” over the next few months.

Ramirez opted against revising its initial forecast of $375 billion but did increase it’s refunding volume estimate by $9 billion to $63 billion “due to the slightly more favorable landscape for current refundings of taxable BABs by tax-exempt.”

The market has been receptive to the heftier slate.

“The muni market is not scared of a $1 billion deal, or a $2 billion or even a $3 billion deal,” said Ben Barber, director of the Municipal Bonds Department at Franklin Templeton.

With these mega deals, “there will be something for everyone in terms of appealing to [separately managed account] clients, mutual fund clients, short-duration, intermediate-duration, long-duration type of clients,” he noted.

The larger deals also allow for more investors to participate in a more liquid name, helping those in need of liquidity, like institutional buyers, exchange-traded funds and mutual funds, said Jock Wright, an underwriter at Raymond James who handled Jefferson County’s $2.24 billion deal at the start of the year.

Additionally, these bonds also offer a diversity of coupons, where investors can ask for “a premium bond, a discount bond, and maybe even move around the call dates a little bit on the maturities of the bonds,” said Mark Paris, chief investment officer and head of municipals, at Invesco.

“There’s a lot of flexibility the main underwriter has in a big deal, and [the firm] can put out a lot of different tranches,” not just a “bunch” of serials and a bullet majority in 30 years; it can be some 25-year paper or 35-year paper, he added.

There is also a mutual desire among market participants for these deals to get done, with them not wanting to see the main underwriter left with a balance that could cause the deal to cheapen up significantly in the secondary, he said.

These mega deals are well received, which will only support a bigger deal coming to market next because the previous one was oversubscribed, said Sylvia Yeh, co-head of AM Municipal Fixed Income at Goldman Sachs.

The pace of mega-deal issuance is not slowing in the second quarter, as more sizable deals are already on the new-issue calendar.

California is set to sell Thursday $1.48 billion of tax-exempt and taxable various-purpose GOs in three series in the competitive market.

There are two additional billion-dollar-plus deals set to price in the coming weeks in the negotiated market: the Florida Development Finance Corp. with $2 billion of Brightline Florida Passenger Rail Project revenue bonds (and another $1 billion of subordinate high-yield bonds that will be a mix of taxable and tax-exempt is also being shopped to investors) and the state of Florida with $1.5 billion of State Board of Administration Finance Corp. revenue bonds.

Why issuers are coming with these larger deals is due to several reasons, including rising costs of construction, administrative burdens, and oftentimes pure economics in the case of refunding outstanding taxable Build America Bonds. Another reason for the slew of sizeable deals is the upcoming federal elections.

With the presidential election set for November, most market participants see issuance as being front-loaded, said Cooper Howard, a fixed-income strategist at Charles Schwab.

The uncertainty has led some issuers to come to market sooner rather than later, he said.

There has also been about this “feed the beast” mentality for issuers, Yeh said.

There have long been talks about the amount of cash on the sidelines, and ahead of rates starting to move lower, bankers have been talking about the amount of money there is to put to work and “to get it while you can,” she noted.

Some of the 16 deals hail from well-known issuers that come to market yearly with large deals, such as the state of California, the Regents of the University of California, and New York City and several city authorities, like the New York City Transitional Finance Authority and the Triborough Bridge and Tunnel Authority.

However, for most of these issuers, among others, coming to market is “more a function of [going] through the administrative steps” and checking all the boxes, than deciding when is an opportune time to try to tap the market, said Scott Diamond, co-head of AM Municipal Fixed Income at Goldman Sachs.

New York City, for example, came to market twice last quarter with $1.51 billion of GOs at the end of February and $1.45 billion of GOs toward the end of March, both of which were mostly new-money.

The city coming to market was “a matter of the need and opportunity,” said Jay Olson, New York City’s deputy comptroller for public finance.

“With capital spending increasing and the number of months of the year not increasing, our new-money deals are just getting bigger,” he said. “Concerning the refunding [aspect], that’s a market-sensitive opportunity, which we took advantage of,” he said.

Demand for the deals was there, said Tim Martin, assistant controller for public finance at the New York City Office of the Comptroller, noting that “on an aggregate basis the deals had been oversubscribed and we’ve been able to get competitive pricing and put the bonds in investor’s hands.”

Meanwhile, the Regents of the University of California and Washington — both frequent issuers of large deals that came to market twice in the first quarter — each decided to issue sizable tax-exempt deals to refund outstanding taxable BABs in one deal apiece.

The Regents of the University of California came with $1.09 billion of general revenue bonds and Washington followed with $1.09 billion of motor vehicle fuel tax and vehicle-related fees GO refunding bonds.

The issuers opted to refund the BABs through extraordinary redemption provisions, which has become a topic du jour among market participants.

There has been a flurry of interest from issuers year-to-date regarding BAB refundings through ERPs, with J.P. Morgan noting there have been 17 “unique” issuers that have either called BABs, posted conditional calls or announced that they are considering financing plans in this regard.

The initial interest led Barclays strategists to predict $20 billion to $30 billion of BABs could be triggered through ERPs this year.
However, there has been pushback from investors, with legal action and warnings of potential lawsuits coming down the line, leading Barclays to revise their initial estimate as “quite optimistic.”

Norfolk, Virginia, pulled a BABs refunding from the market, but did not cite a reason and the city said it reserved the right to call the 2010B BABs for redemption in the future.

However, Jeff Lipton, a municipal research analyst and market strategist said, “despite the legal controversy surrounding this activity, many issuers are moving ahead with large-scale refundings as a way to circumvent the more costly make-whole call, which would be preferable by the BAB investor community.”

If market dynamics “hold constant from a performance perspective,” he expects BAB refunding activity to continue.

Diamond added issuers will continue to tap the tax-exempt market to refinance outstanding BABs “as long as the math makes sense.”

The first quarter also marked a one-off issuer of size.

Of all the issuers, all but one come to market at least once a year with sizable deals. The odd man out is Jefferson County, Alabama, which tapped the muni market at the start of the year with $2.24 billion of sewer revenue warrants.

The deal, which was always set to be large, was to refinance the debt issued by once-bankrupt county 10 years prior, Wright said.

“We had a lot of wind in our sails given that it was the first sizable transaction of the year, so we were able to get a lot of people looking at it,” he said.

The Jefferson County deal caused a “buying frenzy” as a “solid BBB-rated credit that works well for all market players,” said Birch Creek Capital strategists in an early January report.

The deal was 11 times oversubscribed with approximately $26.5 billion in orders, they said.

The strong demand led to lower yields, which were bumped up to 15 basis points from the preliminary pricing.

With these mega deals seeing solid demand from the market, Howard said that “opens the doors” for others to follow.

He said he would not be surprised if this trend continues as fiscal stimulus and tax revenue start to “wane,” leading to a pickup in issuance.

Lipton concurred, noting issuers can only defer capital expenditure for so long.

“The infrastructure and jobs and climate change initiatives will only help to propel sizable muni issuance into the foreseeable future,” he said. And as the market has witnessed capital allocations into the airport sector to upgrade and modernize facilities across the U.S., “other infrastructure projects are likely to follow suit over the coming years as a way to improve our national security, safety standards, and competitive advantages,” he said.

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