As municipal bond issuance continues to fire on all cylinders, issuers and underwriters are confronting an increasingly important crossroad: Which debt structuring software is best?
The question has enormous significance for issuers because efficient debt structuring can save the borrower big money. To underwriters, a speedy and versatile computer program can eliminate precious hours of turnaround time when deals are being rushed to market, not to mention the labor involved in processing the myraid documents.
Goldman Sachs & Co. -- currently the lead underwriter with 12.2% of the entire market, or $6 billion in the first quarter of 1992 -- is betting that a new product from DuBois, Brown & Co. can handle the task.
DBC's software has been used for pricing more than $50 billion of municipal revenue bonds, but until recently the firm operated primarily through its DBC Student Loan and DBC Housing products, and it stuck to those niches of the tax-exempt market.
The latest such product, DBC Finance, is capable of structuring all kinds of municipal debt issues. And Goldman Sachs says it's here to stay.
"Over the years, [DBC] has gained a reputation for being very customer service-oriented," said Michael Borys, vice president of the technical analysis division at Goldman, Sachs & Co. "A firm can call them the day before a financing plan is due, and they will do all they can to provide you with all reasonable services."
One of Mr. Borys's duties is to oversee the actual debt structuring performance, and DBC assists this function, as well. "I am responsible for reviewing other people's work," he said. "A standardized product makes the collection and interpretation of information much easier."
Micro-Muni: Market Share
DBC Finance, however, is not operating in a vacuum. Financial Management Systems Inc., a Washington state-based company, has been providing debt-structuring and information-gathering technology to the municipal bond marketplace for 12 years. The firm's major product, Micro-Muni, has been considered the industry standard -- that is, until DBC Finance.
Samuel J. Bisignano, president of Financial Management Systems, declined to discuss DBC's inroads into the business, but he maintained that Micro-Muni has a huge market share advantage and has helped structure "hundreds of billions" of municipal bonds.
"Other systems have come and gone in the 10 years since we have been producing Micro-Muni," Mr. Bisignano said. "We have had some customers -- Lehman Brothers, for example -- for many years."
But market testimony varies. Robert W. Doty, president of American Governmental Financial Services, a financial adviser based in Sacramento, Calif., said DBC Finance supersedes Micro-Muni.
Micro-Muni "was really a hell of a good system at one time," Mr. Doty said. "It still does a decent job, but the capabilities that a system like DBC makes available are staggering.
"There are two things that make DBC so superior: the adaptability of the system; and the service they provide their customers," he added.
Mr. Doty recounted that when he first weighed which of the two systems to buy, he found DBC was simply hungrier.
"I think I called both companies the day before a long weekend," he said. "I didn't hear from Micro-Muni until Tuesday, and I got a call from DBC over the weekend."
Lawrence Sisung, Sr., president of Louisiana-based Sisung Securities Corp., said he has used DBC Finance to structure from $400 million to $500 million in municipal debt.
DBC "has created a user-friendly system that has enhanced our ability to create an excellent package for issuers," Mr. Sisung said.
"Many times, we have used DBC Finance to check the work of other systems."
DBC Finance's reputation is building based on a host of functions the system performs. It efficiently processes all basic debt-service functions, redemption calculations, bond pricing solutions, issue sizing, and refunding analysis, according to market sources.
But the very size of the computer program, and the ambitious nature of the undertaking, made it necessary to test DBC Finance for three years before the product was ready.
DuBois, Brown & Co. was founded by John DuBois and Cipora Brown in 1980. Together, the two have more than forty years of experience in the municipal finance industry.
Ms. Brown, formerly an investment banker, advises officials at state and local housing, hospital, and student loan authorities on the best way to structure their revenue bond sales.
Mr. DuBois, a computer programmer and systems designer since 1974, specializes in the development of financial applications for the structuring of revenue bond issues. He also oversees the technical staff and all software development efforts.
In addition, he said that in 1984 he designed one of the first commercially available mortgage revenue bond software systems.
Currently, DBC has 12 computer and financial specialists, but that figure could rise as further technical advances are made, according to Ava Aronstam, company spokeswoman.
DBC Finance is a menu-driven, information collecting software program with several specific functions, including:
* Computation of debt service requirements for one or more issues at a time.
* Identification of the maturities within each issue that are candidates for refunding.
* Delineation of options for the refunding escrow accounts.
* Performance of transferred proceeds calculations.
* Construction of the most intricate types of bond structures.
* Support for multi-project finance analyses.
Because of the menu-driven nature of the system, there is little training required, something that Mr. DuBois believes gives the DBC system the edge over competitors.
A menu-driven system allows the first-time user to see all the options a program offers and how to use them more efficiently.
"The objective of the system is to create a smooth, more fluid transition that allows for a quick response to newer, more complex financings," Mr. DuBois said. "The ideal feature to the system is that no matter how complex the financing may be, the system does not slow down."
There are four optional programs available to customers of DBC Finance and one standard module that is basic to the system.
The core module of the system is called "Debt/Size" and can handle all the basic debt structuring tasks. It computes all basic bond math functions and debt service schedules; structures bond issues with overlapping maturities and multiple purposes; allows the user to establish criteria for calling bonds; and is able to compute true interest cost and net interest cost calculations -- all the while generating separate reports for the issuer, investor, and corporate accounts.
Spiffy New Options
The first optional module offered by the system is dubbed "Monitor."
Monitor is an analytical tool allowing the customer to run recurring market-based evaluations of bonds that meet client's savings criteria for a refunding. It also produces reports of potential bond refunding candidates, will maintain market interest-rate tables, and will evaluate refunding candidates from entire issues or any combination of issues and maturities.
The second option, "Refund," allows refundings to be described independently; calculates transferred proceeds for bonds that have been described as previous refunding issues; evaluates multiple refundings and new money transactions; creates structures to achieve up-front or proportional savings; and provides for compliance with escrowed "SLUG" and Open Market accounts.
The third module, "Project Finance," performs multi-project finance analyses; outlines revolving-fund and pooled-loan analyses; and minutely dissects cash flows.
The final option, "Reports," produces summaries of different statistics, including: sources and user statements, debt service schedules, pricing, yield data, documentation of arbitrage yield, accretion tables, refunding candidates prioritized by savings, and full refunding presentations.
DBC Finance operates on IBM-compatible computers, and the firm recommends systems based on Intel Corp.'s 80386 or 80486 microprocessor for best performance. Extended memory of 4 to 8 megabytes and a math co-processor are also required.
Allen Chan, DBC's programmer, said that when the original concept for DBC Finance was presented to him, he believed that the best way to design the program would be in using "C++" programming language.
The C++ language is an expansive new medium that financial programmers are using to create nearly infinite options. It is considered by many in the industry to be the most user-friendly and adaptable languages for financial software available.
"C++ is the Rolls-Royce of computer programming," Mr. Chan said. "It allows for an amazing degree of flexibility."
Although a Rolls-Royce -- and DBC Finance -- can be a very expensive set of wheels, Mr. Doty of American Governmental said the continuous upgrades make DBC's higher sticker price worthwhile.
"The cost of the system is slightly higher than other systems," Mr. Doty said. "But when you consider that they are constantly updating the program, it winds up being very affordable."
Ms. Aronstam said there are different pricing structures available to DBC's clients, depending on the issuer's size. For a standard corporate contract, however, the Monitor function costs $6,000, Debt/Size runs $6,500, and Refund costs $7,500.
Micro-Muni's recently advertised prices run from $5,500 for the firm's "Bidding" system, $6,000 for it's "Debt" system, and $6,500 for "Sizing."
Mr. Borys of Goldman Sachs echoed the sentiment, saying that although the initial set-up of DBC's intricate system may be expensive and time-consuming, in the long run it allows employees to use their time more efficiently.
On the other hand, Mr. Doty noted, issuers with no need for complex financial solutions should remain with a simpler system.
Officials wanting the luxury of the easiest way to plot financings, at the same time, and the waxed and polished look DBC Finance gives documents, will find it hard to resist, he said.
"Alternate fonts, varied pitches, and the ability to highlight certain items within your proposals can create a classier looking document and also point out to people the differences in certain debt structures," Mr. Doty said.
Although DBC Finance now appears to be on its way, Mr. Chan said the road to market was riddled with potholes that slowed down the process significantly.
"What started out being a proposal that we hoped would develop in a year, turned into a three-year process," Mr. Chan said. "But we have advanced the technology to such a point now that the system should remain applicable for at least the next five years."
Mr. Chan is now pursuing a version of DBC Finance compatible with Microsoft Corp.'s Windows graphical user interface, an increasingly popular, user- friendly operating environment that many computer industry observers see as the wave of the future.
In addition to making access to all the system's functions easier -- through the use of a mouse-driven interface similar to that used on Apple Corp.'s Macintosh line of computers -- the Windows version would make DBC Finance compatible with a host of other computer programs, including word processing, presentation software, and spreadsheet applications.
Mr. Chan said that compared with the initial creation of DBC Finance, developing the Windows version has been more of a natural progression than a separate creation.
Mr. DuBois said that he expected the Windows version to be available by the end of 1992.