Fall in new money deals gives Far West worst volume year in a decade

Issuers in the Far West sold $66.2 billion in municipal bonds in 2022, according to Refinitiv data, a 43% drop year-over-year from the $116.7 billion sold in 2021.

California drives the nine-state region’s numbers, and a big falloff in issuance from the Golden State led the Far West to the biggest year-over-year drop of any region in 2022 in a year when volume nationally was down 19.5%.

It was the Far West’s lowest showing since 2012, when issuers there sold $65.3 billion.

The Golden State was the top source of municipal bonds nationally in 2021, but was outpaced by New York and Texas in 2022.

Issuers in California sold $46.98 billion, a 45% decline from the $86 billion sold in 2021, while New York topped the slate with $49.4 billion and Texas issuers sold $47.66 billion.

California’s plunge means the state’s issuers sold almost $40 billion less in bonds during 2022 than in 2021.

The fall in taxable paper as interest rates rose was one major driver. The rising interest rate environment largely eliminated the ability to sell taxable bonds to take out non-callable tax-exempt debt.

“As rates went up, taxable advanced refundings went away, as did taxable pension obligation bonds,” said Raul Amezcua, a senior managing director at Ramirez & Co.

Taxable issuance was down almost 70% in the Far West, to $11.6 billion. Nationally, taxable sales dropped 55.4% to $53.8 billion.

California had been the largest source of POBs until interest rates started to climb.

A substantial drop in new money volume sets California and the Far West apart from the rest of the country. New money volume was down 37.4% in the region to $45.7 billion, and down 40.8% in California to $33.4 billion.

“With rates up, a lot of people looked at project costs and said, ‘Maybe we should just pause,'” Amezcua said. His firm is projecting 2023 will see volume similar to 2022’s totals, but he also said there are a lot of projects in California that need to be done, so he thinks issuers will be moving forward on them.

Refundings in the Far West fell 59.7% to $10.8 billion and deals Refinitiv categorizes as combined new money/refunding dropped 42.8% to $9.6 billion.

Unless something changes — like Congress rolling back the 2017 elimination of advanced refundings — the only kind of refundings that are economical are those done when bonds hit their call date, Amezcua said.

The fate of one deal helps tell the story. The operator of a bond-financed seawater desalination plant in San Diego County was approved in June by its conduit issuer California Pollution Control Financing Authority for a $722.9 million deal including $522.9 million of refunding bonds.

By the time it was ready to go to market, the deal was reduced to $158 million of new money.

“It takes months to put these deals together, and sometimes the market shifts,” said Lisa Marie Harris, finance director/treasurer for the San Diego County Water Authority, which buys all the water from Poseidon’s Carlsbad desalination plant. “The increase in interest rates eliminated any savings from the refunding, so there was no point in refunding the debt.”

The Far West region’s largest deal was $3 billion priced by Barclays and JP Morgan for the Regents of the University of California in April. California state government priced the second largest deal, $2.3 billion in general obligation bonds in September. The third largest deal was a $1.36 billion competitive GO deal from Washington state government in April, for which BofA Securities was low bidder on all four tranches.

California’s state government was the region’s top issuer credited with $6 billion on Refinitiv’s top 20 list for the region.

The UC Regents continued to be big issuers in 2022, number two in the Far West with $4.1 billion. In third place was Washington’s state government with $3.2 billion.

The region had six deals over $1 billion last year. The other three were: a state of California deal of $1.2 billion priced in October, $1.2 billion for the Los Angeles Department of Airports in August and $1.05 billion for the California Health Facilities Financing Authority in March, a deal that closed the $2 billion authorization for the No Place Like Home program, which issued bonds to fund supportive housing projects for homeless people dealing with mental illness.

Deals Refinitiv classified as for education were California’s highest-volume sector at $12.2 billion, a 48% drop from the prior year’s $23.5 billion.

Issuers in Washington posted the second-highest volume after California, selling $9.1 billion, a 30% drop from 2021.

“We can only speculate from our experience, but the decline was likely a combination of things,” said Jason Richter, Washington’s deputy treasurer for debt management.

“First, rising interest rates reduced the appeal of refinancings, especially so for the more creative structures, such as taxable advance refundings, he said.

“Next, the significant amount of federal aid, such as ARPA funds, that was made available to state and local governments left many municipalities with abundant cash resources, reducing the need for new money bond financings,” Richter said. “At the same time, the uncertainty of the past three years undoubtedly impacted plans for capital projects, disrupting and delaying some number of building and construction projects, especially at the local level.”

The Evergreen State’s three biggest deals were the $1.3 billion of competitive GOs in April, $862.6 billion the Port of Seattle issued in July, and $749.5 billion issued by state government in February, according to Refinitiv.

Volume fell in every Far West state except Nevada, where issuance increased 9.2% to $2.2 billion.

Alaska’s issuance fell by 32.8% to $790 million, Hawaii dropped by nearly half to $1.6 billion, Idaho fell 37% to $866 million, Montana fell more than half to $453 million, Oregon dropped almost half to $3.9 billion and Wyoming fell more than 75%to $155.6 million.

BofA Securities secured the Far West’s top underwriting ranking, credited by Refinitiv with $7.35 billion in 53 issues, followed by Morgan Stanley with $7.29 billion in 58 issues and JPMorgan with $5.58 billion in 41 issues.

Public Resources Advisory Group topped the financial advisor rankings, credited with $11.08 billion in 34 issues, trailed by PFM Financial Advisors with $9.59 billion in 95 issues and Piper Sandler & Co. with $4.68 billion in 57 issues.

Orrick, Herrington & Sutcliffe continued its long reign atop the Far West bond counsel table, credited with $25.4 billion in 168 issues, followed by Stradling Yocca Carlson & Rauth with $7.47 billion and Foster Garvey PC with $4.48 billion in 40 issues.

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