Declining interest rates, coupled with strong demand from cash-laden investors, pushed average gross underwriting spreads on long-term competitive bond offerings down by more than $1.00 during the first nine months of 1993.
Spreads on negotiated deals also declined but at a slower rate, according to Securities Data Co.
The average gross underwriting spread for a competitive offering during the first nine months of the year was $7.55 per $1,000 par value, down from $9.02 at the end of 1992. Spreads on negotiated issues fell to $8.39 from $9.34.
Due to favorable conditions and the continuing downward trend of interest rates, underwriters perceive the market as less risky and they are willing to work for reduced spreads, several dealers said.
"In a competitive [bidding] environment, you have to put your best foot forward in the dark," one municipal dealer said, explaining the larger decline in spreads on competitive issues. On negotiated offerings, however, underwriters are working more closely with issuers and can often persuade them to part with a slightly higher spread, the dealer said.
In addition, when competitive syndicates receive a large order for bonds, they are more willing to cut spreads to increase their chances of winning a deal, one underwriter said.
Competitive issuance totaled $40.54 billion during the first nine months of 1993, compared with $179.58-billion of negotiated volume.
The average gross spread for all underwritings was $8.29 per $1,000-par value, down from $9.30 at the end of 1992.
The gross underwriting spread earned by a dealer is the difference between the price paid to an issuer for bonds and the price the public pays for the securities. Usually, the spread is comprised of four sources of revenue: the management fee, the underwriting fee, expense payments, and the average takedown, which is the largest component of the spread.
During the past nine months, "there's been a better market environment and more competition in the marketplace," one underwriter said. "There's more competition among underwriters to procure deals, and in a less risky environment, the place you can be more competitive is in spreads."
Spreads on refunding issues fell more than those on new-money deals. Refunding spreads declined by $1.03, to $8.08 per bond, during the first nine months of the year, compared with a 66 cent decrease on new-money deals to $8.90.
One underwriter attributed the larger drop in refunding spreads to the dominance of refundings in the bulk of issuance this year.
Issuers sold $147.5 billion of debt in the first nine months of the year. New-money deals totaled about one half of that, or $74.16 billion.
The largest decline among underwriting spreads was seen on public facilities issues. Spreads there declined by $2.11, to $8.32 per bond from $10.43 at the end of 1992.
Spreads rose slightly on only two types of financings: housing and industrial development bond issues, according to Securities Data.
Housing spreads increased by a modest nine cents to $9.31, while spreads on industrial development issues edged up 50 cents to $12.28. Industrial development bond spreads remain the highest among the 10 sectors examined by Securities Data.
Housing and industrial development bond issues tend to be among the weaker municipal credits, several dealers said. As a result, underwriters are able to ask for -- and command -- higher gross spreads.
"Housing bonds are less responsive to interest rate changes, so underwriters feel they need more protection" against the risk of purchasing such issues, one dealer said.
In addition, housing bond financings can be more complex than other types of issues, and fewer underwriters have expertise in this area. Both factors can lead to increased underwriting expenses, one underwriter said. "They're not cookie cutter deals," he said.
