The Midwest was the only region to experience a year-over-year drop in municipal bond borrowing for the first half of 2021.
Volume in the region fell by 9.9% from first half 2020 to $37.3 billion in 2,093 issues, according to Refinitiv data, as an uptick in new money borrowing fell far short of making up for a decline in refundings.
The region got out of the gate slowly in the first quarter when volume fell 18.3% compared to 2020. The second quarter saw only a 1% decline.
In the first half of 2020, the Midwest had
The 2020 jump and 2021 fall also underscore the impact one deal can have on an entire region’s numbers as last year’s first half was inflated by the nation’s largest sale of 2020, the Ohio Buckeye Tobacco Settlement Financing Authority $5.4 billion refinancing in the first quarter of 2020.
Take that out of the mix and 2021 numbers would be ahead of 2020.
The overall 2021 numbers bear signs of the pandemic’s sweeping effects on market dynamics and the economic and budgeting impacts of massive amounts of federal relief, most recently in the form of $350 billion that is flowing to states and local governments in the American Rescue Plan Act signed in March.
“Traditional Midwestern conservative fiscal policies were evident in the tone of debt issuance,” said Richard Ciccarone, president of Merritt Research Services. "Despite a backdrop in which most borrowers have seen improved balance sheets due to federal COVID relief funds and a reduction in debt outstanding and carrying costs, municipal borrowers in the region remain slow on the trigger to launch major new capital improvement programs."
While the pandemic’s influence lingers, the political landscape also may have weighed on borrower's minds and influenced issuance plans.
“There was a change in administration and so I think a lot of issuers wanted to wait and see what President Biden would do and some waited on the sidelines waiting to see” how the economic recovery and the pandemic’s course would progress, said John Hallacy, president of John Hallacy Consulting LLC.
New-money financing volume in the Midwest was up 14.8% year-over-year to nearly $24 billion while refundings plummeted 48.9% to $8.9 billion,
Combined deals for the first half of 2021 made up another $4.4 billion of borrowing.
The tapering of refundings followed a year in which refinancing volume swelled by 53% to $32.1 billion as 2020 as rates hit new lows and borrowers turned to taxable and forward delivery structures to capitalize in the absence of the ability to advance refund debt, which was eliminated in the 2017 tax bill.
“While interest rates edged higher in the first half, they still remained lower than historical averages. The Midwest’s deep drop in refundings was probably signaling that the low-hanging-fruit refunding opportunities have run their course,” Ciccarone said.
Illinois was the largest source of municipal bonds in the 11-state Midwest, with issuers there selling about $6.1 billion.
It was followed by Ohio with $5.2 billion, then Michigan and Wisconsin, both at about $4.8 billion.
Volume was up in Illinois, Indiana, Iowa, Missouri, North Dakota, South Dakota and Wisconsin. Michigan, Minnesota, Nebraska and Ohio recorded declines.
Education borrowing was the biggest sector at $14.2 billion but that marked a 12.3% drop. General purpose borrowing accounted for $9 billion, down 31% and healthcare accounted for $3.9 billion, up 22.9%. The transportation and housing sectors also finished the first half in positive territory.
Even the Midwest’s normally strong issuance in the education and general purpose sectors took a step back, perhaps suggesting that prospects for slower demographic and economic growth were diminishing the appetite for new projects, Ciccarone said.
Bonds Refinitiv classed as state agency borrowing grew by 43.4% to $10.9 billion, followed by districts that dropped by 6.5% to $10.4 billion.
Taxable bond volume, which grew in favor last year as issuers sought to capitalize on low rates to refinance debt that hadn't reached its call date, dropped 28% to $8 billion reflecting the broader overall drop in refunding bonds.
The use of negotiated transactions contracted by 8.8% while competitive deals dropped off by less than 1% which market participants attributed to the decline of refundings. Even borrowers that use competitive transactions for new money will often turn to a negotiated transaction for more market-sensitive refundings.
Illinois’ $1.26 billion new money and refunding in March was the Midwest’s largest deal of the half and the region’s only deal over $1 billion.
The Missouri Health and Education Facilities Authority’s March sale for nearly $800 million on behalf of BJC Health System came in second followed by the Iowa Tobacco Settlement Authority’s $689 million transaction in April.
That one deal made the Illinois state government the region's top issuer, followed by Ohio, the Indiana Finance Authority, the Illinois Finance Authority and Wisconsin.
A series of larger deals are planned in the region including a $500 million issue coming this week from Illinois and a $1 billion refinancing from Chicago in the fourth quarter, but a series of factors looms large over the remainder of the year.
Factors that will weigh on borrowing include the anticipated passage of a massive federal infrastructure bill, the status of the economic recovery that could be set back by a surge in COVID-19 cases due to the Delta variant, and expectations that the Federal Reserve could begin tapering its asset purchases which could drive up market rates even though the Fed has not signaled it’s ready to raise rates, market participants said.
If issuers fear interest rates will rise as talk of tapering grows more amplified then they might pull the trigger on planned financings especially if tax revenues remain on the mend, Hallacy said.
“There’s all this federal aid flowing so there’s not as much deficit financing as some might have believed there would be and issuers in the Midwest tend to be more cautious about adding debt so many might be waiting on the sidelines trying to pick the optimal time to borrow,” he said.
“Anytime we see rates on move and that could happen with any tapering we see a burst of activity,” Hallacy said.
“Despite aging infrastructure, many Midwestern state and local governmental officials could well be buying time awaiting passage of federal infrastructure packages that lessen their own debt loads. In reality, the fiscal requirements for updating and modernizing infrastructure will require a substantial input from state and local sources even if federal funds are made available,” Ciccarone said.
BofA Securities captured the top spot among underwriters, credited by Refinitiv with running the books on $4.2 billion followed by Robert W. Baird, Morgan Stanley, JPMorgan and Stifel Nicolaus.
Chapman and Cutler led among bond counsel, credited with working on $3.6 billion of issuance followed by Quarles & Brady, Ice Miller, Miller Canfield and Kutak Rock.
PFM Financial Advisors advised on $5.8 billion of debt taking the top spot among advisors followed by Baker Tilly Municipal Advisors, Acacia Financial Group, Baird and Columbia Capital Management.
