Regional Firm-Led Underwriting Surges in 2006 Led by Corporate and Securitized Sectors; Municipal and Agency Volume Lower

Regional firm-managed issuance in the municipal, corporate, federal agency, and structured finance market sectors surged to $520.1 billion in 2006, 61.7 percent above the $321.6 billion a year ago. The year-over-year increase was led by the securitized finance sector with 2006 volume nearly triple that of 2005 and the corporate bond sector in which volume also increased substantially. The regional dealer underwriting share increased to more than 9.7 percent of total U.S. issuance volume, compared to 6.5 percent in 2005.

Issuance growth has been supported by beneficial financial market conditions. Strong credit quality, historically low default rates, investor demand for credit products, and ample liquidity have combined to create the favorable conditions and tight credit spreads, a trend that persisted throughout 2006. The Federal Reserve’s completion of its monetary tightening phase in August further spurred the credit markets in the fourth quarter. Recent economic data suggest GDP growth surpassing the earlier consensus below-trend growth expectations for 2007, which bodes well for continued elevated issuance levels in the credit markets over the next year.

Strong liquidity and investor demand are keeping market conditions at a cyclical peak. Later in the year, credit and pricing conditions are likely to fall back, perhaps leading to reduced investor risk tolerance should liquidity conditions moderate. Rating agencies are projecting gradually rising default rates, which should still remain well below long-term averages. In addition, shareholder-favoring strategies, increased leverage and the pace of LBO activity could pose event and single name risk that would affect pricing. The effect of the recently reported increase in subprime mortgage default and delinquency rates appears to be contained within that sector as sustained economic and employment growth underpins a continued positive operating environment.

Regional firm-led issuance for full-year 2007 should approach 2006 levels depending on the direction of benchmark yields, credit quality trends and economic growth. The consensus view is that the housing sector correction will conclude this year, stabilizing the mortgage-affected sectors. The municipal bond sector should continue to see refunding levels below the peak year of 2005 absent a reduction in interest rate levels, but new municipal bond issuance is expected to continue to grow. Corporate issuance should remain at historically high levels, driven by M&A and LBO deal volume.

About the Report

The report analyzes and presents aggregate information and trends related to bond and equity underwriting in which one or more middle market securities firms “non-primary dealers” are the lead underwriter or “book runner” on the deal based on publicly available information. The report’s bond coverage focuses on long-term transactions – those in which the stated original maturity at issuance is greater than thirteen months – and covers the range of fixed-income market sectors, including municipal bonds, corporate bonds, federal agency securities and asset-backed and private-label mortgage-backed securities. In addition, the report analyzes and presents middle market firm mergers and acquisition (M&A) advisory activity.

Credits

SIFMA Research

• Senior Managing Director, Co-Head of Research and Policy: Michael Decker
• Vice President, Director of Research: Steven Davidson, CFA
• Director, Market Statistics: Marcelo Vieira
• Research Analyst: Tiffany Coln
• Research Analyst: Bryan Gross