CDFA Spotlight: Municipal Finance Review - Annual Bond Volume Trends By Stan Provus

Preface

This article looks back and examines some trends that have changed the municipal finance Industry today. Future articles may look at other industry trends. This article rests on annual municipal bond volume data prepared by The Bond Buyer as well as other sources. Our historical analysis of municipal bond volume trends primarily examines changes between 1990 vs. 2000 vs. 2004.

Bond Volume

Total long-term bond volume increased from $200.7 billion in 2000 to $384 billion in 2003 to $359.9 billion in 2004. Between 2000 and 2004, the percentage of new money vs. refunding vs. combined changed from 82%, 10%, and 8% in 2000 to 64%, 25% and 12%, respectively. Although the percentage of new money bonds of total bonds issued annually declined, the absolute dollar amount of new money bonds increased--$165.2 billion in 2000 and $228.8 billion in 2004. Refundings rose as a result of historically low interest rates.

Variable Rate Bonds

Since 1990, there has been a dramatic increase in the number of variable-rate bonds. In 1990, auction rate variable rate bonds accounted for a meager .22% of the 1990 muni bond volume ($128 billion). Variable rate (short put) bonds (7 day low floaters, etc.) accounted for 10.4% of the annual volume. In 2000, auction rate bonds as a percentage of annual volume ($ 200.7 billion) increased to 5% and variable-rate (short put) to 20% of annual volume. By 2000, these variable rate bond issues accounted for 25% of bonds issued, an increase of 135% from 10.62% in 1990.

In 2004, variable rate bonds continued to account for a 25% share of total long term bond volume ($359,884,200) but the split between auction rate and variable rate (short put) bonds had changed. In 2000, auction rate and variable-rate (short put) bonds accounted for 5% and 20% of total bond volume, respectively. By 2004, auction rate and variable rate bonds accounted for 12% and 13% of bond volume, respectively—auction rate issuance had nearly caught up with variable-rate (short put) bond issuance.

The dollar amount of variable rate bonds has also increased substantially. The dollar amount of auction rate and variable rate (short put) bonds increased from $283,000 and $13.3 million, respectively, in 1990 to $42.8 million and $47.3 million in 2004.

Interest Rate Swaps

Although we could not identify a data source indicating the annual volume of municipal interest rate swaps and other derivatives, many bankers we have spoken with indicate the volume has increased substantially. The size and breadth of the municipal swap market is difficult to estimate. However, in 2004 the National Federation of Municipal Analysts suggested the municipal swap market had grown substantially over the past few years, with more issuer participants of varying levels of financial sophistication entering the market as swap counterparties. Many of the interest rate swaps undertaken by issuers involve swapping variable rate debt for fixed rate. These swaps undoubtedly account for some of the increase in variable rate debt. In other words, a number of issuers have issued variable-rate debt and swapped for fixed because they have been able to access lower fixed rates than would have been possible had they issued fixed rate bonds in the first place. There are, of course, risks, such as basis, tax, and counterparty risk, which will determine how efficient swaps are over time.

Bond Insurance

The majority of long-term bonds issued today are insured. In 2000, 40% of bonds issued were insured, while 54% were insured in 2004—in 2004, $193.4 billion were insured.

This article is intended to provide accurate and authoritative information in regard to the subject matter covered. The author and CDFA are not herein engaged in rendering legal, accounting or other professional services, nor does it intend that the material included herein be relied upon to the exclusion of outside counsel. CDFA is not responsible for the accuracy of the information provided in this fact sheet. The information provided has been collected from a variety of sources. Those seeking to conduct complex financial deals using the tools mentioned in this document are encouraged to seek the advice of a skilled legal/consulting professional.