Larger deals offset fewer issues as Illinois leads Midwest dealmaking


The Midwest region saw larger municipal bond deals yet fewer issues in 2023 compared to the previous year.

Robust deal amounts in nearly half the region’s states offset declines in the remaining states in both overall volume and number of issues. Tax-exempt new money deals surged as Illinois overshadowed its neighbors in both deal size and issuer rankings.  

Last year saw total Midwest deal volume rise by $2.63 billion from 2022, a 3.9% increase, even as the number of issues dropped to 2,525 from 2,901, a decrease of nearly 13%, according to data from LSEG, formerly Refinitiv.

“Hard to get too excited about resurgent bond volume since Midwestern supply remained significantly lower than two years ago,” observed Richard Ciccarone, president emeritus of Merritt Research Services.

Illinois led the region with issuers there selling $14.36 billion of bonds in 322 deals, while Wisconsin had the most issues at 415. The city of Chicago and the Chicago School Board together issued nearly 20% of Illinois’ total 2023 supply.

Larger governments, school districts and agencies were responsible for the bulk of issuance in the region, Ciccarone noted.

“The usual heavyweights, comprised of the states, their agencies and the larger issuers in general, came to the market with outsized issues that outweighed the smaller issues, which were fewer in number than in recent years,” he said.

Across the Midwest, there was more than four times as much new money deal volume as refunding volume, but both figures climbed slightly higher — to $51.28 billion and $12.02 billion, respectively — from 2022’s totals. The number of issues declined for both categories: to 2,246 from 2,412 and to 225 from 408.

Tax-exempt volume jumped to $58.6 billion from $53.8 billion even as the number of issues declined by 301. Taxable bond volume fell to $9.27 billion from $10.09 billion as the number of issues dropped by 79.

Most of the deals (52.8%) were negotiated sales; 35.6% were competitive sales and 11.6% were private placements.

Deal volume in the region was highest in the second quarter, followed closely by the fourth quarter, when refundings picked up considerably.

Illinois dominated the list of the region’s top issuers, with the state of Illinois and the city of Chicago topping the rankings in first and second place. They issued bonds with a total par value of $3.386 billion and $2.116 billion, respectively.

The Wisconsin Public Finance Authority and the state of Wisconsin came in third and fourth, followed by the Illinois Housing Development Authority. The Illinois State Toll Highway Authority also made the top ten, placing eighth, after the Indiana Finance Authority, according to data from LSEG. 

The education sector was responsible for the most issuance by far — $21.08 billion — followed by general purpose issuance of $14.3 billion total, the Refinitiv data shows. Still, education issuance declined from $21.516 billion in 2022.

“The amount [of bonds issued for education] was down from 2022 and even more since 2021,” Ciccarone said. “It did not help that bonds issued by colleges and universities fell by 56% from the previous years. With a demographic decline in enrollment overall, schools at all levels are funding renovations or improvements rather than providing for expansion.”

At the K-12 level, he added, 2023 was not a big year for bond levy referendums. Households are stressed about inflation, and “the economics for school district refundings are still not there for most schools, which issued a considerable amount of their debt during the low-rate heyday.”

Most infrastructure sectors saw increased volume throughout the Midwest year-over-year. Bonds LSEG classified as being for transportation were up to $6.838 billion from $4.499 billion in 2022. Bonds for environmental facilities were also up, rising to $1.106 billion from $911 million, as were electric power bonds, which jumped 65% year-over-year to $1.238 billion.

Housing agencies turned in a surprise performance: municipal bonds issued for housing rose 33% in 2023 over 2022 and 40% over 2021, Ciccarone said.

“With conventional mortgage rates rising in most of 2023 to their highest levels in recent years, it was good to see the relatively dormant Midwestern state housing agencies step up to the plate to make housing a little more affordable to qualified persons,” he added.

Hospitals, meanwhile, which are typically a major source of supply to answer demand for bonds in the Midwest, dropped their issuance significantly from previous years, Ciccarone pointed out.

Healthcare sector bonds were down more than 35% to $4.3 billion

“A down year for hospital operating margins due to adjustments needed to cover higher personnel costs kept the focus on the bottom line rather than on brick and mortar or expansion projects,” he said. “Higher interest costs also reduced the economies for merger or improvement deals that might have taken place otherwise.”

At the state level, bucking the overall trend of bigger deals yet fewer issues was Minnesota, where the number of issues ticked up slightly in tandem with a roughly $90 million increase in volume over 2022. Issuers there sold $7.4 million of municipal bonds last year.

“Hard to get too excited about resurgent bond volume since Midwestern supply remained significantly lower than two years ago,” said Richard Ciccarone, president emeritus of Merritt Research Services.

Alan Klehr

And on the other hand, there was Wisconsin, where the volume dropped by $310.9 million to $8.47 billion as the number of issues dropped by 55.

Michigan was the region’s number-two source of bonds, with $8.57 billion, as the number of issues climbed to 239 from 220 even as its volume dropped by $210.8 million.

Indiana volume dropped by $247.7 million as the number of issues dropped by 39; in Iowa the volume dropped by $404.9 million as the number of issues dropped by 37; in Nebraska, volume dropped by $301.9 million as the number of issues dropped by 57; and in North Dakota, volume dropped by $316.1 million as the number of issues dropped by 29.

Illinois’ share of the region’s total dealmaking was large enough that its prevailing trends, along with those of Missouri, Ohio and South Dakota, set the larger trends for the region.

The state of Illinois was responsible for the Midwest’s largest deal of the year, a May 2023 series of general obligation bonds totaling $2.511 billion. The Series 2023A taxable, 2023B tax-exempt, 2023C tax-exempt and 2023D refunding bonds were issued to fund accelerating pension benefits payments; to finance capital expenditures under the Rebuild Illinois plan; to finance information technology projects; and to refund outstanding GO bonds. All but the Series 2023A bonds are callable.

The bonds represented the state’s first venture to market after upgrades that raised two of its ratings to single-A status. Wells Fargo was the deal’s lead manager, joined by Goldman Sachs and Loop Capital Markets. 

Fitch Ratings went on to upgrade Illinois to A-minus in November.

BofA Securities topped the table of Midwest underwriters, credited by LSEG with $6.9 billion, edging Stifel and RBC Capital Markets.

PFM led the region’s financial advisors, credited with $14.77 billion. Kutak Rock topped the bond counsel ranks with $7.65 billion.

Nationwide, continued interest rate hikes by the Federal Reserve contributed to fewer issuers refunding or going to market. Total new issue volume in 2022 and 2023 came in under $400 billion compared to almost $500 billion in 2020 and 2021. Many issuers used federal pandemic relief money to fund projects rather than take on new debt.

The Municipal Securities Rulemaking Board charted weaker demand from mutual funds last year and noted “significant” cutbacks in municipal bond holdings by banks and insurance companies. Much of the demand for municipal bonds came instead from individual investors.

Munis rallied in the last two months of 2023, and PIMCO predicted that the market conditions that brought headwinds over the past two years “may turn supportive.”

“Should investor sentiment continue to strengthen and result in a sustained period of inflows, municipals would be positioned strongly,” the fixed income investment management firm said in its monthly market update last month.