HomeMy WebLinkAboutItem #44 - Discussion ItemCITY OF MIAMI, FLORIDA
� 32
INTER -OFFICE MEMORANDUM
Honorable Mayor and Members
of the City Commission
Cesar H. Odi
0
City Manager
DATE MAR 2 5 11q?
SUBJECT Discussion
Competitive
Negotiated
REFERENCES
ENCLOSURES
Item -
vs.
Bond Sales
Transmitted with this memo is a letter received from the City's co -
financial advisors, Raymond James & Associates, Inc. and Howard Gary &
Company, addressing the issue of competitive vs. negotiated bond sales.
The following comments have been prepared by the City's Finance
Department.
In the past City of Miami general
competitive basis, while sales
obligation bonds have been awarded
obligation bonds have been sold on a
of refunding, revenue and special
on a negotiated basis.
Bids for competitive sales, which are due at a date and time certain,
are requested from underwriters by advertisements in trade publications
and distribution of hundreds of official statements and notices of the
sale. Once the bids are received, opened and read during a City
Commission meeting the sale is awarded to the lowest bidding
underwriter.
The City has been very successful in selling its general obligation
bonds on a competitive basis. The pledge of its full faith and credit,
jointly with the fact that the City has a well -recognized name and
excellent credit ratings, Al and A+, have attracted strong interest
from investors, consistently resulting in bond sales with interest
rates lower than market rates at the time of such sales.
These sales are made through an underwriting team appointed by the City
Commission, based on the recommendation of a selection committee. Once
all the documentation required for the transaction has been prepared
and the existing market conditions provide interest rates within the
range desired, the market is tested with a preliminary interest rate
scale that is prepared jointly by the underwriters, the financial
advisors and City staff. This scale may be adjusted several times,
depending on responses received from prospective buyers, until a
final interest rate scale is agreed upon at which time the bond
purchase agreement is signed. Rationale for negotiated bond sales is
as .follows:
9 2 - 23•ti 3�-/
rN
Discussion Item -
Page -2-
Refunding Bonds. The main advantage of an advance refunding issue is
to produce significant debt service savings, which result from the
difference between the interest being paid on the new bonds and the
interest earned on the escrow account funded with the proceeds from
the new bonds. This escrow account will be used to redeem the old
bonds as they become due. Timing of the transaction is critical due to
volatility of interest rates. For instance, the City had a refunding
transaction that took over a year to bring to market after receiving
City Commission approval in order to obtain desired savings. If such a
sale would have been done on a competitive basis bids would have been
received during the City Commission meeting subsequent to the meeting
in which the notice of sale was approved. Such bids would have been
rejected since they would not have produced the desired savings as the
market "had moved away" from us.
Revenue and Special Obligation Bonds. These bonds are secured by the
pledge of a particular revenue of the City or of one of its facilities.
Because such specific credit may not be known to general investors,
greater response may be achieved from potential investors when
underwriters become well acquainted with the transaction and the credit
behind it. In a competitive sale underwriters would not be involved in
the structuring steps. Greater response from underwriters tends to
lower the interest rates the City will pay on the bonds.
A number of minority underwriting firms lack sufficient capital to
underwrite bonds on a competitive basis, since these transactions
require commitment of capital before any bonds are sold. These firms
do better on negotiated basis sales when a large portion of the sale is
presold before the transaction is finalized, reducing the amount of
capital required.
In recent years new procedures have been developed in the marketplace
that facilitate use of competitive processes. Some of these include:
Refunding Bonds. Delegating receipt of bids and award of sale to the
City Manager so that the bids may be received when market conditions
provide the threshold savings desired. At that time, underwriters will
be contacted by fax and asked to turn their bids within forty eight
hours.
Revenue and Special Obligation Bonds. As these types of bonds become
more popular, certain revenue repayment sources are becoming better
known to investors. Bond issues that are collateralized by very well
known revenues, such as half -cent state sales tax or local option gas
tax, could obtain satisfactory sales responses under' a competitive
sale. If such responses were not acceptable, bids would be rejected
and a new recommendation would be made to the City Commission.
Z 92- 234.1
L-1
Discussion Item -
Page -3-
Based on these new developments we propose to sell on a competitive
basis those refunding, revenue, and special obligation bond issues with
characteristics, such as well-known repayment source and delegation of
bid receipt and acceptance to City Manager, that would produce strong
response from potential investors. General obligation bonds would
continue to be sold on a competitive basis. Remaining issues, because
of their timing, market conditions, lesser known collateral, or
specific requirement for minority participation, would be sold on a
negotiated basis.
92- 234-1
KI
RAAMES
s. INJC�
(^***OlOoward
Gary & Company
8F
IF..'" ;_73 =f,6 • Fay �%*3 '.. 83
18021249.8831 - Ex' 2R87
March 9, 1992
Carlos E. Garcia, CPA
Director
Department of Finance
City of Miami
DuPont Plaza Center, Suite 210
300 Biscayne Boulevard Way
Miami, Florida 33131
Dear Mr. Garcia:
Investment Bankers
Y a—, F orida 33137-416 3
13C?' 57 3.1632 • Far 13O5� 576.20_!6
In late January, The Miami Herald ran a series of articles on the
municipal bond business that specifically discussed the sale
methodology of bonds by negotiated versus competitive sale. These
articles contained certain inaccuracies that, as the City of
Miami's Financial Advisors, we believe need to be clarified.
Whereasthese articles addressed the process and procedures
utilized by Dade County in its selection of Managing Underwriters,
it should be noted that the City has one of the most competitive
and exhaustive selection processes in the nation, as evidenced by
the volume of proposals received by the City from a wide range of
local, regional, national, and minority firms to the City Is Request
For Proposals for Managing Underwriter(s) issued in March 1991.
These proposals were subsequently reviewed by an independent
selection committee comprised of civic and business leaders of the
community.
The Miami Herald articles created considerable discussion by the
industry and users of the industry. The issue of whether the City
should issue its bonds on.a. "negotiated" or a "competitive" basis
should be viewed in terms of the goals the City is trying to
achieve. As one of the County Commissioners stated "It seems to be
politically expedient to say it should be competitive, but in a lot
of deals it's not the best thing for the County". The facts bear
this out and the costs to the taxpayer, minorities, and local firms
could be significant.
The two most important goals the City has established are achieving
the lowest cost for its bonds and maximizing minority
participation.
92- 2341
Memoe,s NASD 1%4SRB SIPC S
Carlos E. Garcia, CPA
Director
Department of Finance
City of Miami
March 9, 1992
Page Two of Four
The best analysis of competitive versus negotiated bond sales in
response to The Miami Herald articles and its editorial regarding
competitive bonds was prepared by the financial advisor for the
Department of Off Street Parking. This analysis was requested by
the Department of Off Street Parking because it was entering the
municipal bond marketplace and wanted an educated analysis of the
best approach to use. We support the conclusions reach in this
analysis.
The analysis prepared for the Department of Off Street Parking can
be summarized as follows:
1. The Miami Herald articles were not factual in its
analysis of competitive versus negotiated bond sales. To
the contrary, its research revealed the reverse -
negotiated bond issues were cheaper than competitive bond
issues in the last year and a half.
2. The Miami Herald Editorial, dated January 22, 1992,
erroneously stated that the Dade County Public School
Board had saved millions of dollars by selling their
bonds on a competitive basis. These facts were completely
erroneous as supported by the following factual
information. On Wednesday, January 22, 1992, the Dade
County School Board sold competitively $200 million of
General Obligation Bonds AAA rated (Insured). Within the
same hour, Broward County sold approximately $260 million
of General Obligation Bonds rated AA- on a negotiated
basis. The Dade County Public Schools transaction
received five competitive bids. The winning bid (lowest)
was from a firm which was a co -senior manager on the
Broward County transaction and yet, Broward County
achieved an overall net interest cost of six basis points
lower than the Dade County Public Schools transaction.
This savings to Broward County is equivalent to
approximately $1.6 million of interest savings annually
to the taxpayers. It is further interesting to note that
both Dade County Public Schools and Broward County
utilized the same financial advisor.
3. The Dade County Public Schools competitive bonds were
more expensive than Broward County's negotiated bond sale
even though Broward County's bonds were rated lower than
the Dade County Public Schools bonds.
92- 234.1
Carlos E. Garcia, CPA
Director
Department of Finance
City of Miami
March 9, 1992
Page Three of Four
4. If the Dade County Public Schools bonds were sold
"negotiated" similar to Broward County (which had a lower
credit rating of Aa/AA-), Dade County Public Schools
could have saved $11.4 million over the life of the bonds
to the taxpayers.
5. Another point that should be noted is that the Dade
County Public Schools paid a higher Underwriters'
Discount versus Broward County. The Dade County Public
Schools paid $10.53 per Bond versus Broward County, which
paid $9.34 per Bond.
It should also be noted that meaningful minority participation was
not achieved in the Dade County Public Schools bond sale. Minority
participation was less than 2 % compared to a 34 % Dade County Public
Schools goal. In essence, the minority participants received less
than $4 million of the $200 million bonds sold. Some minority firms
did not get any bonds. More than 98% ($196 million) of the bonds
went to majority, out-of-town firms.
The above results substantiate the position taken by industry
professionals and market experts that competitive sales are not the
cheapest approach to selling municipal bonds. It also substantiates
the contention that the "competitive sale approach" does not help
governmental entities that have an expressed commitment and
sensitivity to minority participation
When applied to minority participation programs, "negotiated sales"
could stimulate the local economy and create jobs. Negotiated bond
sales are beneficial to the local economy particularly when local
governments are seeking ways to stimulate their economies.
Following The Miami Herald suggestion that bond sales be done
competitively could result in tremendous losses to the tax payer as
demonstrated by the experience of Dade County Public Schools.
A We concur with the City's decision that its bonds be sold via the
negotiated method of sale, based on the fact that the City has
_ historically utilized this methodology in its best interest and
negotiated sales have proven cheaper over the last year and a half.
(See attached article in The Bond Buyer) As you are aware, there
are numerous instances where the City has saved hundreds of
thousands of dollars in interest costs, as well as issuance costs
by utilizing the negotiated sale methodology.
92- 234.2%
Carlos E. Garcia, CPA
Director
Department of Finance
City of Miami
March 9, 1992
Page Four of Four
An example of this being the City's $22,605,000 General Obligation
Refunding Bond transaction sold in April 1989. This transaction was
originally authorized by the City Commission in 1987, but
sufficient present value savings were not present at that time. The
Managing Underwriters monitored the capital markets for two (2)
years before identifying an "interest rate window of opportunity"
that provided City taxpayers with in excess of $515,000 in present
value savings alone.
The City has utilized an Underwriting Team concept that permits the
greatest degree of control by the City over its financings, as well
as ensuring the greatest level and amount of participation by
minority investment bankers and underwriters, in adherence with the
City's stated procurement goal of 51% for all procurement contracts
to minorities, as defined by City Ordinance Number 10062, as
amended.
It should be noted that the City does issue bonds via competitive
bid when it deems this methodology to be in its best interest, as
was the case in July 1991 for the $10, 000, 000 of General Obligation
Bonds for storm sewer improvements, fire fighting, fire prevention,
and rescue facilities transaction.
In summary, the process and procedures that the City has
established and utilized has enabled the City to select Teams of
Managing Underwriters who provide the City with:
i. the lowest cost,
ii. the highest degree of control,
iii. greatest degree and amount minority participation,
iv. the highest level of service and attention.
Should you have any questions, please do not hesitate to contact
the undersigned at (305) 571-1380.
Sincerely,
H RD GARY & C PAN
is or M. Pa
First Vice President
Enclosures
RAYMOND JAMES & ASSOCIATES, INC.
Wendell G. Gaertner
Vice President
92- 23v.1
20 (s.2) 4,130 pond Buyer W is or,cay, April 22, i99t
Van Kampen Departs as Spreads Inert
Or Did They-? And Other Market Questions
By Joe ' ysak
t.:onsider tl;e top under4.-rltcr,
Ccld:,,an. Sachs b! Co. The firms un-
dem-rote $5.31 billion of bonds
during the first quarter. 17.8`:S of
the total market: but that's 17.5
of the par value of beds so!d --
only 52 cf the 1,776!ssues Uhat were
offered, The figure does not Include
34 private: p!aca.:,cnis.
To be precise. Cold -man under-
- .;rpte 17.5'; of the Negotiated mar-
ket: 43 of the 989 deals that went
negotiated, with a par value of
S3 77 billion, Serendip!tously,
G^id;,.an also undenvr•ote 17,Slylz of
the compctitive -,narket: nine !ssues
,vcrth $1.54 bnlion.
In the negotiated sector, Gcld-
: InLn's deals are u::remar -able i:Z
s/te, except fcr the S1209 m!1ilcn
New Yora L,c` l Coverr...,tnt A ss!s-
tance Corp issue it undtr.mote in
.Fcbruary. The ether deals range
from a $5.30 rniliicn New Or:cans
Exh!bltion Hail Authorlty !ssue, to
a S27 mi,lion rope County, r',rl:.,
deal, to $106.23 ;.iM!n, fcr the
:.Schlga.-t :fu. iclpal G--nd AuU or-
ity. Spreads a:,ged fr on a foxy cf
S1.25 to a h!gh of $15.07, ;;1Uh the
avel•ge coininX -!n at £3.13 - .
S CCtator
I
so_mew:tat to • the market.
There is rroth!ng pat ,Icular ly r`-
rnarkable !n any of this, of course:
ccrtainly:.•;t: lr,g to trove that any-
.;i.t 'lb- ught ail of L e !cover !n the !
market, or engaged !n rotcus
price cutting. if the averaZe sp cad
went down in the first euarter. it
did so act oss the board. i
Theti• Cali it Overcapacity `
ti4hni underwTl►ers are faced
n•:th is not so much anticompetitive
pricing, which would be the case if I
one underwriter "dominated" the
market -- in fact, it could be said
that the top 20 undern•r•iters " dorn- :
inated" the market. with 75 % of
the par value of business but only
562 of the issues — but prohibi-
tively competlt!ve pricing in a cer-
tain segment of the market. We l
routinely hear of underwriters do-
ing business for Ilttic or in some
cases no swead at all.
(C)
The problem is "overcapacity."
There are. It is said, too many
bankers chasing too few deals. No-
body will say what over capacity is,
exactly. Is it 2511; of the Industry?
Or 50 %7 «When the cutback con. es,
i Itwill be no -lore pretty* than it was
in the fall of 1987. when Salomon
( Brothers, then the top underwriter
In the business, bowed out because
they were not rnarin.g enough mcn-
ey in municipal bonds.
, K'hich 1~,;ds us to the second om-
' ihous event L-f last creel:: Va.-t Kam-
pe--r 1„ emit Inc. deciding to -pull out
p� , municipal trading and ender.
writing and choosing instead to fo
;oils on asset mana,gemcnt. In s!m-
., plc terra.-, for thos$ unsentimental
stu;a who look at tho betto;tt line,
those lo•,rer spreads meant th—em
Y,-as not enough moncy• :ni:i,dcr-
writing and trading municipal
bonds. And 80 otherwise unsus-
rct!ng employees, who no doubt
thought they x•cre doing a Sne job.
are now cut of work.
During the past few yea.^.-. rrun!-
cipals have been shlelded from
such sav2ge cutbacks, pr i.:,ar:1y
because so manv other areas of the
securities business have been bad
perfonners. But it appears that the
municipal side's number has come
up again; and this time around, it Is
certainly no more a ma;cr profit
center than it :was in 19S7.
So last week was a crazy week,
and a sad wtek, arid If one reads the
signs correctly. it may be as memo•
rable for the market as Oct. 12.
1967. when Salomon decided that
being to was not enou h.
Not So Fast...
Tisc luvC:zluu of alJiCctly 15 t,c,.•7,
But take a closer look at the num-
bers, and you will find business as
usual. and why this newspaper's
advice in 1926. that anythtrxg that
shuts off competlt:on is directly op-
ppoo�e1 to tine best interests of the
berretei:ig :r:unteiM:l:trcr." io a
good one to adopt, i>{j•ou are r:;osr !s-
suers.
Because during the first quarter
of 1991. issues of $10 .:pillion and
less made up 77% of the market ---
1,373 issues. or ":Host of the mar-
ket." They only accounted for
$4.22 billion of pas :•slue, however.
and not too many dealers can sur-
vive oa that.
But for the record. the negotiated
spread on those issues averaged
$15.50 during the first qua: per: on
competitive issues, it averaged
S 12.42.
TOTAL P
if yea arc a b!g municipal bond Is-
suer, and !f you have any debt ca.
paclty left without raising taxes.
the time to cc -Me to Maritet Is not:.
For one thing. rates, at a llttle
more than 7 %. are hovering at re-
cent. If not record, logs. For anoth-
"Er"it is going to cost you very little to
come to rnaxket. And if you expect
to sell more bonds In the future. you
might not have to pay at all.
But fcr certain: Come to :na. ket
while t>>ere is still a municipal band
industn• left.
Two incidents occarred last week
Lhat may portend so..,e darn ti-mes.
ahead.
For the first tine In municipal)
bond hister� , so far as 1 cap tell, a
erage negotiated and competlt!ve
spreads have inverted -- gress un. '
derw-, Ur,9 spreads en c0rnp.cII111 v e ,
deals arc nc%v S 11.44 per S 1,000 1
pax v2l::c. cr ;,p:.red !th ne„ ouat.
ed spreads of $10, :0. BY earr,parl-
son. in 19M the average c=npct!-
tive spread -xas S14.0 , the
average n gotlatcd. 1523.62,
Negotiatcd spreads over the past
eight •rea. . or so have faller more
than 50%: more than one :financial
adviser told me Negotiated spread:
on deals he has acne are down
more than 7 0 ; and. in some cases,
more than 75 ;.
"I don't know how they :Wade any
money on that deal." has been ut-
tered�by more than one financial
adviser, of underwriters,
If you are an issuer, of course.
this comes as good news. The lower
the cost. the better.
Dark Clou.dv
But, If you're as underwriter, alas
astou-zdirq nears Is just another
sign that the business seer ns to be
nov!ng quickly toward self-de-
struction.
Thee axe a nual'iL. �•f v caavjja
for what %re :night call the inver-
slcn of the spread c,:r. e. One !s that
underwriters of competitive issues
are demanding some profit for the
risk they are taking on buying !s.
sues competitively.
.knothcr reaoon for the inverafen
is that underwriters of negotiated
deals are not demanding as much
profit in their underwritings, de-
spite the reportedly rnassive over.
head costs (including hours and
hours of bankers' time. political
contributions, and travel and en•
terta!nment expense) of negotiated
deals.
The burden of "guilt." if you can
tail it that, does not belong to any
one firm. Everyone is cutting
prices.
N
M
N
Monday, April 22, 1991 Now York, Now York IIA
QUARTERLY Statistics Supplement
Spreads
Conrinued front rage J.I
Industry has many firms chnsing
too few deals and so prices are rift
to gel a leg up on the competition,
she said.
Another fnctor In the drop In tic.
gollalcd spreads mentioned by
tnnrkel players Is politics, Ms. Ruth
said. The "Increased scrutiny of
spreads Is follower! by Incrcnscd
scrutiny of campaign contrlbu-
(Ions." site sold. "The Issuer is re-
luctant to nppcar to be 'giving
nwny' anything to anybody who
gives n campnign contribution."
For Issuers, the news of lighter
spreads means bargain prices
when they shop for underwriting
firms. For dealers. It means either
doing mare with less or Just getting
by.
"It's lough," said Mr. Clcmniccki
of Lehman Drolhers. "The Industry
cannot afford to have spreads Light-
en" any more.
A senior bond official with a
small New York -based dealer said.
"It's like K-Mart: Drop prices and
Just sell more.
"The spreads are not Just there.
Prnpic are cutting nvencend," lac
said. "They are not Just culling
bodies anymore, they arc also cul-
ling basic expenses like theater
tickrts, dinners. outings• and hm-
us. Wall Slrccl has mnnnged to gel
Itself close to bare brines."
Uudt-rbieldinf; Questioned
One dramatic change. Mr. Clem.
niecki observed, Is that Issuers ask
underwriters In rommll to a gross
underwrillog spread doring file
sycdicale selection process, even If
ihr bond enrol Is months away.
"Thr Issuer thinks he isgetting n
good deal If Ire is getting a light
spread," lie said. But if Elie deal is
priced In n market that would cut
Into n dealer's profit, file dealer Is
going to "make sure to price the
t�onds to sell," lie continued, add -
Ing that -[he underwriter makes
his sprcncd."
Elaine 1.nRochc, managing dircc-
for and mnnagcr of Morgan Slanicy
& Co.'% public finance department.
said. "I do recognize there are des-
perate attempts In the marketplace
to underbid and really win n price
of business through prier -culling.
But when the deal gels done. It nev-
er gels done at the original prier.
"Underwriters confuse market
share with profitability, and Issu.
ers tend to confuse market shnrc
with cmmpctence ❑s In honking and
distribution cnpabllltics." Ms.
taRochc said.
Carl M. Cincr, managing director
of public finance at First Boston.
said, "I don't think we did a single
First Roston also tallied [lie hlghcsl
volume In Texas, uncicrvrlling five
dcnis totaling 5479.6 million, for a
18.676 market share. Roth stairs
wercon the firm's lilt list. Mr. Clner
said.
In logo, the firm was ranked
third In underwriting, inking down
32 deals, totaling S7.7 billion for a
G.2% total market share.
Ms. Ruth of the 1'SA said caplur.
Ing more of the market Is a "slrate.
gv which may or may not pay off for
those firms. But It Is their right to do
11."
John li. Petersen. senior dirrclnr
of file Government Finance Offl-
ccrs Association. said he has not
seen or heard of any cases of low
underwriting spreads causing an
Market conditions, credit concerns, and sharp competition
helped pressure the average negotiated spread down to
$ 10.40 per $ 1,000 par value.
transaction for market shnrc."
To explain his flrm's strategy,
Mr. Cher said there are two things
going oil In the market.
lie noted Ihal• among the larger
firms. "Ihcre Is clearly a forus on
large transactions" In sell more
bonds and make more money.
"There Is also more competition
for file Iccy Issuers — the key Issit.
crs have the larger transacliuns."
he said. To win the issuers over,
firms will offer a "safe -sell busi.
ness" approach by which a firm
can sell itself to an Issuer by telling
the Issuer it has a back record of
lianlling n variety of band Issues.
Mr. hiller snId. ,we arc going af-
ler [lie ISSticrs that a•c con get file
most bang for Elie buck."
In lhr first quarter. for esnplr.
First tin -ton fni
igured most proml-
neatly in the Pennsylvania market,
where the firm underwrote two
deals totaling S381.3 mllllon,
claiming the top underwriting spot.
Issuer to pay higher yields.
Mr. Petersen noted that file con-
cerns over underwriting spreads
.ire shared by Issuer and under-
writer and "cicnriv rcnecl that we
arc on opposite sides of the market
when It comes to the pricing of n
product."
Ile said that while underwriters
nre under pressure to provide quill.
ly services for less Income, n reccs-
slon has put Issuers under the gun
to provide services with less reve-
nues. ns well as cut expenses.
Stingy underwriting spreads are
"a sign that excess capnclly hncl dc-
vcloped In (lie industry. It Is lhr be-
ginning of a new era of Wal-Mart
cumes to Will Slrccl," Mr. Petersen
added.
Goldman Sachs led the Slrccl
most noticeably In Callfornla,
where they won file largest compet-
itive dc3l In history — $1.3 billion
of California GO bonds, sold In the
first quarter.
Golrhnnr pushed aside Rank of
America, u:•hlch previously had an
Iron grip on the slate's major bond
sales and has a 33% share of file
Callfornla market.
Merrill Lynch ranked number
one In Michigan, underwriting two
deals Iota;ing $232.5 mllllon. n
28.1 % market share. Merrill
worked most frequently In file Call-
lornia seclor, doing seven deals to-
InIIng A574.6 mllllnn• n 12.5% mnr-
krl share. Goldman Sachs was the
only firm attend of Merrill In file
sec I or.
In 1990, Merrill Lynch was
ranked the lop senior manngrr.
pull ngdcx-.•n 2H4 dcnis for n total or
814.3 bill.on, 11.4% of the total
market. Goldman was ranked see.
on"
, with 243 deals totaling $13.8
billlon, on l I % market share, while
First Roston was third, with 913
deals Iola:ing $7.7 billion for a
6.2% mnrl,.cl share.
The toln: volume for last year was
5125 billicn. Competitive deals nc-
counted for 23.1 %of that, negntlal-
cd 75.9%.
"if these spreads start getting
lighter• yo.t have to pick up market
shnrc," Mr. Clcmnlcckl said, add-
Ing. "You ire going to find n few
major firms" who can survive on
tight spreads and make it on
volunic.
11 volun-c returns. he said, then
undervrit.ng spreads will widen.
On a Its% optimistic note. Ms.
LaRoche said, "Thr Industry Is go.
lug to have• to recognize that Ihr old
spreads ar•_ nnl comingback. And If
they ranr.ot manngc In this cnvl-
ronnnent, :ht•n maybe they should
not be In I he business.
"1{verybody Is waiting for Gotinl
In conic bark. 1'tnt have to adapt to
file prrsc:it realllics," site contin.
tied. "Everyenc Is still looking at
volume ll:Inking that volume Is go-
Ing to come back and ball them out:
That Is a false hope."
Interest Rate Trends. 1981.1991
18%
17 14 -- 30-Year AA Industrial — 30-Year Treasury — 20-Year Bond Index
16
15
1<
13r 1\1
12
11 A AA
10 ?
9 V
e
7 '
6
1901 1982 1993 1904 1985 1986 .1987 1988 1989 1990 1991
92- 234-1
11
Negotiated Spreap'-, Fall Below Those on Cony V
titive Underwritings
By JOHN J. DORAN and SEAN MON RAT
The steady downward spiral of
gross underwriting spreads
look a surprising turn In the
first quarter of this year: Pecs
earned on tax-exempt negotiated
bond sales. normally very lucra-
tive, plunged below those garnered
on their country cousins, confpctl-
live offerings.
Municipal market participants
said a combination of factors. In -
eluding market conditions, credit
concerns, and continued cutthroat
competition, pressured the average
negotiated spread to slip to $10.40
per $1.000 par vnlue during the
quarter, while the average spread
on a competitive offering wl�cncd
to S11.44, according to Securities
Data Co./Bond Buyer.
In 1990, underwriters captured
an average S 11.64 per bond on nc-
gollated issues and grossed S9.44
on competitive offerings.
As a result of the lighter spreads,
a number of firms, especially large
Wall Street firms, have started a
campaign to snare more (racket
share, targeting major bond Issu-
crs. Focusing on large -volume
transactions, the firms can proba-
bly make up some of the revenue
fround lost to smaller spreads.
owcvcr, this Is a tricky strategy
plat could also prove a bust - with
Salomon Brothers Inc., which left
the market In October 1987, the
most prominent example of failure.
Of the top 20 senior managers
ranked for the quarter, three firms
- Goldman Sachs & Co.. First Bos-
ton Corp., and Merrill Lynch & Co.
- led the pack. The three stepped
up to the new -Issue plate for a total
of 148 issues. totaling $10.1 billion,
snaring 34% or the market. The 17
other firms underwrote 4 1 % of the
bonds, totalling $12.3 billion, In a
quarter that saw 1,776 competitive
and negotiated offerings totaling
$29.84 billion.Ofall the deals. 71%
were negotiated, 29% competitive.
Goldrnnit Sachs Lends
Netting 52 Issues, Goldman
Sachs underwrote a higher par val-
ue of deals than any other firm In
the first quarter or 1991. It racked
up a whopping $5.3 billion In bond
deals, handily outdistancing First
Boston. which underwrote 32 deals
totaling $2.5 billion for the period.
Merrill Lynch came In a close
third, underwriting 64 deals for a
total of $2.3 billion during the pc-
rfod.
These same firms were ranked
the top three senior managers on
bond deals for all or 1990.
Also, all three firms dominated
underwriting In at least five states
apiece. Goldman Sachs ranked
among the top three senior manag-
crs for six out of the 10 top slate is-
suers In the first quarter of 1991.
First Boston and Merrill Lynch also
were In the lop three for five out of
10 of the lop issuers.
"Dealers are chasing the deals
trying to gel a market share." said
Stanley Clcmnicckl, executive vice
prcsldcnl and manager of Lehman
Urothcrs, which ranked fourth as a
senior manger for Life first quarter.
While overall underwriting
spreads on municipal bond deals
have been In a steady frcc•fall since
1982, there has always been a gen-
erally wide margin bclwccn ncgott-
atcd and competitive underwriting
spreads, with negotiated fees prov-
ing to be Icing on the revenue cake
for municipal dealers.
Perhaps an even morc startling
statistic for the first quarter was
(lie fees carved on general obllga-
lion bond Issues. In the first quar-
ter, the average negotiated spread
for a GO Peal edged down to $9.21
per bopd, wPlic life avcrssc spread
1982
GROSS SPREADS:1982-91
(dollars per $1,000 par value)
1983 1984 1905 1986 1987
1088
1969
1990
1991'
ALL MUNICIPALS
523.25
$21.42
$18.90
516.59
513.21
$12.50
511.88
$11.50
$11.10
51049
Negotiated
23.62
22.33
20.70
17.87
13.80
12.99
12 45
12.23
11.64
1040
23.85
22.55
20.74
17.83
13.81
13.20
12.50
12.32
11.76
10.77
_R7venue
General Obligation
19.86
19.93
21.16
18.13
14.15
12.05
12.16
11,62
11.11
9.21
Competitive
14.08
14.55
13.15
10.79
10.86
10.44
10.49
9.32
9.44
11.44
Revenue
13.97
16.42
14.57
12.55
11.79
11.42
11.63
9.62
11.49
10.67
General Obligation
18.83
13.33
12.47
9.85
10.43
9.94
9.97
9.17
8.41
11.00
Education
19.21
17.95
18.59
1508
13.67
12.22
11.56
11.19
11.85
11.46
_
Electric Power
21.02
20.66
20.2.4
1e.09
12.92
10.99
11.62
10.83
10.76
11.09
Environmental Facilities
19.20
19.97
14.93
12.78
11.57
11.44
9.97
12.77
12.27
6.66
Health Care
28.02
25.75
22A8
16.99
16.11
15.76
1'•.64
12.77
12.50
11.83
Housing
25.12
22.60
21.74
19.12
13.19
12.82
12.14
11.86
10.07
10.50
Industrial Development
21.20
23.35
18.28
16.33
12.06
13.93
14.95
13.92
12.90
11.07
Pubic Facilities
23.28
23.06
18.97
16.69
13.29
12,51
12.48
12.33
10.79
10.64
Transportation
22.90
19.99
18.56
15.65
12.86
11.25
10.94
10.60
10.46
9.09
Ulaities
22.92
21.97
19.67
18.37
14.41
13.51
12.74
11.93
12.03
10.07
Miscellaneous
21.07
18.20
15.71
14.49
12.18
11.19
10.96
10.44
9.66
9.56
Not 5. • 1991 bgua is la lest quote, orgy. Amounts represent doaaes per 51,000lace value of bond issues. Gross speads include manage,%' lees, i n-
dc w iing lees, evem9e takedowns, and expenses. Pnvate placements, shot term rotes mahang in 12 mantles er less, and renorketngs of vatoNeraIc
secumes see excluded, re m. - not meannglul. source. securities Data Co Aland dryer
Grm Spreads 1981-1991
25
A
-- Nccolialcd Issues
- lorg•Tcrm Municipals
Competitive Issues
� - -
on a competitive GO offering moved
up to $1 1.80 per bond. In 1990. the
negotiated spread was $11.11 per
bond, whllc competitive Issues
went for $8.41.
The average gross underwriting
spread, which Includes fees earned
on negotiated and competitive rcve-
nuc and GO bond sales. continual
to shrink, posting a mere $10.49
per bond. In 1990, the overall
spread per bond was 611.10 per
bond. a revenue rivulet when com-
pared with the S23.35 per bond
earned In 1982.
The gross underwriting spread.
which is the Income earned by a
dealer based upon the differences
In price paid to an Issuer for a new
Issue of bonds and the price of life
bonds sold to the public. comprises
four components: the management
fcc, the underwriting fee. expenses,
and the average takedown, which
Is the largest component of the
spread.
Market risk played the most Im-
portant role In the widening of com-
pcttllvc underwriting spreads, un-
derwriters and traders said. When
bidding for a competitive Issue In
volatllc markets, dealers usually
factor more spread Into their bid to
cover any potential problems in the
aflcrmarkct. So unitis a dealer Is
casting Its fate to th'c.wlnd by mak-
Ing a political old to curry favor
with an Issuer, most dealers ap-
proach a competitive deal with
caution.
Contpetilives' Pitfalls
"Spreads are real thin In the
competitive market, and It's really
haul to make money," said a senior
officer with a Wall Street firm.
"The basic rule of thumb Is that If
you make one mistake, it lakes five
or six deals to make up the loss."
An underwriter with a major sc-
curlllcs firm said. "You really have
to be careful with competitive un-
dcnvriUng. The Street can take a
real shellacking when deals get
priced at the lop of the market.
which happened last nlonitn."
Christopher R. Ilovich, vice presl-
dcnl and manager of municipal
trading with Chase Municipal Sc-
curlllcs Inc.. said troubling mar-
kcls In mld•Fcbruary and the
month of March forced dealers to
buttress their bids against the vola-
tility when making competitive
bids.
While noting that the gross
spread on negotiated offerings has
been declining for some time, Mr.
Bovlch said he fell they had "loos-
cncd up a bll"during the first quar-
lcr. He attributed this to dealers
and Issuers feeling somewhat more
comfortable, and llcxlblc, during
the first quarter because the Fetter-
al 12cscrvc moved to case credit and
there was a lower Interest role en•
vir3nmcnt.
"Underwriters arc stepping up
and working for less," he said. "1
think people arc willing to work for
less If they llnlnk the environment
Is one they want to be long In. If the
market is shaky, they put more
spread In."
L•'ycing the most lucrative portion
of life spread, Mr. Uovlch said he
was rchevcd to sec that the average
underwriter's takedown un a deal
had remained stable, still hovering
between Y. and one point (luring
the first quarter.
Heather Rulh, president of the
Public Securities Assoclallnn.,said.
"It doesn't make any sense how low
the spreads are. In lift competitive
sector. people have more of a
clfolcc, they slay constant.
"The significance Is that negotl-
alcdspreads ought to be higher be-
cause the fcc% pay for things that
you don't gel from competitive bid-
ding, such as computer runs and
Information meetings."
Ms. Ruth sa11i municipal market
pai-llclpanls said they sec two ma-
jor reasons for the decline In ncgotl-
nlcd spreads. Overcapacity In the
I'lrodt 1 urn to SPREADS Pogw• !/A
32-/2 92_ 234a1