What a difference a year makes.
Last September, the municipal bond market was enjoying its biggest year ever, eventually setting issuance records for bonds ($291.97 billion) and notes ($46.89 billion) and touching the lowest yields in nearly 20 years.
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Government officials were in long-term bond heaven, refunding $149.62 billion in high-coupon bonds, selling $142.36 billion in new-money and combined bonds, and paying record low gross spreads and insurance fees in the process. For underwriters, bond insurers, financial advisers, and bond counsel, there was plenty of business to go around.
Not anymore. The Federal Reserve crashed the party this February with the first of five interest rate increases this year. Since then, The Bond Buyer's 20-bond index of general obligations has risen nearly 120 basis points, from 5.25% on Feb. 3 to 6.43% on Sept. 29. Municipal prices may not have slumped as badly as long-term Treasury securities -- the 30-year Treasury bond's yield rose 155 basis points during that same period, from 6.30% on Feb. 3 to 7.85% on Sept. 29 -- but it was bad enough to wipe out the ideal market conditions for refundings. (See the "Interest Rate Indexes" table on page 2.)
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Issuers responded to the higher yields by slashing refunding sales a whopping 71%, to $33.53 billion in the first nine months of 1994 from $116.73 billion in the same period a year ago. Bond issues that combine refunding and new-money issues suffered an even sharper 73% drop, to $9.19 billion from $34.4 billion. (See the "Long-Term Bonds" table on page 16A.)
Those declines took nearly every other category of financing down with them. Negotiated bond sales dropped nearly $100 billion, to $84.26 billion from $181.07 billion. Revenue bond financing fell 46%, to $82.12 billion from $151.58 billion, while general obligation bond issuance declined 38%, to $44.52 billion from $71.87 billion. Taxable municipal issuance dropped 19%, to $5.17 billion from $6.36 billion.
The use of bond insurance and bank letters of credit suffered as well. Insured bond sales fell 44% in the first nine months, to $47.16 billion from $83.79 billion. Issues backed by letters of credit also fell 44%, to $4.05 billion from $7.22 billion.
One encouraging sign, however, was a solid 16% increase in new-money financing, to $83.92 billion from $72.32 billion. New-money issuance rose 16% or more in the education, housing, industrial development, public facilities, and general-purpose categories. In addition, bonds sold through competitive bidding eked out a 1% increase, to $41.08 billion from $40.57 billion.
Despite the new-money increase, bond sales for education, the most common specific purpose for taxexempt bonding, dropped 39%, to $23.17 billion from $38.21 billion a year ago. The giant "general purpose" category posted a similar 38% drop, to $31.93 billion from $51.63 billion. Electric power financing suffered the largest percentage decline, plunging 83%, to $4.22 billion from $24.54 billion. (See the sector volume tables on pages 4A through 6A.)
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PUBLIC FACILITIES
Senior Managers Volume Manager ($ mils.) 1 Goldman Sachs $1,687 2 Smith Barney 548 3 A.G. Edwards 482 4 Kidder Peabody 397 5 Merrill Lynch 390 6 First Chicago 201 7 Lazard Freres 177 8 Bear Stearns 172 9 Lehman Brothers 13710 Dean Witter 115
Private placements, short-term notes, remarketings, and taxable debt issued by private nonprofit institutions are excluded. Source: Securities Data Co. (10/8/94)
HEALTH CARE
Senior Managers Volume Manager ($ mils.) 1 Merrill Lynch $1,442 2 PaineWebber 1,353 3 CS First Boston 1,183 4 J.P. Morgan 1,031 5 Lehman Brothers 984 6 Smith Barney 667 7 Goldman Sachs 545 8 Bear Stearns 544 9 Ziegler Securities 52810 Morgan Stanley 437
Private placements, short-term notes, remarketings, and taxable debt issued by private nonprofit institutions are excluded. Source: Securities Data Co. (10/8/94)
INDUSTRIAL
Senior Managers Volume Manager ($ mils.) 1 Morgan Stanley $754 2 Stone & Youngberg 595 3 Lehman Brothers 566 4 PaineWebber 400 5 First Chicago 204 6 First Albany 200 7 Goldman Sachs 156 8 J.P. Morgan 136 9 Donaldson Lufkin 12510 Miller & Schroeder 122
Private placements, short-term notes, remarketings, and taxable debt issued by private nonprofit institutions are excluded. Source: Securities Data Co. (10/8/94)
EDUCATION
Senior Managers Volume Manager ($ mils.) 1 Merrill Lynch $2,497 2 Smith Barney 2,461 3 Lehman Brothers 1,393 4 Goldman Sachs 1,266 5 PaineWebber 1,161 6 J.P. Morgan 622 7 Seattle-Northwest 551 8 Bear Stearns 548 9 A.G. Edwards 49210 Bank of America 479
Private placements, short-term notes, remarketings, and taxable debt issued by private nonprofit institutions are excluded. Source: Securities Data Co. (10/8/94)
ELECTRIC POWER
Senior Managers Volume Manager (S mils.) 1 CS First Boston $1,620 2 Bear Stearns 997 3 Goldman Sachs 540 4 Smith Barney 316 5 Merrill Lynch 254 6 Sutter Securities 120 7 Lehman Brothers 104 8 Prudential Securities 61 9 PaineWebber 5310 WR Lazard 19
Private placements, short-term notes, remarketings, and taxable debt issued by private nonprofit institutions are excluded. Source: Securities Data Co. (10/8/94)
TRANSPORTATION
Senior Managers Volume Manager ($ mils.) 1 Lehman Brothers $2,670 2 Smith Barney 1,501 3 Goldman Sachs 1,281 4 Merrill Lynch 1,243 5 Bear Stearns 765 6 PaineWebber 750 7 Dillon Read 612 8 CS First Boston 507 9 Morgan Stanley 47410 J.P. Morgan 326
Private placements, short-term notes, remarketings, and taxble debt issued by private nonprofit institutions are excluded. Source: Securities Data Co. (10/8/94)
Top 10 Municipal Auditors All Municipalities Number AverageRank Auditor Of Govts Population 1 Certified Public Accountants 354 43,719 2 State auditors 315 742,423 3 KPMG Peat Marwick 296 764,222 4 Deloitte & Touche 248 932,069 5 Ernst & Young 161 925,417 6 Coopers & Lybrand 145 552,090 7 Arthur Andersen & Co. 101 1,057,081 8 Lerch, Vinci & Higgins 53 27,593 9 Grant Thornton 40 80,636 10 McGladrey & Pullen 39 42,752 Counties Number AverageRank Auditor Of Counties Population 1 State auditors 80 116,903 2 KPMG Peat Marwick 34 664,487 3 Deloitte & Touche 30 843,573 4 Certified Public Accountants 21 71,958 5 Coopers & Lybrand 13 312,757 6 Arthur Andersen & Co. 11 1,049,177 7 Ernst & Young 10 580,826 8(*) County auditors 9 172,550 8(*) Robinson, Farmer & Cox 9 28,226 10(*) Grant Thorton 5 142,423 10(*) Estal & Associates 5 16,645 Cities Number AverageRank Auditor Of Cities Population 1 Certified Public Accountants 221 13,198 2 KPMG Peat Marwick 136 126,198 3 State auditors 123 27,967 4 Deloitte & Touche 111 113,770 5 Coopers & Lybrand 67 159,030 6 Ernst & Young 65 204,684 7 Arthur Andersen & Co. 38 353,654 8 Lerch, Vinci & Higgins 33 13,868 9 Grant Thorton 28 34,527 10 McGladrey & Pullen 26 28,213
Rankings for each firm is based on the number of municipalities whose financial statements are being audited by that firm as of the first three quarters of 1994.
(*)Tie. Source: Securities Data Co.'s Muniprofiles (10/6/94)
UTILITIES
Senior Managers Volume Manager ($ mils.) 1 Goldman Sachs $2,009 2 Smith Barney 1,486 3 PaineWebber 1,228 4 Merrill Lynch 987 5 Morgan Stanley 546 6 Prudential Securities 480 7 Lehman Brothers 404 8 Kidder Peabody 370 9 Wheat First 25210 Stone & Youngberg 216
Private placements, short-term notes, remarketings, and taxable debt issued by private nonprofit institutions are excluded. Electric power issues are excluded but "combined utility" issues are included. Source: Securities Data Co. (10/8/94)
GENERAL-PURPOSE
Senior Managers Volume Manager ($ mils.) 1 Merrill Lynch $5,467 2 Goldman Sachs 2,924 3 Prudential Securities 2,615 4 Lehman Brothers 2,451 5 CS First Boston 2,286 6 J.P. Morgan 2,108 7 Bear Stearns 1,609 8 Morgan Stanley 1,404 9 Bank of America 1,14110 PaineWebber 1,017
Private placements, short-term notes, remarketings, and taxable debt issued by private nonprofit institutions are excluded. Source: Securities Data Co. (10/8/94)
HOUSING
Senior Managers Volume Manager ($ mils.) 1 Lehman Brothers $1,749 2 Goldman Sachs 1,537 3 PaineWebber 1,264 4 Merrill Lynch 853 5 Bear Stearns 821 6 CS First Boston 783 7 Dean Witter 448 8 Smith Barney 431 9 George K. Baum 36310 Prudential Securities 337
Private placements, short-term notes, remarketings, and taxable debt issued by private nonprofit institutions are excluded. Source: Securities Data Co. (10/8/94)
ENVIRONMENTAL
Senior Managers Volume Manager ($ mils.) 1 Goldman Sachs $1,219 2 CS First Boston 919 3 Merrill Lynch 791 4 Smith Barney 618 5 J.P. Morgan 532 6 Morgan Stanley 400 7 Kidder Peabody 299 8 First Chicago 211 9 Lehman Brothers 21110 Citicorp Securities 128
Private placements, short-term notes, remarketings, and taxable debt issued by private nonprofit institutions are excluded. Source: Securities Data Co. (10/8/94)
Only two purpose categories posted increases from the first nine months of last year. Housing bonds enjoyed a 13% upswing, to $11.28 billion from $9.95 billion, and industrial development, perennially the market's smallest sector, gained 17%, to $5.48 billion from $4.67 billion.
Several other types of bond financing went along for the housing bond ride -- bonds subject to the alternative minimum tax rose 25%, to $11.84 billion from $9.49 billion, and the use of collateralized mortgages or mortgage securities to enhance bonds rose 32%, to $3.18 billion from $2.41 billion.
Sales of short-term notes also declined in the first nine months of this year, but nowhere near as much as bonds. Note issuance fell 16%, to $33.85 billion from $40.47 billion a year ago. Note sales are concentrated in two key sectors -- general purpose and education -- and a 19% drop in general-purpose note sales, to $23.7 billion from $29.33 billion, has overwhelmed an 11% increase in education note sales, to $7.2 billion from $6.47 billion. (See the "Short-Term Notes" table on page 16A.)
Much of the decline in note sales can be attributed to reduced issuance by the biggest issuers. The 25 largest note issuers in the first nine months of last year, who accounted for $22.98 billion of sales, cut their issuance 23% this year, to $17.58 billion.
California, the nation's leading note issuer, marketed a whopping $10.8 billion in 1992 but trimmed that to $7 billion last year and $6.2 billion this year. New York State, which once led the market with its giant "spring borrowings" and ranked second in 1992 with $2.6 billion, cut back to $850 million last year and just $71 million so far this year.
The sharp drop in municipal bond sales has exacerbated the earnings pressures on bond underwriters, already locked in fierce competition for market share. Gross spreads fell 1% in the first nine months of 1994, to $8.28 per $1,000 par value for all municipal bonds, down from $8.38 for all of 1993. (See the "Gross Spreads" table on page 9A.)
That was the smallest percentage decline in gross spreads in the past 13 years and well below the 10% declines for 1992 and 1993. Nevertheless, underwriters are unlikely to stop pining for the heady spreads of the early 1980s ($23.25 in 1982 and $21.42 in 1982) or even the more modest ones of the late 1980s ($12.50 in 1987, $11.88 in 1988, and $11.52 in 1989).
Gross spreads fell in the first nine months of this year for categories such as new-money issues (to $8.17 from $9.14 for all of 1993), negotiated issues (to $8.33 from $8.48), and general-purpose issues (to $7.05 from $7.58). At the same time, they rose for categories such as competitive sales (to $8.02 from $7.64), refundings (to $8.27 from $8.16), and education (to $9.30 from $8.98).
One aspect of tax-exempt finance that has not changed much at all during the past 12 months is the ranking of senior managers, bond counsel, and financial advisers. (See the "Top 10 Rankings" table on page 9A.)
Merrill Lynch & Co. and Goldman, Sachs & Co. were the top senior managers of long-term bonds at the end of September 1993 -- and they still are. Merrill was first at the end of September 1994 with $14 billion and Goldman was second with $13.16 billion.
CS First Boston, Lehman Brothers, and Smith Barney Shearson Inc. held the next three spots (with some shuffling) in both years, as well. And Bear, Stearns & Co., J.P. Morgan Securities Inc., Morgan Stanley & Co., PaineWebber Inc., and Prudential Securities Inc. continued to occupy the sixth through 10th spots.
The top ranks of financial advisers did see some changes. Evensen-Doge, which ranked seventh in 1992 and sixth in 1993, vaulted all the way to second place with $6.6 billion at the end of September 1994, behind top-ranked Public Resources Advisory Group, which had $9.65 billion. Lazard Freres & Co., which ranked fifth at the end of 1993, dropped out of the top 10 in the first nine months of 1994, and was replaced by up-and-coming WR Lazard & Co.
Among bond counsel, Orrick, Herrington & Sutcliffe, which finished a close second in 1993, took a commanding lead at the end of this year's first nine months with $13.34 billion. Last year's leader, Mudge Rose Guthrie Alexander & Ferdon, slumped to second this year with $6.5 billion, less than one-third of its 12-month total of $20.9 billion for 1993.
Three law firms in last year's top 10 -- Barnes, McGhee, Neal, Poston & Segue; Kutak Rock; and Preston Gates & Ellis -- were replaced in the nine-month ranking for this year by new-comers Ballard Spahr Andrews & Ingersoll, Leslie M. Lava, and Vinson & Elkins. But Barnes McGhee, Kutak Rock, and Preston Gates remain serious contenders in 15th, 12th, and 14th place, respectively.
In the rankings of long-term bond issuers, California surged into the lead with $5.8 billion in the first nine months of 1994, more than triple its $1.9 billion figure for all of 1993. New York City, the biggest issuer in 1993, dropped to second for the year to date with $2.07 billion. Last year, 41 issuers sold more than $1 billion of bonds apiece; this year, only seven cracked the billion-dollar barrier by the end of September.
Goldman Sachs led all senior managers of short-term notes at the end of September, with $3.75 billion, followed closely by Bank of America with $3.72 billion. Last year's top note underwriter, Lehman Brothers, placed third with $3.37 billion. Public Resources was the leading financial adviser for notes, with $8.4 billion, Orrick Herrington was the top bond counsel, with $8.67 billion, and California was by far the biggest note issuer, with $6.2 billion.
California issuers were the busiest in the nation in the first nine months of this year, selling $20.09 billion of bonds and $14.21 billion of notes. They were followed by New York State with $14.01 billion of bonds and $5.84 billion of notes, and Texas with $8.51 billion of bonds and $2.19 billion of notes. (See the "Purposes of Municipal Finance by State" and "Types of Municipal Bonds by State" tables on pages 10A and 11A.)
Other top bond-issuing states were Pennsylvania with $6.87 billion and Florida with $6.6 billion, while Ohio, New Jersey, and Massachusetts all sold slightly more than $1 billion of notes apiece.
California issuers led the states in selling general-purpose bonds ($9.29 billion), education bonds ($2.38 billion), utilities bonds ($1.86 billion), and industrial development bonds ($1.51 billion). New York was first in transportation ($2.73 billion), health care ($1.92 billion), and housing ($1.09 billion). Florida topped the list in public facilities ($1 billion), Washington ranked first in electric power ($805 million), and Pennsylvania led in environmental facilities ($609 million).
