Texas bond volume up amid first-half Southwest slump

Municipal bond issuance in the Southwest slumped 7.9% year-over-year in the first half of 2023 amid a bigger decline nationally and despite growth in Texas, the region's largest source of municipal bonds.

Volume in the eight-state region totaled $38.5 billion in 1,040 deals, according to Refinitiv data. Nationwide issuance was nearly $181 billion, a 17.1% drop from the same period in 2022.

Issuance rose in only two states in the region: Texas, which accounted for almost 72% of the bonds sold in the region, was up 12% and Oklahoma was up 17.3%. 

Estrada Hinojosa & Company

"Texas paper continues to have a good reception by investors out there," said Noe Hinojosa, chairman, president, and chief executive officer of Estrada Hinojosa & Company. "We haven't seen deals struggling in the first half." 

With more than $27.7 billion sold, Texas was the number-one source of municipal bonds in the first half, ahead of California.

A $3.52 billion Texas Natural Gas Securitization Finance Corporation taxable bond sale in March was the biggest deal nationally in the first half of the year. The corporation, on the strength of that single deal, was also the Southwest region's largest municipal bond issuer, according to Refinitiv data.

The deal led by Jefferies came more than two years after Winter Storm Uri battered the state with snow, ice, and high winds amid record-low temperatures, spiking demand for natural gas to generate electricity and heat buildings. As a result, prices for the commodity soared. To ease the blow on customers' monthly bills, Texas in 2021 enacted a law authorizing the securitization financing to extend the period over which customers pay off the high costs.

A $756 million Houston airport system subordinate lien revenue and refunding bond issue through Siebert Williams Shank & Company ranked second among deals, followed by a $636.6 million San Antonio electric and gas systems revenue refunding bond sale through Loop Capital Markets, which featured an Internal Revenue Service private letter ruling affirming certain Winter Storm Uri costs incurred by CPS Energy can be refinanced on a tax-exempt basis.

The region's other largest issuers over the half were Lower Colorado River Authority, followed by Houston and the Colorado Housing and Finance Authority.

The education sector had the most issuance at nearly $15.58 billion in 449 deals with issuers in Texas accounting for 71.7% of the par amount.

With voters approving billions of dollars of bonds in 2022's and 2023's May and November elections, Texas public school districts have unleashed a stampede of debt in the muni market as they seek to accommodate growing student enrollment and update or replace aging facilities.

A steep drop in capacity for the Texas Permanent School Fund's triple-A-rated bond guarantee program forced some districts earlier this year to sell debt based on their underlying ratings or to insure their bonds.

The Internal Revenue Service in May took steps to lift its cap on the program, greatly increasing its projected available capacity, which stood at $30.22 billion at the end of June.

The full return of the guarantee program and the conclusion of the Texas legislative session, which provided districts with some direction on funding, along with the passage of a massive state-funded cut in school property taxes, has continued the onslaught of bond deals into the summer, according to Ajay Thomas, head of public finance at FHN Financial. The firm served as senior manager for several large school district deals this year.

"The 'Texas Tsunami' of PSF bonds certainly repriced the high-grade credit market in Texas and frankly nationally for general obligation credits," Thomas said in an email. "With rising interest rates and a more volatile marketplace overall, with the outsized supply of Texas PSF Bonds, each transaction had to find its own investor base and pricing levels in a series of consecutive weeks marked by increased volatility in the U.S. Treasury market that somewhat carried over into the municipal market."  

Jefferies, aided by the Texas natural gas securitization deal, was the Southwest region's top underwriter in the first six months of 2023, credited by Refinitiv with $7.32 billion of bonds, followed by JP Morgan with $3.66 billion, and RBC Capital Markets with $3.32 billion, according to Refinitiv data. For all of 2022, Jefferies ranked third and RBC was in the top spot.

Jefferies was also the top underwriter of debt in Texas, while JP Morgan, which sank to 22nd place in 2022, ranked second, followed by RBC in third place.

Some big investment banks, including JP Morgan, pulled back from the Texas muni market after laws were enacted in 2021 prohibiting state and local government contracts worth $100,000 or more with companies that "boycott" the fossil fuel industry or "discriminate" against firearm businesses. Citigroup and UBS were hit with outright bans, leading to their removal from deals, including the natural gas securitization issue, for which they had been tapped as co-managers.

Wells Fargo's status is currently under review by the Texas Attorney General's Office. JP Morgan reached out to the office last year to clarify its status as an underwriter, while Bank of America did the same this year. 

In Oklahoma, Bank of America's reign as top underwriter in 2023's first half will be short lived due to a similar contract prohibition in a 2022 law in that state. State Treasurer Todd Russ last week shrank his initial list released in May of financial firms found to be boycotting the fossil fuel industry to six from 13. Bank of America, Wells Fargo, and JP Morgan remained on the list and continue to be banned from deals.

Hilltop Securities retained its number one ranking as financial advisor, credited with deals totaling $6 billion. Estrada Hinojosa & Co. remained in second place with $5.72 billion in deals and Texas-based Specialized Public Finance placed third with $2.72 billion in deals. 

With all its deals in the Lone Star State, Estrada Hinojosa topped the table for Texas financial advisors, followed by Hilltop and Specialized.

Bond counsel rankings shuffled a bit, with Norton Rose Fulbright credited with $8.1 billion and moving up to first place from third in 2022 and McCall Parkhurst & Horton falling to second place from first. Bracewell slipped to third place from second last year.

The amount of insured bonds in the Southwest region jumped 80.7% compared to the first half of 2022 at $5.3 billion in 250 deals.

Refundings were down 16.6% at $3.68 billion and taxable bond issuance fell 16.3% at $5.52 billion in 178 deals.