Even as overall issuance declined 17.1% in the first half of 2023, the volume of issuance in the environmental facilities sector and the
Percentages are for changes in dollar volume issuance in the first half of 2023 compared to
In the first half of 2023 there was $2.006 billion of environmental facilities issuance, growing by 46.1%, and $8.35 billion of electric power issuance, which was 4.9% higher. In both sectors the number of issues declined — to 19 from 23 in environmental facilities and to 39 from 56 in electric power.
Regarding the dollar volume growth in environmental facilities, John Hallacy, president of John Hallacy Consulting LLC, said, "Localities led the way in this category. It is simply the critical local projects that need to get done. The rate consideration is secondary."
In the environmental facilities sector, local authorities experienced a 934.1% increase and cities & towns had a 353.6% increase. Among other issuer types, the next biggest increase was 39.7% for state agencies.
"Some financings needed to be more sizable this year," said Tom Kozlik, managing director at Hilltop Securities. "There were operation specific requirements as a result of generation and transmission needs."
Healthcare declined by 62.5% and transportation by 34.2%.
"General acute and pediatric hospitals were down the most," Hallacy noted. "These entities had done more financing when rates were very low. They also have a tendency to [use variable rate-short term notes] until they know the total costs of the projects.
"The reimbursement climate is also getting more challenging," Hallacy continued. "Congress keeps talking about doing something about the growth in Medicare/Medicaid."
Of the transportation sector's 34.2% decline, Kozlik said, "the need for upgrades still exist but many themes are working against some entities in the transportation sectors, such as interest rates, inflation, staffing, etc."
In the electric power sector, the variable rate (long/no put) issuance increased 382% and to seven issues from one issue. The volume percent increase compares to a variable rate (long/no put) issuance 76.1% increase across all sectors. Hallacy explained, "The power sector is very sensitive to rates. [Issuers in it] will [use variable rate-short term notes] until they know the true cost of their long-term projects. Along with the health care sector, the sector is more inclined to use swaps."
While the general-purpose sector declined 14.3%, revenue bond issuance was down 43.3% as general obligation issuance was up 2.5%.
"Revenues are more sensitive to the business cycle. GO backing is solid in any market environment," Hallacy said.
Similarly, Kozlik said, "there is less fiscal uncertainty on the tax-backed side mostly because of the federal government American Rescue Plan Act of 2021 relief is still providing a boost to certain balance sheets."
Within the healthcare sector, the life care/retirement subsector declined 79.5%. Operating margins are compressed and occupancy rates have not returned to pre-pandemic levels, said Hilltop Securities Managing Director Yaffa Rattner. "Higher costs of capital, investor concern, and constrained operating margins and liquidity have culminated into a trend of sharply lower senior living issuance."
"Hospitals and senior living facilities generally pay debt service from net income," Rattner said. "If debt service costs significantly increase because of rising interest rates, debt service coverage and overall project viability can be constrained."
Hallacy said the decline in retirement subsector issuance stemmed from the weakening resale housing market. Stronger "volume was done when the housing market was flying high and proceeds from the sales could be deposited for entry to the facilities."
While the housing sector was up 2.6% overall, its path was split with single-family increasing 27.1% and multifamily declining by 21.4%. "Demand for single family [bonds] is at the peak when mortgage rates are high," Hallacy said. "With mortgage rates around 7% for well-qualified buyers, the increased demand makes sense."
Mortgages financed by single-family bonds "are typically more competitive with conventional loans in a higher interest rate environment so it makes sense that single family issuance is stronger," Kozlik said. "Multifamily issuance is more negatively tied to the higher interest rate environment so it is not surprising it is even lower compared to the general market."
While the transportation sector declined 34.2%, the bridges subsector increased by 2038.8% and to 10 issues from two issues. "The planning for bridges is done over the long term," Hallacy said. "Many of these projects have been on the drawing board for quite some time.
"Consequently, many of the necessary approvals are already in place and when funding is available, these entities tap the market quickly," Hallacy said. "Rates are important but federal approvals and funding are more important."
