Southwest volume fell in 2022 but not as much as other regions

Southwest issuers sold $82.2 billion of municipal debt last year, a 10.5% tumble from 2021 that was the smallest decrease among regions and well below the 19.5% plunge nationwide. 

In Texas, which accounted for the lion's share of the Southwest's issuance, laws restricting access to government contracts shook up underwriter rankings as some big investment banks became less active or left that state's municipal market.

With the Federal Reserve hiking interest rates to ease inflation, standalone bond refundings in the eight Southwest states plummeted nearly 62%, while taxable issuance, used in part for advance refundings, dropped 53.3% to $11.62 billion, according to Refinitv data. But new-money issuance was up almost 21%.

Matt Boles, a Dallas-based managing director at RBC Capital Markets, said increased migration to Southwest states like Texas is driving debt issuance.

"They're attracting population and the critical infrastructure needs of those residents have to be addressed," he said.

The region also has the ability to finance the replacement and renewal of infrastructure, according to Ajay Thomas, head of public finance at FHN Financial Capital Markets in Austin.

"Most states in this region have very healthy economies and can support their capital needs due to expected economic growth and increasing property tax valuations," he said in an email. 

Texas issuance totaled $47.66 billion in 1,297 deals, down 9.5% from 2021. New York was the only state where more municipal bonds were sold in 2022.

Volume increased in only one Southwest state, Oklahoma, where it jumped 70.5% to $5.42 billion due to $2.89 billion of taxable ratepayer-backed bonds issued through the Oklahoma Development Finance Authority on behalf of four gas and electric utility companies that incurred huge costs during 2021's Winter Storm Uri.

The Oklahoma authority's $1.354 billion August bond sale for Oklahoma Natural Gas Company was the region's second largest last year.

Denver ranked in first and fourth place with airport deals totaling $1.64 billion in July and $1.167 billion in November and Dallas Fort Worth International Airport's $1.188 billion April deal ranked third.

Denver and the Oklahoma Development Finance Authority were numbers one and two respectively on the ranking of the Southwest's top issuers in 2022. In third place was the Colorado Health Facilities Authority.

What would have been the region's largest deal last year — $3.4 billion of taxable Texas Natural Gas Securitization Finance Corporation bonds also meant to address extraordinary utility costs from the 2021 storm — was delayed, with approval still pending from the Texas Bond Review Board, which meets on Friday. Jefferies is the senior underwriter.

The education sector dominated the region's issuance at $27.83 billion, although it fell 8.9% from 2021.

Volume grew in only a few sectors with healthcare up 34.5% and housing, utilities, and environmental facilities notching smaller gains.

In Texas, education bond issuance of $19.68 billion was up 11.4% from 2021 as many public school districts sold bonds backed by a triple-A-rated Permanent School Fund guarantee to accommodate growing student populations and rehab or replace aging facilities. 

In the fall, the projected available capacity for the bond guarantee program, which is capped at $117.32 billion under federal law, began to drop dramatically, ending the year at only $26.65 million.

Meanwhile, districts were flush with bond authorizations. About $12.5 billion of school bonds on Nov. 8 ballots received voter approval, according to election results posted on the Texas Bond Review Board's website. In the May 7 elections, $10.4 billion of school debt passed, S&P Global Ratings reported in August. More school bond proposals will hit ballots this May.

RBC was the Southwest region's top underwriter again, credited by Refinitiv with $8.46 billion in 130 deals, followed by Piper Sandler with $6.67 billion in 135 deals, Jefferies with nearly $5.6 billion in 40 deals, and Raymond James with $5.17 billion in 169 deals.

Texas had its first full year under two 2021 state laws prohibiting state and local government contracts with companies, including bond underwriters, that "boycott" fossil fuel businesses or "discriminate" against the firearm industry.

Two big investment banks in the top five in Texas last year sank in 2022's ranking, with JP Morgan Chase falling to 22nd place and BofA not showing up in the top 25, according to Refinitiv data.

Jefferies took over the Texas top spot held in 2021 by RBC, which sank to fifth place behind Raymond James, Piper Sandler, and Citigroup, which is one of two underwriters that have been explicitly excluded from the Texas government bond market. 

Last month, the state attorney general's office barred Citigroup from participating in deals after determining the bank's commercial firearms policy runs afoul of the law. The Texas comptroller's placement of UBS on a list of fossil fuel boycotters in August led to the bank's voluntary or forced removal from deals.

A research paper found the two laws may increase borrowing costs for Texas issuers due to less competition among underwriters.  

Thomas contended the lack of involvement by investment banks unable to certify their compliance with the laws that took effect in September 2021 "has not altered the financing results achieved by issuers" in a rising interest rate environment.

"At the current limited impact (of the laws), Texas issuers will be just fine," he said. 

Meanwhile, Oklahoma is gearing up to compile its own list of energy industry boycotters under a 2022 law that includes a contract provision, while a state lawmaker has reintroduced a bill similar to the Texas firearm industry discrimination law after the measure fell short of passage last session.

Hilltop Securities was again the region's busiest financial advisor by far, credited with $18.24 billion in 334 deals, including the Oklahoma ratepayer-backed bonds. Moving up to second place from fourth in 2021 was Estrada Hinojosa & Co. with $4.52 billion in 59 deals followed by Stifel Nicolaus & Co with $4.14 billion in 48 deals, and PFM Financial Advisors with $4.01 billion in 77 deals.

As in 2021, McCall Parkhurst & Horton was the dominant bond counsel, credited with $15.8 billion in 359 deals, followed by Bracewell LLP with nearly $7.7 billion in 111 deals, Norton Rose Fulbright with $6.57 billion in 160 deals and Orrick Herrington & Sutcliffe with $5.4 billion in 76 deals. 

Only $6.75 billion of the region's bonds were insured, a drop of 32.1% from 2021.