Bonds

California refundings, community choice aggregation support Far West volume

First-half municipal bond issuance in the Far West region was down 2.3% year-over-year to $38.2 billion, according to Refinitiv data.

California drove the Far West bus as usual with $26.6 billion in bonds sold by issuers in the Golden State, compared to $4.52 billion from Oregon and $4.47 billion from Washington, the states with the second- and third-highest volume.

Refunding volume was down 10.6% in the Far West in the first six months of 2023, falling to $6.7 billion, taking less of a hit than the 20.9% drop nationally.

In California, refunding volume was actually up 0.2% at $4.4 billion.

The jump in refundings despite higher interest rates likely came from a boost from refunding advance-refunded taxables back to tax-exempt, said Sara Oberlies Brown, a managing director with Stifel.

A lot of taxable bonds were issued in 2021 and 2021, when they were economical, that were looking out to call dates one to two years ahead, said Stifel Managing Director Sara Oberlies Brown.

“Another thing we are seeing a lot of is we have done more tenders, not mandatory tenders, but where we offer people bonds that are less than par,” said Justin Cooper, co-head of public finance for Orrick, Herrington & Sutcliffe.

“It’s a refunding, but with the consent of bondholders,” he said.

“We have done more of those in the last six months than the previous decade,” Cooper said.

“The original tax-exempt bonds are gone, and now there is enough of a spread between tax-exempt and taxables, so issuers can refund taxables with tax exempt,” he said.

Other than that, the focus on issuance has really “been correlated with getting shovels in the ground,” he said. “We in the Far West have been impacted by escalating construction costs and insurance costs for anything we are building. Insurance costs go up because insurance companies realize there is a higher cost to build things.”

“We in the Far West have been impacted by escalating construction costs and insurance costs for anything we are building,” said Justin Cooper, co-leader of Orrick’s public finance department.

michael rubottom photography

The biggest trend Oberlies Brown said she noticed in the first half compared to the same period last year is a more receptive audience from investors.

“In 2022, we saw interest rates rise — week after week, interest rates were on a march to higher rates; it made it challenging to sell bonds,” Oberlies Brown said.

“There was a period of straight up sticker shock last year,” Cooper said.

“The markets are tied to human psychology. People just couldn’t believe it when money cost twice as much as it had recently,” Cooper said. “If you start pulling up to the gas pump and all of a sudden it’s $12, that would give you pause. “

When the equivalent happened in the bond markets last year, plus the inverted yield curve, it caused fear, Cooper said.

“All these things were making people nervous,” he said.

But the markets have calmed this year, there aren’t the same outflows as last year, and that steadiness is showing up in the data.

“In first half 2023, interest rates remained fairly range bound,” Oberlies Brown said. “They traveled a great distance, but didn’t get that far.” she said.

“So investors had more confidence it was the right interest rate range, combined with the fact outflows were not as significant or as widespread as what we had in 2022,” she said.

Bankers did have to take price discovery into account during first half of 2023 and take the time to recognize there were different investor rate expectations, and get out and talk to more people, Oberlies Brown said.

But there was a receptive investor audience, she said.

Oberlies Brown said that K-12 education was pretty active with smaller transactions getting done.

Issuers sold $10.3 billion of bonds for education in the Far West during the first half of 2023, up 33.1% from the year before, according to Refinitiv.

There weren’t as many GO bond authorizations loaded into the 2022 election, and Oberlies Brown is expecting that many school districts will go to voters during next year’s presidential election year seeking bond authorization.

“That puts us in late 2024 or 2025 where we see meaningful new issuance in K-12,” she said.

Another big sector push in California has been issuance by community choice aggregators, Cooper said.

“That is a growing area,” Cooper said.

CCA allows cities, counties and governments in the service areas of investor-owned utilities to purchase and/or generate electricity for their residents and businesses. And the aggregators have been moving into the municipal bond market with energy prepayment deals.

A trend Stifel Managing Director Sara Oberlies Brown said she noticed in first half, compared to the same period last year, is a more receptive audience from investors.

Stifel

The California Community Choice Finance Authority was the Far West’s second-biggest bond issuer in the first half, credited by Refinitiv with $2.8 billion of debt, behind only the California state government’s $4.36 billion.

The Regents of the University of California ranked third at $2.16 billion, followed by the Washington state government at $2.08 billion.

The largest individual bond sales in the region were $2.5 billion state of California GO combined new money and refunding priced on April 5 by co-senior managers BofA Securities and Ramirez, $2.2 billion Regents of the University of California mixed taxable, tax-exempt and refunding deal priced on February 15 by co-senior managers Morgan Stanley and Goldman Sachs, and a $1.8 billion State of California taxable GO sale priced on March 8 by co-senior managers Wells Fargo and Siebert Williams Shank.

The largest deal outside California was the region’s fourth largest of the half, the $1.34 billion Washington GO competitive deal April 26. The deal came in two tranches, one won by BofA Securities and the other by Morgan Stanley.

Deals Refinitiv classified as general purpose represented $9.5 billion of volume in the first half of 2023, up 14.4% year-over-year. Electric power deals drove $5.8 billion in volume, up 59%.

Healthcare took a big dive, falling to $239.5 million compared to $4.1 billion in the first half of 2022.

A combination of factors, including issuers refunding taxables into tax-exempt debt, helped tax exempt sales grow by 10.4% to $33.7 billion, while taxables were off by more than half, to $3.1 billion.

New money grew by 2.4% to $26.9 billion, refundings were down 10.6% to $6.7 billion and combined new money/refunding deals fell 14.2% to $4.5 billion.

Bond volume from state governments grew 42.7% to $7.9 billion and deals Refinitiv classifies as coming from state agencies were up 20.3% to $7.5 billion. Colleges and universities bond volume decreased by 34.5% to $2.4 billion.

Orrick Herrington & Sutcliffe continued its long streak atop the bond counsel tables, credited by Refinitiv with $13.7 billion, followed by Hawkins Delafield & Wood at $4.2 billion and $3.7 billion for Stadling Yocca Carlson & Rauth.

“We have core institutional clients we are privileged to serve,” Cooper said. “That is a strong foundation. On top of that, we are the most innovative law firm around.”

The firm goes after new sectors and also prides itself on creating solutions for issuers as new challenges arise, he said.

BofA Securities topped the senior manager table, credited by Refinitiv with $5.6 billion, followed by Morgan Stanley with $4.2 billion and Goldman Sachs with $3.9 billion.

PFM Financial Advisors came in first among financial advisors, credited with $9.1 billion, followed by Public Resources Advisory Group with $7.1 billion and Piper Sandler with $2.6 billion.

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