General utility bond volume plummeted nearly 50% in the first half of 1994 compared with the same period a year ago.
A total of $10.33 billion of utility bonds were issued in the first half, down 47.8% from the $19.8 billion issued during the first six months of 1993, Securities Data Co. said.
The decrease in the number of issues, to 772 from 1,078, reflected rising interest rates and the industrywide downturn in refundings, market observers said.
"The fall-off in issuance is not surprising," said Richard Raphael, executive managing director for Fitch Investors Service.
Despite the volume downturn, Raphael and other observers are confident that the general utility category's dominant component -- water- and sewer-related issues -- has good long-term prospects.
Observers expect that deteriorating water and sewer infrastructure will require replacement, and that compliance with a host of legislative mandates will lead to new-money issuance.
Concerning the decline in first-half 1994 volume, the "single biggest reason is the loss of refundings," said Gary M. Krellenstein, a senior vice president at Lehman Brothers. "There's been a tremendous slowdown in refundings in that segment."
Besides water and sewer, the general utility segment of municipal finance includes gas, telephone, sanitation, and flood control. The category excludes the electric power industry.
Refundings dropped 54.2%, to $4.99 billion, in the first half, accounting for slightly less than half of the general utility category's total volume. New-money deals declined 20.2%, to $3.66 billion. A component known as combined issues, which includes deals structured to contain a mix of refundings and new money, fell 61%, to $1.68 billion.
Continuing a long-term trend, water- and sewer-related infrastructure projects dominated general utility financing during the first half of 1994.
Utility bonds used for water and sewer purposes totaled $7.98 billion in the first half, a 52.7% decline from the same period a year earlier, when $16.86 billion of water and sewer issues were priced.
"More utilities are moving to postpone or defer additional capital projects," Krellenstein said. The combination of competition and a slowdown in refundings "led to a dramatic reduction" in utility bond issuance for the first half, he said.
"The outlook is for growth" in the water and sewer utility category, said Raphael of Fitch. "They are good credits with broad-based revenue pledges," and that provides them with "decent ratings," he said.
When refunding volume is excluded from dollar volume totals for water and sewer deals, new-money issuance has held "pretty steady" at about $9.6 billion a year in recent years, said Gene Caponi, a Lehman municipal research analyst.
The steadiness bodes well for water and sewer issues, Caponi indicated. Issuers continue to devote new money to such projects "for the purposes of keeping up with new regulations," such as the federal Clean Water Act, he said.
In addition, issuers are trying to meet capital planning needs "given that a lot of the water and sewer projects were built in the 1960s and 1970s with federal grant money," which is declining, Caponi said. Projects "are starting to depreciate and need rehabilitation."
Unlike some public projects such as toll roads, water and sewer projects cannot be deferred because the issuer must "keep up with federal mandates or risk being subject to severe fines in some cases," Caponi said. This "essential service" means that the need to issue such bonds will probably continue, he said.
New York State Environmental Facilities Corp. led all issuers in the general utility area in the first half with five issues totaling $809 million. Rounding out the top five were San Antonio, Tex., with one issue totaling $777.7 million; Washington State Suburban Sanitary District, with two issues totaling $505.7 million; Dade County, Fla., with one issue for $431.7 million; and New York City Municipal Water Finance Authority, with three issues totaling $428.2 million.
The top 25 issuers accounted for $5.64 billion, or 54.7% of first-half issuance.
Goldman, Sachs & Co. was the top-ranked senior manager of general utility issues, by dollar volume, in the first six months, handling 10 deals totaling $1.89 billion. Smith Barney Inc. was second, with 34 issues totaling $1.07 billion.
Rounding out the top five were PaineWebber Inc., 13 deals for $1.03 billion; Merrill Lynch & Co., 20 deals for $690 million; and Morgan Stanley & Co., two deals totaling $457.1 million.
Lehman Brothers was sixth, followed by Kidder, Peabody & Co.; Prudential Securities Inc.; Wheat First/Butcher & Singer; and Dillon, Read & Co.
The volume of issuance for gas-related utilities dropped 48.5% during the first half, to 10 issues totaling $267.9 million. By comparison, in the first half of 1993, $520.5 million of gas-related issues were sold.
Telephone utilities plummeted 77.6% in the first half, when only two issues totaling $224.8 million were sold. In the first half of 1993, four telephone issues totaling $1.0 billion were priced.
Sanitation issuance dropped 57.3% in the first half from the year-earlier period. There were 18 sanitation issues totaling $37.1 million, compared with 16 issues totaling $86.9 million in the first half of 1993.
Bond insurance continued to play a substantial role in the sale of municipal debt for utilities in the first half of 1994, accounting for more than half of the total volume.
A total of 290 issues totaling $5.4 billion carried bond insurance, compared with 446 insured issues totaling $10.3 billion during the same period last year. One issue totaling $1.7 million was backed by a bank letter of
credit during the first half of 1994, while 12 issues totaling $416.7 million were priced with letter of credit backing in the first six months of 1993.
For the first half of 1994, issuers continued to prefer to sell their utility-related bonds by negotiation as opposed to competitive bidding. However, the percentage of issues sold via competitive bid gained slightly from the same period a year ago.
Negotiated offerings represented 75.8% of the market share of utility issues sold during the first half of 1994, and competitively bid deals totaled 24.1%.
A total of 502 issues totaling $7.83 billion were sold via negotiation, compared with 254 issues totaling $2.49 billion sold via competitive bid.
For the first half of 1993, the negotiated sector obtained 78.6% of the market share, compared with 19.8% for competitively bid deals.
Private placements represented just 0.2% of the bid type in the first half of 1994, a slight decline from last year's period, when private placements accounted for 1.5% of the business.
When compared with the first half of 1993, negotiated issuance in the first half of this year declined 44.8% and competitive business dropped 36.6%.
In the first half of 1994, state governments issued $227.5 million of utility-related debt, a 7% decline from the year-earlier period.
State agency utility issues totaled $1.25 billion, a 51.7% decline. Municipalities issued $6.29 billion, a 51% drop, and local authorities issued $2.57 billion, a 37.8% decline.
In state rankings, New York was the top issuer of utility debt in the first half of 1994. Issuers in the state sold 16 deals totaling $1.63 billion. Texas was second-ranked, with 103 issues totaling $1.25 billion, followed by California, with 57 issues totaling $1.17 billion. Rounding out the top five were Florida, 29 issues totaling $1.15 billion, and, Maryland, six issues totaling $591 million.
Revenue bonds outdistanced general obligation bonds in the utility. category for the first half of 1994. Issuers sold $8.72 billion of revenue bonds, compared with $1.6 billion of GO bonds. Reflecting the overall trend in utility issuance, revenue bond issuance declined 44.8% in the first half of 1994, while GO bond issuance fell 59.5%. UTILITIES Senior Managers Volume Manager ($ mils.) 1 Goldman Sachs $1,859 2 Smith Barney 1,073 3 PaineWebber 1,032 4 Merrill Lynch 690 5 MorGan Stanley 457 6 Lehman Brothers 375 7 Kidder Peabody 364 8 Prudential Securities 345 9 Wheat First 24610 Dillon Read 209 Combined utility issues are included, butpublic power issues are excluded. Privateplacements, short-term notes, and remarketingsare excluded. Source: SecuritiesData Co. (7/9/94)
