Municipal bond volume in the Southwest region increased slightly in the first half of 2021 as its seven other states more than made up for a decline in Texas.
Across the region, volume rose 2.9% year-over-year through June, according to the data collection firm Refinitiv, besting the previous first-half record for the region, set in 2020.
“Despite the fact that we had a very good year at our firm, things were a little slow in some sectors,” said Noe Hinojosa Jr., founder and chief executive of Estrada Hinojosa and Company, the region’s third-ranked financial advisory firm, credited with $2.49 billion of deals in the first half.
Low interest rates kept issuers pushing their paper out the door at a fairly steady clip.
"Every day, week, and month there are obviously shifts in the market but from an overall perspective we are still 'historically' low," said Christine Crotwell, director at Masterson Advisors in Houston. "This low interest rate environment has led to many refinancing opportunities but also an overall drive to get debt — new money or refunding — into the market sooner rather than later, to capitalize on the market."
Volume in the first quarter rose 3.7% year-over-year followed by a 2.3% rise in the second. Regionally, volume hit $44.29 billion on 1,583 deals, 46 more transactions than the first half of 2020.
In Texas, which accounted for 58% of the regional total, volume was down nearly 5%, to $25.7 billion. During the same period, home prices and state sales tax receipts were soaring at record levels.
Industry execs said they continued to adjust to the pandemic while working remotely and tending to clients seeking guidance on the new reality.
“The first half of 2021 has been a story of resiliency for public finance issuers, as they became more adept at managing operational and financial challenges caused by the pandemic,” said Stephanie Massey, partner and co-chair of Locke Lord’s public finance group.
“Throughout these challenges, issuers successfully forged ahead with financing postponed or delayed capital projects during the first half of 2021,” she added. “I expect we will see more of the same for the rest of 2021 as issuers learn to live with pandemic-related issues in a more permanent way than originally anticipated.”
At Masterson Advisors, a firm that specializes in the hundreds of utility and flood-control districts that have proliferated with the housing boom, the pandemic was less brutal than a deep February freeze that took power plants offline, causing widespread blackouts and more than 100 deaths across Texas.
"I do feel that the Feb. 15 winter storm in the Houston area probably had more direct effects upon our special district clients compared to the pandemic," Crotwell said. "Each entity is different. Natural disasters are a direct issue in relation to operation of certain districts’ facilities."
Regionally, special district volume was up nearly 14% to $17.5 billion.
As in other parts of the country, the states of the Southwest channeled a flood of federal coronavirus relief finding to state and local governments used to offset the effects of the pandemic.
In the second half of the year and beyond, state and local governments are positioning themselves to absorb the $1 trillion in federal infrastructure legislation passed by Congress in early August.
“We’ve never seen federal relief like we saw in the Rescue Plan Act,” said Tom Kozlik, head of municipal research and analytics at HilltopSecurities. “That’s the story of a decade right there. It could be setting us up for a golden age for public finance. But that golden age is going to last longer for some than for others.”
Republican-controlled states dropped some of the precautions designed to prevent the spread of COVID-19 and its emerging Delta variant.
The spread of the virus remains a wild card in most forecasts.
“At end of March, I increased my outlook on seven of our 11 municipal sectors, and I reserved the right to change these if a fourth wave of COVID develops,” Kozlik said.
“We are in that fourth wave right now," he said. "Going into the fall, general obligation bonds should remain stable. I know there’s a lot of talk about schools potentially closing. Schools closing will have an economic impact, but in general, GO credits should remain stable because of those Rescue Act funds.”
Colorado was the second biggest source of issuance in the Southwest during the first half, with volume up 42.7% year-over-year to almost $6.1 billion.
The Denver-area's Regional Transportation District led the way with $834 million, in a single February refunding deal that carried
Arizona was another big gainer, with a 41.6% volume increase to $4.3 billion, ranking it third among states in the Southwest.
The state's top issuer was the city of Tucson, at $658 million in a single
Utah’s 20% drop, to $1.8 billion was the largest volume decline, followed by Oklahoma’s at 16%, to $1.6 billion.
Kansas saw a 9% increase in volume to $2.1 billion, followed by Arkansas at 8%, to $1.6 billion. New Mexico’s volume was down1% to $1.1 billion.
Only one issue out of the Southwest in the first half exceeded $1 billion, the Texas Municipal Gas Acquisition and Supply Corp.’s January sale at $1.06 billion.
The North Texas Tollway Authority’s string of savings continued with $848 million of refunding bonds sold in May for the region's second-largest deal of the half.
A shakeup among senior managers saw JPMorgan surge to first place in the region, credited by Refinitiv with $5.3 billion of deals, while Citi, the leader for three years running, fell to seventh place.
Citi was targeted by the Texas Legislature’s bill banning transactions by underwriters who take positions against the firearms industry. However, the bill does not take effect until Sept. 1, so that does not explain the bank’s fall.
JPMorgan, Bank of America and Wells Fargo were also identified as banks that might lose business based on their policies that pro-gun politicians in Texas say could limit sales of military style automatic weapons used in massacres.
Citi has said that it does not expect to be disqualified from underwriting in the state.
RBC Capital Markets, which managed the NTTA deals, ranked second among senior managers with $4.2 billion of deals.
Bank of America Securities ranked third with $3.7 billion, followed by Stifel Nicolaus at $3.4 billion and Morgan Stanley with $2.98 billion.
Hilltop, the perennial leader among financial advisors, was credited with $9.4 billion of deals, followed by RBC at $2.7 billion, and Estrada Hinojosa.
McCall Parkhurst retained its perennial spot atop the ranks of Southwest bond counsel, credited with $6.3 billion, followed by Bracewell at $4.7 billion and Norton Rose Fulbright at $4.6 billion.
