En route to a record year during a pandemic, the municipal bond industry in the Southwest learned how to spread out, mask up and Zoom.
At $93.5 billion, the region's 2020 volume, as measured by Refinitiv, blasted past the 2016 record of $83.4 billion and more than doubled the sales of a decade earlier. The 18% year-over-year increase in the Southwest outpaced the national volume growth of 13.4%.
“Before the pandemic, it was widely known that the municipal market was projected to have a record year in terms of issuance volume in 2020,” said Keith Richard, managing director and head of Texas public finance for Siebert Williams Shank.
“COVID-19 pumped the brakes on what had been a very robust start to the year,” he said. “Ultimately, after a couple of weeks, the deal calendar began its cautious return to normalcy.”
For industry execs, the pandemic year required flexibility and new ways of transacting business.
“We found we could quickly adapt, working from home, and we used the technology pretty efficiently,” said David Medanich, head of public finance at Hilltop Securities.
Without annual conferences and personal contact, bankers and advisors had to ply their skills through Zoom and other video meeting media and don masks in group settings.
The teleconferencing alone required a new level of caution, Medanich said.
“If we did the Zoom, and someone could get into our system, we were toast,” he said. “We’re comfortable with it now.”
By the end of the year, Hilltop had retained its perennial place at the top of the Southwest and Texas municipal advisory ranks, credited by Refinitiv with 448 deals valued at $19.8 billion.
“Hotel tax-backed issues, entertainment, golf courses, convention centers — those were the major things that were impacted,” Medanich said. “What is the future going to look like? I think the big deal was: Can you respond quickly? You want to be able to get hold of your advisor and get them quickly.”
A 154% increase in taxable issues and a 73% rise in refunding drove much of the volume in 2020.
“In my view, the vast increase in taxable issuance volume would not have occurred and likely led to so many advance refundings, if not for environment created by the pandemic in 2020,” said Ajay Thomas, head of public finance for FHN Financial. “Many transactions, particularly for new capital spending, were delayed or postponed due to the pandemic, especially in the K-12 sector where many school districts delayed calling bond elections until the full magnitude of the pandemic and the evolution of school instruction and facility needs were better and fully understood. We are now seeing that volume return and reassessed need return to the market in 2021.”
Riding the taxable refunding wave, the region’s No. 2 municipal advisor, Estrada Hinojosa & Co., nearly doubled its volume to $10.8 billion, which included the Southwest’s largest single deal of 2020, a $2.3 billion refunding for the Grand Parkway loop around the greater Houston area.
The Parkway deal took the grand prize in a year that was heavy with transportation issues, particularly airports and toll roads. Transportation volume rose 92% to $17.6 billion.
“Favorable conditions in regional markets including the Southwest are allowing issuers to refund outstanding transportation bonds for considerable savings while also achieving the objective of front loading savings for the first one to three years to reduce debt costs while COVID 19-influenced revenue pressures persist,” Seth Lehman, senior director at Fitch Ratings, told The Bond Buyer.
The Texas Transportation Commission was the region’s top issuer, credited with $3.1 billion of debt over nine issues.
Toll-road systems saw dramatic drops in traffic and needed to cushion revenues for 2021 and 2022, though their coverage ratios were still in the safe zone.
The North Texas Tollway Authority sold $761 million of refunding bonds that provided $146 million in debt-service savings and about $80 million in upfront savings for near-term relief.
“NTTA was planning to execute a transaction prior to the pandemic,” said Horatio Porter, chief financial officer for the agency. “However the stress on revenues forced us to modify the structure to deliver more upfront savings.”
The 2020 refunding followed a complete restructuring of NTTA’s debt after a period of record growth for the system since the global financial crisis of 2008.
“We’ve worked extremely hard over the past seven years to strategically contour our debt and we did not want this refinancing to undo all the positive effort made to level our debt service,” Porter said.
In Colorado, the E470 Authority saw its plans for a $250 million refunding of callable toll bonds disrupted by the declaration of a national emergency on March 13.
“We pushed back the bond deal at least one month,” said Jason Myers, E-470 director of finance. “The market and rates were crazy in March/April and no one was issuing or refunding debt. I believe we were the first toll road to enter the market after mid-March.”
The E-470 deal was part of a long-term restructuring designed to flatten debt service. Despite economic uncertainty, the deal was 26 times oversubscribed, producing net present value savings of $80 million, Myers said.
Colorado, Arizona and New Mexico were three states in the eight-state region that saw volume fall in 2020. Texas was the largest gainer with a 35% increase, followed by Utah, Oklahoma, Kansas and Arkansas.
“We had a much better year than we expected during the beginning of the pandemic,” said Dennis Hunt, head of public finance at Stephens, Inc., the leading senior manager and second-ranked financial advisor in Arkansas. “Our top line revenues were more than 150% of revenues in 2019.”
The real estate boom, particularly in Texas, the nation’s fastest-growing state in 2020, brought benefits to the bond industry, particularly those specializing in utility districts, which saw a 26% rise in volume.
“Our special district group has never been busier,” said Drew Masterson, whose firm Masterson Advisors represents 300 districts in the Houston area. “Our general market clients benefited from the low interest rates that prevailed most of last year to both refund old bonds for savings and to issue new bonds at lower rates.”
RBC Capital Markets edged Citi to claim the top spot among the region's underwriters, credited with $7.6 billion of business over 212 issues.
McCall Parkhurst was far and away the top bond counsel, credited with $23.3 billion on 493 issues.
The record volume would not have been possible without strong demand. And investors still saw opportunity in munis during what often seemed an irrationally exuberant stock market.
“We were able to add high quality credits at good prices during the early period of the pandemic,” said Douglas Benton, senior municipal credit manager at fund manager Cavanal Hill. “Thus far, the credit challenges from 2020 have been less than those spawned by the global financial crisis 10 years ago. However, I hope we don’t have a repeat of that year during my career.”
