Bonds

In a period where all other municipal bond sectors shrank in volume, electric power and healthcare expanded strongly in the first half.

Electric power bond volume increased 49.9% and healthcare grew 26.9% compared to the first half of 2021.

Overall municipal volume was down 11.2% in the first half.

All data is from Refinitiv and all percentages are for changes in dollar issuance volume in the first half of 2022 compared to the first half of 2021.

Electric power saw $7.9 billion of issuance in the first half of 2022.

Fitch Ratings Managing Director Dennis Pidherny said the listing of a $931 million California Choice Finance Authority as a prepaid energy transaction was a large portion of public power issuance statistics. Second, there were two large new-money transactions — one from the New York Power Authority and another from the Intermountain Power Agency. There have been few large new-money transactions in the sector recently and these two contributed to the half’s growth, he said.

The other large transactions were primarily refunding transactions, Pidherny said.

Within electric power, state agencies issued 52.5% of volume in the first half compared to 21.9% of the volume in the first half of 2021. The state agencies issuance increased 259% between the periods.

“I would think that some of the activity is related to alternative energy projects that are in the forefront given the climate change focus,” said John Hallacy, president of John Hallacy Consulting LLC.

In the electric power category, the tax-exempt subcategory increased 72.4% but the taxable subcategory declined 69.2%. “A lot of the [pre-2022] refundings that were accomplished were done on a taxable basis,” Hallacy said. “With the rise in taxable yields, the math no longer worked as well. Also, a lot of refunding that could be done has already been accomplished. The refunding category is now more reliant on current refunding.”

Within the healthcare sector, college and university issuance was up 13,241%. Hallacy said colleges and universities were reactivating some variable rate issuance. He said it was notable that these institutions were increasing their borrowing for this even as enrollments were shrinking.

The sectors with the biggest issuance were education with $55.6 billion, general purpose with $54.5 billion, and transportation with $26.5 billion. These were the same three sectors, in the same order, for the biggest issuers in the first half of 2021.

The sectors that shrank the most were environmental facilities with 47.4% and public facilities with 39.1%.  

Looking at the first half, Hallacy said he was struck that the variable rate (long/no put) category expanded 20.7%. “Higher rates will encourage more issuers to consider this option over time.”

Colleges and universities were the only type of issuer to show an increase, which was 20.3%. They are more likely to use variable rate structures because they utilize swaps. “It is not clear whether the higher issuance will continue given falling enrollments.”

General purpose volume was down 11.6%. “Higher rates could be forcing some rethinking of general-purpose projects,” Hallacy said. “The use of the variable rate structure was also on the rise in the category,” going up 698.8% for the short put type and 224.8% for the long/no put type.

In the housing sector, the single-family category shot up by 34.2%. Given the increase in median prices and in mortgage rates, the demand has firmed for the single-family product. “Single family [issuance] is directed at lower-income folks who may otherwise not qualify for a conventional mortgage,” Hallacy said. “Demand for the muni product goes up when rates are high.”

In the public facilities sector, the refunding subcategory declined 95.7%. The combined (new and refunding issues) volume went down 74.3%. Hallacy said the explanation was like his explanation, above, for the decline of taxable issuance for electrical power. Higher yields mean potential taxable refundings do not bring cash savings. The best candidates for refunding have already been executed.

In the transportation category that declined 19.8%, the bridges subcategory shrank 89.3%. “I think the [subcategory] has been sluggish because the authorities and agencies are awaiting rules from the bureaucrats about infrastructure funding,” Hallacy said. “The plans of finance for these complex projects have many elements. The federal component is a critical one. Also, environmental rules have not changed all that much despite some call to eliminate red tape.”

Also in the transportation sector, cities and towns saw a 40.8% increase. “Some of the volume may be induced by the greater availability of federal aid for certain projects,” Hallacy said.

In the utilities category, which declined 2.2%, the gas subcategory increased 24.6%. ”Next to wind, solar, and nuclear, gas is the most fuel-efficient electric generation,” Hallacy said. “Many gas plants were built over the years. It appears that the industry is thinking longer term.”