Although the average gross underwriting spread earned on long-term tax-exempt bond deals retained its penurious character during the first nine months of 1991, municipal bond dealers said money can still be made in the business.

The average gross underwriting spread was $10.56 per $1,000 par value, down from $10.77 per bond notched at the halfway point of this year, but slightly higher than the $10.49 garned per bond during the first quarter, according to Securities Data Co./Bond Buyer.

For all of 1990, the gross underwriting spread was $11.10 per bond.

But while dealers say they still feel the pinch of slim profit margins, they also say there has been a change for the better in the municipal market. The industry has been steered in this direction by burgeoning bond volume, very healthy investor appetite for municipal bonds, lower interest rates, and a stable bond market, they noted.

"The municipal market is just beginning to blossom," said Christopher R. Bovich, a bond trader and manager of Prager McCarthy & Lewis's New York office. The strong demand for bonds is being spurred by "the appetite of open-end funds" and investors seeking shelter from burdensome state and local tax rates.

Harry Larson, president of First Chicago Capital Markets Inc., said it appears dealers are doing better because of "the stability of the market and the ability to distribute bonds: stability allows for the orderly distribution of bonds." In volatile markets, many dealers will pare the underwriting spread to price an offering to sell as quickly as possible.

Municipal bond dealers also are making money by branching out to provide other services to issuers.

Frank C. Paul, a senior vice president and head of public finance at Rodman & Renshaw Inc. in Chicago, said, "We are going after other kinds of public business, such as asset management and bond reinvestment."

The pursuit of other sources of income is in part driven by the precipitous drop in underwriting spreads since the mid-1980s. In 1983, spreads fell to $21.42 per bond from $23.25 per bond the year before.

Since then, a host of factors, including competition, shrinking bond volume, and changes in the tax law, shrank underwriting spreads.

The gross underwriting spread, which is the income earned by a dealer based upon the difference in price paid to an issuer for a new issue of bonds and the price of the bonds sold to the public, usually has four sources of revenue: the management fee, the underwriting fee, expenses, and the average takedown, which is the largest component of the spread.

Management fees and expenses have been whittled away over the last 10 years to almost inconsequential levels. But it has only been in the last few years that managers have nibbled away at the takedown, which includes an underwriter's concession.

To please an issuer, some book-running senior managers are lowering issuance costs by dropping the concession, which is a discount on the purchase of bonds offered to members of a deal's managers or selling group.

This trend, however, may be ameliorated by the increased bond volume that has been recorded so far this year.

Indeed, volume has made a dramatic comeback, lifting dealers' spirits as well as their ledgers. During the first nine months of 1990, bond volume totaled about $95 billion. For the first nine months of 1991, volume has shot up to $119 billion.

The market saw 73%, or $86.82 billion, of the deals come through negotiated sale, and 26%, or $30.62 billion, offered through competitive auction. The average gross underwriting spread on a negotiated bond deal was $10.66 per bond, while the average spread on a competitive deal was $9.62 per bond.

During the first six months of this year, the underwriting spread on a negotiated bond sale was $10.77 per bond, while dealers made about $10.51 per bonds sold competitively.

During the first quarter, dealers were surprised to see competitive spreads widen to $11.44 per bond, and $10.40 per bond on a negotiated sale. In 1990, the spread earned on a negotiated deal was $11.64 and the underwriting spread on a competitive deal was $9.44. In 1982, a negotiated deal earned an average of $23.62 per bond and on a competitive deal the average spread was $14.08 per bond.

While heated competition among dealers continues to dominate the negotiated bond market, "with volume people bid reasonably," said John B. Feery, a first vice in Prudential Securities Inc.

Mr. Paul of Rodman & Renshaw said, "I am finding competitive spreads are very similar to negotiated spreads.

A number of regional firms, as well as some larger firms with retail outlets, target small and medium-sized bond deals because the underwriting spreads tend to be slightly wider than on large deals, underwriters said.

Noting his firm's strategy, Mr. Paul said, "We target the middle market," which has bond deals ranging in size from $2 million to $25 million. This market has opened up even more for regional dealers because bigger firms have retrenched and "they have focused on volume and volume does not equal profitability."

For those municipal securities firms that have endured the choppy market waters that have defined the industry of the last few years, the latest statistics evidence a respite.

A tremendous leap of faith may have been required to stay in an industry that some predicted in 1987 -- the beginning of a major retrenchment -- might not be around for much longer. The hardiness needed to wait it out may be best illustrated in the comments of a veteran public finance banker from a firm in the Midwest. He admitted that he will not hire a recently interviewed job prospect, who is highly qualified for the post, because "the guy asked if the industry will last, if there is a future."

The banker went on to say, "In order to be in it, you have to believe. It is tough; it is not easy.

"I cannot sit here and send out direct mail and wait for the phone to ring," he continued. "If you do basic blocking and tackling, calling on mayors and developers and major finance agencies, and you put in 8 to 10 hours a day, you will make money."

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