New money decline helps bring down volume in Midwest

Midwest municipal bond sales slid by 17.4% in 2022 to $65.3 billion from $79 billion a year earlier as issuers soured on borrowing amid rising interest rates and a rockier market.

The region fared slightly better than the overall national decline of 19.5% to $389.1 billion as issuers confronted rising interest rates and mutual fund outflows that added to borrowing challenges that were especially acute for marginal credits.

The sharp drop off in refundings by 49.2% to $10.2 billion dragged down issuance most notably as rising interest rates slashed savings opportunities, but new money volume was also lackluster, down 3.4% to $49.7 billion, according to data from Refinitiv.

“It was really a year of subdued market activity and that was true not just of volumes but also in demand,” as seen in the mutual fund outflows, said Richard Ciccarone, president of Merritt Research Services. “Interest rates that aren’t enticing may be the most important factor but other factors stifled” borrowing.

Other factors that held issuers back across the region came in the form of healthy cash levels from robust tax collections and remaining federal COVID-19 aid that allowed for pay-as-you-go options. Midwest cities benefitted from 428 days cash on hand, Ciccarone said.

Infrastructure needs run deep in the Midwest with the average age of assets on the high end so pent up demand for spending can’t be met with the federal Infrastructure Investment and Jobs Act alone, but Midwest issuers likely will remain resistant amid higher rates.

“There’s clearly a need but it’s going to be held back by these influences of conservative fiscal policies, stunted growth and demographics and high debt loads in the urban areas,” Ciccarone said.

New money issuance had increased in 2021, so the 2022 numbers marked a reversal.

The market’s influence stood out most notably in the first and fourth quarters of the year which served as bookends for overall volume. First-quarter volume was up 10.8% year-over-year in the Midwest to reach $19.7 billion.

The Federal Reserve launched a series of interest rate hikes with the goal of tamping down inflation beginning in March. Mutual fund outflows also began in the latter half of January and accelerated through most of the year as rising rates drove down the market value of portfolios.

With the Federal Reserve’s policy expected to continue, issuers continued to hurry deals to the market and Midwest volume fell just slightly by 0.6% year-over-year with $20.5 billion sold in the second quarter.

Year-over-year volume turned down sharply in the third quarter, off 27.1% to $14.1 billion. Borrowing crashed in the fourth quarter with just $10.95 billion sold for a 48.4% year-over-year decline.

The number of deals plummeted to 2,848 in 2022 from 4,121 the year before.

Illinois-based issuers accounted for the most borrowing in the Midwest at $12.8 billion for a decline of 12.5%, followed by Michigan with $8.8 billion, Wisconsin with $8.6 billion for a 20.7% decline, Minnesota with $7.3 billion, and Indiana with $7.1 billion for an 8% drop.

Of the Midwest’s 11 states, only Michigan and Minnesota bucked the trend and landed in positive territory compared to 2021 volume. Michigan saw an uptick of 5.6% while Minnesota recorded a 7.7 % increase.

Education-related borrowing topped sector-wide issuance at $21.2 billion for a 12.7% decline, followed by general purpose at $15.97 billion for a 15.7% decline, then housing which at $6.7 billion bucked the trend and saw a 26.2% increase, following by healthcare at $6.4 billion, a 35.5% drop. Housing was the only sector with higher volume.

Colleges and universities carried the distinction of being the only borrower type to grow at $4.4 billion for a 54.6% hike.

The University of Michigan’s $2 billion issuance and Michigan State University’s $500 million deals that included 100-year century bonds, both in the first quarter, helped propel the higher education numbers into positive territory and also propped up the taxable borrowing category.

The University of Minnesota also considered using a century bond structure but decided to go with a more traditional maturity structure for its $500 million April taxable sale amid rising interest rates.

The three deals accounted for more than half of the Midwest’s higher education issuance, said Julia Harris, a managing director and head of higher education at Siebert Williams Shank & Co. LLC.

“The increase in rates over the past year has largely eliminated issuers’ ability to execute in-the-money taxable advanced refundings” that are reliant on arbitrage between reinvestment and bond rates to make economic sense, along with century bonds, Harris said.

“Combined with the anticipated slowdown in new money issuance – largely as a result of unspent COVID-related issuances, COVID stimulus, and the rise in rates over 2022 – we anticipate 2023 volume will be significantly less than in 2022,” she said.

While tax-exempt paper accounted for the bulk of borrowing at $53.1 billion — for a decline of 13.2% — taxables were hit especially hard tumbling 42.9 % to $9.3 billion.

The volume of debt wrapped with bond insurance dropped by 17.1% covering only $5.1 billion of bonds while guarantees rose by more than 100% to $5.2 billion.

The University of Michigan’s $2 billion issue in March stood out as the region’s blockbuster transaction. The issue’s $1 billion of 100-year bonds offered the largest century bond seen to date by the market and the school’s first green-designated bonds. The size gave a boost to the rankings of firms involved in the deal including Barclays, Loop Capital Markets, and Miller Canfield.

Chicago’s $1.8 billion O’Hare International Airport deal in August led by JPMorgan was the region’s second largest issue.

The city’s December general obligation issue for $528 million didn’t make the top 10 but bolstered the city’s ranking among borrowers, where its $2.37 billion total placed it third behind the second-ranked University of Michigan’s $2.47 billion.

Illinois’ $1.6 billion general obligation sale in May led by Citi and Siebert Williams Shank & Co. took the third slot on the deal rankings. The state’s $700 million issue later in September positioned the state as the region’s fourth-ranked issuer in 2022 with $2.34 billion.

The Michigan Finance Authority’s $890 million sale in April led by Morgan Stanley and JPMorgan on behalf of Beaumont Health and Spectrum Health which closed on their merger earlier in 2022 came in fourth. The Chicago Board of Education’s $872 million deal in January led by Goldman Sachs ranked fifth among deals.

The Wisconsin-based Public Finance Authority, a national conduit agency, led among issuers with 51 issues valued $2.7 billion. Because of its role a national conduit, many of its issues are on behalf of borrowers outside the Midwest.

The Indiana Finance Authority with $1.9 billion in 15 issues was the fifth-ranked issuer.

State conduits dominated the overall top 10 issuers with the Iowa Finance Authority, Illinois Finance Authority and Michigan Finance Authority rounding out the top 10 along with the state of Wisconsin and Minnesota Housing Finance Agency.

JPMorgan Securities took the top Midwest senior manager’s slot, credited by Refinitiv with 78 deals valued at $6.8 billion, followed by Stifel Nicolaus & Co. Inc. with 297 deals valued at $5.6 billion, BofA Securities Inc. with 48 deals valued at $4.2 billion, Citi with 24 deals valued at $4.04 billion, and Robert W. Baird & Co. with 374 deals valued at $4.018 billion.

RBC Capital Markets, Goldman Sachs & Co., Barclays, Morgan Stanley, and Piper Sandler & Co. round out the top 10.

PFM Financial Advisors LLC led among financial advisors, credited with 226 deals valued at $9.2 billion, followed by Baker Tilly Municipal Advisors with 237 deals valued at $4.4 billion, Acacia Financial Group Inc. with 23 deals valued at $2.6 billion, Ehlers & Associates with 261 deals valued at $2.3 billion, and CSG Advisors Inc. with 30 deals valued at $2 billion.

Columbia Capital Management, Ponder & Co., PMA Securities Inc., Caine Mitter & Associates Inc., and Piper Sandler & Co. rounded out the top 10.

Kutak Rock took the top spot among bond counsel, credited with $6.1 billion of the region’s borrowing in 190 deals, followed by Miller Canfield at $5.2 billion in 70 deals, Chapman and Cutler with $4.8 billion in 192 deals, Ice Miller with $4.4 billion in 194 deals, and Dorsey & Whitney at $3.97 billion and 174 deals.

Gilmore & Bell, Quarles & Brady, Katten Muchin Rosenman, Squire Patton Boggs, and Ahlers & Cooney round out the top 10.