U.S. municipal bond issuers spurn letters of credit in 2012

WASHINGTON Fri Jan 11, 2013 2:59pm EST

WASHINGTON Jan 11 (Reuters) - U.S. municipal bond issuers eschewed bank letters of credit in 2012, with the amount of debt backed by the facilities dropping by half, according to Thomson Reuters data that showed U.S. Bancorp was the leading provider of the letters.

A large number of the backstops expired in 2012, and the data only captured new issuance of the letters - not renewals.

Still, the drop of 49.4 percent from 2011 was notable. A bubble in bank letters of credit developed when the auction-rate securities market collapsed and issuers moved into variable-rate bonds. Last year, Moody's Investors Services warned repeatedly that debt backed by the letters could be hurt by bank rating downgrades.

U.S. Bancorp backed $918.3 million of debt in 2012. JPMorgan Chase & Co, the leading provider of letters in 2011, dropped to sixth place in 2012, when it backed $340.8 million of bonds.

Demand for many other forms of credit enhancement also declined in 2012, including insurance and stand-by purchase agreements.

Record low interest rates prompted issuers in the $3.7 trillion municipal bond market to refinance in 2012, tipping the sales scales toward refunding bonds. In 2012 issuers sold $221.9 billion of refunding bonds, 1.5 times the $145 billion of new bonds that were sold.

In total, municipal bond sales climbed to $367 billion up 32 percent from 2011.

Very little changed in 2012 in terms of bond counsel, the data showed. Orrick Herrington & Sutcliffe maintained its top position, followed by Hawkins, Delafield & Wood. The firms were the top bond lawyers in 2011, and made up nearly 15 percent of the market in 2012.

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