Although issuers and institutional investors at last week's public finance conference often had similar views on the roles of financial advisers, there was less agreement on the topic of bond designation policies.
Most issuers tended to favor the practice of group net designation. But buyers said they prefer a net direct designation, which gives them an opportunity to determine how some profits from a bond issue will be distributed.
Generally, under group net designation, issuers determine how underwriters' commissions or the profits from a bond deal will be distributed. Buyers usually prefer group net designation because it gives them an opportunity to compensate firms which continually provide them with services.
"The buyer has something to say because he does buy the bonds," said Bernard Schorer of Franklin Advisors at the conference, which was sponsored by Grigsby Brandford & Co.
"It is up to the buyer to see where some of the money goes," Schorer said.
"It's hard to purchase an issue and give money to firms you don't know," said David Johnson, a portfolio manager at Van Kampen Merritt.
Instead, said Johnson, bond deals should be set up in two portions -- one with a designation policy, and one without.
Several buyers and issuers pointed out that while group net designation now is generally believed to ensure that minority-owned and women-owned firms receive bonds. the process was originally established to ensure that small, regional underwriters would get bonds when working with major Wall Street firms.
"I think group net is really the fairest way to go for the issuer to provide compensation for the people who do the financing," said Tom Friery, treasurer of Sacramento.
When a bond deal does not do well, underwriters generally want to take only as many bonds as they were allocated based on their status in the underwriting syndicate, Friery said. When a deal performs well, therefore, underwriters should not expect to receive additional bonds, Friery said.
At one time, Sacramento did allocate bonds based on a net direct system. The city halted the practice after a minority-owned firm pointed out that it had received orders from buyers but was unable to fill them because it did not get any bonds from the transaction.
In some instances under the net direct allocation process, minority-owned and women-owned firms or smaller firms often received bonds from the slowest moving part of the deal. Then, they would be criticized when they were unable to sell the bonds, Friery added.
