Competitive Muni

Competitive Muni Sales Still Have a Place Among Rising Negotiated Sales

CARLSBAD, Calif. Despite the growing dominance of negotiated bond sales over competitive transactions, there is room for both types of sales in the primary municipal bond market, according to panelists at The Bond Buyer’s 15th Annual California Public Finance Conference here.

The share of negotiated sales, when an issuer hires an underwriter to sell its bonds for a fee, has been steadily rising from 72% of total issuance in 1995 to 81% in the first eight months of the year, and looks set to continue on that pace.

But the trend has raised concerns about over-reliance on negotiated underwriting, as some market participants argue that issuers get a better deal when underwriters bid against each other in a competitive sale.

When markets are efficient, as they are for most bonds sold in California, especially insured bonds, for example, a competitive sale offers absolute price transparency and ensures absolute integrity and accountability in the pricing process, David Leifer, vice president at Kelling Northcross & Nobriga, a financial advisory firm, told the conference Wednesday.

According to conventional wisdom, well-known issuers, which frequently sell average-sized deals, are better served by the competitive market, but large transactions with a complicated structure or a new credit are more likely to benefit from a negotiated sale.

Terry Matsumoto, executive finance officer and treasurer at the Los Angeles County Metropolitan Transportation Authority, told the audience that the authority tends to follow the conventional wisdom.

When it’s a new credit, negotiated is the way to go. As the credit matured, we ran a period of competitive deals, Matsumoto said.

Nevertheless, competitive sales comprise only one-third of the $9 billion of debt the authority sold since 1996.

Matsumoto said negotiated was the right method when it recently came to market with a $264.9 million capital grant receipts revenue bond offering because it was a relatively new credit structure that relied on securitizing a federal grant pledge. The negotiated sale also allowed it flexibility in structuring the deal.

Although acknowledging the role of negotiated sales in marketing new credits and structures, Leifer said many deals that once were considered novel, such as certificates of participation or lease-backed bond offerings, no longer need to be brought to market through negotiated underwriting. He argued that refundings and large deals can be sold in the competitive market as well.

Of course, negotiated underwriting has an important place in our market however, we need to see a shift in the bias towards greater use of competitive sales, Leifer said. In fact, it’s essential not only to issuers but to ensure the integrity of the industry in itself.

He said imbalance between competitive and negotiated deals could invite regulator scrutiny and lead to over-regulation.

Tony Hughes, managing director at Citigroup Global Markets Inc., agreed that refundings or tax anticipation revenue notes are not that esoteric to warrant a negotiated sale, but argued that negotiated transactions offer better value than competitive offerings.

If managed properly, a negotiated sale will always deliver a good result and often beat a competitive sale regardless of size, structure and market volatility, credit risk, or frequency of issuance, Hughes said.

Reid Smith, senior portfolio manager at Vanguard Investments, who manages more than $13 billion in assets, said it doesn’t matter whether he buys the bonds in the competitive or negotiated market as long as they offer the highest possible yield.

What I want to see is cheap bonds, Smith said, adding that the other two factors for buying bonds are structure and execution.

He said competitive deals offer better execution because the buyer knows how many bonds he owns on the day of the sale, while allotments take longer during a negotiated sale, making it hard to hedge the risk. But negotiated sales provide better structure because of an extensive pre-marketing period. He said issuers selling bonds competitively have to take on marketing responsibilities themselves and constantly stay in touch with investors, citing Florida as a good example.