Recession-weary state and local governments issued almost 16% more short-term municipal notes in the first half of 1991 than during the same period last year, according to Securities Data Co./Bond Buyer.
Note sales rose to $19.2 billion in the January-June period, compared with $16.6 billion in the first half of 1990. It was the biggest first-half volume for notes since 1984, when $20.41 billion was issued.
"It's pretty obvious why," one short-term note trader said. "With state and local governments having the problems they're having, they have to issue notes for cash-flow purposes."
Political disagreements over how to cut budgets in response to the economic slowdown has prompted huge note sales that otherwise might have been unnecessary. New York City, for example, came to market with the third-largest note deal of the half -- a $1.3 billion issue in late April -- that was prompted by New York State's failure to pass a budget on time.
Largest Single Deal
New York State, which was the leading note issuer at $4.2 billion, had the largest single deal of the first half -- a $3.9 billion June issue. That issue made its senior manager, Merrill Lynch Capital Markets, the top lead manager for the first half. Merrill Lynch managed more than $4.5 billion of short-term notes between January and June.
Morgan Stanley & Co. ranked second with $2.1 billion, including a $1.3 billion Los Angeles County issue on June 13, and Lehman Brothers was third with $1.8 billion, including $700 million of New York City general obligation notes.
The upswing in note volume should continue into the second half, the trader said, "as long as you have so many state and local governments overextended with declining revenue bases."
Included in the second half's statistics will be New Jersey, which earlier this month priced a $1.2 billion note deal, its first ever, and Pennsylvania, which plans a note sale of well over $1 billion as soon as the state's delayed fiscal 1992 budget is passed.
Note issuance has been on the rise over the past few years, after gradually declining throughout the mid-1980s. Last year's total was $34.3 billion, compared with $29.3 billion for 1989 and $22.8 billion in 1988.
The U.S. Department of Housing and Urban Development was once a major note issuer, selling tax-exempt housing project and urban renewal notes. But HUD stopped issuing tax-exempt notes in mid-1984, cutting short-term volume drastically, to $19.49 billion in 1985 from $31.07 billion in 1984.
Poor Economic News
The current revival stems mostly from poor economic news around the country.
"A lot of the issues that had been downsized over the past few years have increased with the slowdown," one note trader said.
June and July tend to be among the heaviest months for note issuance, because most governments begin their fiscal years in those months. Short-term notes are typically paid off at the end of a fiscal year, only to be followed by a fresh set at the start of the next.
June 1991's total of $9.82 billion was larger than usual, because New York State's "spring borrowing," usually done in April, was delayed for more than two months while the state sought to pass a budget.
Compared with last year, the number of note issues has remained fairly constant so far this year, with 1,405 issues in the first half of 1991 and 1,401 during the same period in 1990.
The vast majority of notes were general-purpose sales, which rose 12%, to $14.71 billion from $13.09 billion. The most popular reasons for issuing notes were for education and transportation, which both saw big increases over 1990. Issuers sold $2.97 billion of education notes, a 22% increase from $2.44 billion the year before. Transportation notes more than doubled, to $856 million from $268 million.
The New York State Attorney General was the leading bond counsel for notes, with $3.9 billion. The leading private counsel was Brown & Wood, with $1.8 billion, followed by O'Melveny & Myers, with $1.5 billion.
Public Resources Advisory Group was the leading financial adviser for note issues during the first half, with $1.5 billion to its credit. P.G. Corbin & Co. was second with $1.3 billion, and Tucker Anthony was third with $516 million. New York State's $3.9 billion issue did not have a financial adviser.
Securities Data's note volume figures and rankings are based on short-term issues with final stated maturities of 12 months or less. Private placements are included in the volume figures but not the rankings. The figures are preliminary and subject to revision.
