"Road shows" mounted by municipal bond issuers leave a lot to be desired, according to a portfolio manager at the Putnam Cos.
"Most of them are like presidential debates: They tend to reinforce existing opinions." Triet Nguyen, a senior vice president at the firm, told a gathering of public finance professionals on Thursday. He spoke as part of a panel on investors relations at the Bond Buyer's Municipal Finance Conference at the Crowne Plaza Hotel in New York City.
Institutional investors, Nguyen said, gain little information at most investor meetings, which are set up to draw attention to upcoming bond sales.
The meetings usually feature investment bankers and issuer representatives, some of them from finance and some in elected office, who talk about the issuer and pending bond sale. But too often, the portfolio manager said, there are no experts present with the detailed knowledge necessary to address specific investor questions and concerns.
Several panelists defended their efforts at investor relations, but Nguyen's comments struck a chord with at least one issuer.
"He's putting his finger on an important part of the market," said Jeffrey S. Green, general counsel for the Port Authority of New York and New Jersey, when told of Nguyen's remarks. "Secondary market disclosure really needs to focus on the information that people are interested in receiving."
The Port Authority has been cited by the National Federation of Municipal Analysts as one issuer that has stepped up and improved disclosure policies.
Nguyen singled out the last few investor meetings conducted by New York City. The city and investment banking officials in attendance have been unable to answer questions he raises about labor issues, he said.
"Time and time again, the bankers have failed to produce anyone who can speak to the questions with any degree of credibility," Nguyen said.
Michael Geffrard, director of the city's Office of Public Finance, took issue with Nguyen's statements.
"I don't understand," said Geffrard, who learned of Nguyen's comments on Friday. "Putnam is one of the firms that we talk to quite regularly, but up to this point we haven't heard directly from them that we haven't answered any questions."
He added, "We have a very aggressive program of outreach to investors. We like to believe that we are particularly responsive to institutional investors, especially if they are as important as Putnam."
The city's public finance executive said the city spends a portion of each investor meeting discussing labor issues, such as the number of city employees and the status of labor contracts and negotiations.
James Hanley, the city's labor commissioner, has participated in some investor meetings held in New York City. While he has not traveled to speak with investors in other cities, he is always available by telephone, Geffrard said.
While most issuers seem to view investor meetings as an important component of marketing a new issue, "it would help if they went in knowing investors' mindsets" and the type of questions they are likely to ask, Nguyen said. In addition, issuers should make an effort to provide ongoing disclosure and financial information to investors after a bond issue is sold, he added.
"It does not stop with the new-issue road show. Believe me, it does have an impact on your cost of capital as a muni issuer," Nguyen said.
To illustrate, Nguyen gave a fictitious example of a bond fund that purchased about $5 million of hospital bonds. Then the issuer begins to have financial problems, and the investment bankers are told not to release any financial information to investors. This is because the hospital wants to avoid the appearance that some investors are trading on inside information, the portfolio manager added.
However, once the bondholder can't get any information about his securities, he decides to sell the bonds, Nguyen continued. A trader, because he is uncertain about the hospital's problems, offers the investor a low price for the bonds, about 100 basis points too cheap, just to be on the safe side, Nguyen said.
Then the bondholder panics and trades the bonds at a price 50 basis points too cheap. As a result, the issuer's cost of capital has increased by 50 basis points because the investor will not want to pay a higher price for the bonds, which could actually be what the bonds are worth, the next time the issuer comes to market, Nguyen explained.
The Putnam portfolio manager cited Massachusetts and the Massachusetts Water Resources Authority as examples of issuers whose investor relations programs bear results.
The two issuers, which were represented on the panel, have made efforts to identify key buyers and analysts as well as the concerns of both groups, Nguyen said.
"Constant contact with the investor can certainly help him to put things into perspective," he said. "The market hates uncertainty and surprises. When it senses uncertainty, it will impose a penalty."
Nguyen suggested that issuers conduct follow-up meetings with buy-side analysts and portfolio managers to ensure that their concerns are being addressed. "The key is to avoid hitting them when you want to take their money."
Ongoing investor meetings could help reduce the yield on New York City bonds, the portfolio manager said.
Nguyen noted that between bond sales, investors often get information about New York City and its finances through the news media.
"We're not seeing an awful lot from the city," he said. "A lot of positives are not getting out. We do need some person from the city to put that all into perspective. New York City is not one of the best trading names out there for a reason. "
But while Nguyen was skeptical about the quality of investor relations efforts, other panelists said such efforts are paying off.
Offering a case study, Robert Jackman, senior managing director at Bear, Stearns & Co., told conferees that the firm was asked by Illinois to find out why certain state sales tax revenue bonds were performing badly in the market.
Bear Stearns surveyed bondholders and other institutional investors, using the results to set up an investor relations programs that erased some of the confusion about the bonds, including questions about volatility of sales tax revenue.
"We took results and set up a road show to explain all the various misconceptions [and to make clear] that we were ready, willing, and able to answer all questions," Jackman said. "We were highly successful. It culminated in bringing in new buyers both for the primary deal and the secondary market, thus generating savings.
"Success in the secondary market doesn't necessarily go to the firm with the most capital or to the firm with the most aggressive bidding. Success in the long run goes to those firms that provide the best information."
Another panelist, Massachusetts Treasurer Joseph Malone, said his state is moving aggressively to shore up investor confidence. "We're not sitting back and saying, economically, isn't it terrible that it's raining? Instead we're saying, how do we build an ark in order to get through these rainy days?
"We've taken the initial steps of holding the kind of meetings that will allow the governor, lieutenant governor, and myself to meet with investors in New York and Boston, and to be on a conference call with investors in Los Angeles and Chicago," Malone said. "In addition, we are now issuing quarterly reports. We give good news and the bad news, when there is bad news.
"We have some people we think are forthright in our office and are willing to answer all the tough questions you have."
The Massachusetts Water Resources Authority, which has been at the vanguard of secondary market disclosure, is exploring setting up an electronic bulletin board to get information rapidly to investors on a real-time basis, said panelist Philip Shapiro, its chief financial officer.
The authority, often cited as one of the first issuers to state its commitment to ongoing disclosure in its bond offering statements, frequently holds one-on-one and group investor meetings. conducts tours of its facilities, issues quarterly reports, and answers all investor inquiries.
In what Shapiro dubbed the "roll your own bond" initiative, he said the authority may "allow investors to work with us on the time of defeasance of debt that might best meet their own needs."
