LOS ANGELES -- A targeted business enterprise in Irvine, Calif., owned by a disabled veteran recently became the third such firm to be invited to participate in underwriting selling groups by the state treasurer's office.
The firm, Great Pacific Securities Inc., qualified for participation after it received a stand-alone broker-dealer license from the National Association of Securities Dealers. The firm has been in business for two years in California, with previous municipal transactions being cleared through a NASD firm in Colorado.
Only six businesses owned by disabled veterans are registered with the California treasurer as targeted business enterprises -- four underwriting firms and two law firms. A targeted business enterprise is defined as majority-owned by a member of a minority group, a woman, or a disabled veteran.
Great Pacific Securities has been registered as a targeted business enterprise since 1991, and its expansion into municipal underwriting brings to light a category of targeted business enterprise with a low profile in California public finance -- disabled veterans.
The other two disabled veteran-owned firms in the state selling group are Roberts & Ryan Investment Inc. of San Francisco and Johnson, McKenney & Carr Securities of Los Alamitos. Johnson McKenney also is a minority business enterprise firm.
All three firms have been invited to be in a selling group handling a $322 million California State Public Works Board lease revenue refunding for various University of California projects, said state assistant treasurer Hal Geiogue.
Roberts & Ryan and Johnson McKenney have each participated in six selling groups for California transactionss since Kathleen Brown became treasurer.
Assist in Distribution
Selling groups are often used by the treasurer's office to assist in the distribution of California bonds when the size of a financing exceeds $100 million.
Such groups are not to be confused with underwriter pools for state negotiated offerings, which consist of book-running managers and co-managers chosen for their ability to assume liability for purchasing and reoffering state bonds for sale to the public.
By joining the NASD and the Municipal Securities Rulemaking Board, Great Pacific Securities is signaling its intention to expand its tax-exempt business, said Bob Yaap, 46, president and owner of the firm.
As part of the expansion, in June, Great Pacific Securities opened a municipal department headed by 13-year industry veteran Gary Grant, 42, who was named managing director.
Grant most recently was senior institutional trader for Sutro & Co. in San Francisco and previously worked nine years for Seattle-Northwest Securities Corp. in Seattle.
Grant said the firm will be "issuer-driven" but has not yet picked a niche in terms of municipal transaction specialization. "Our first goal is higher visibility and getting to know issuers," he said. "We will pick specific niches later."
Last December, the firm co-managed a $75 million issue of Chula Vista industrial development revenue bonds for San Diego Gas & Electric Co.
None of the disabled veteran firms have been chosen as underwriter book-running managers andco-managers for state negotiated s
offerings and financing authority deals. These underwriting pools were formed in March 1992 by the treasurer's office.
The book-running and co-manager underwriting pools contain 47 firms divided among four pools: one to handle Public Works Board and other state agency issues, and three pools for financing authorities. These pools currently contain 10 minority-owned businesses and nine women-owned businesses.
Great Pacific Securities and Roberts & Ryan applied for the pools but they were rejected. At the time of its application, Great Pacific Securities did not have a stand-alone broker-dealer license. Roberts & Ryan was insufficiently capitalized, Geiogue indicated, although the seven-year-old firm was a co-manager in 1991 on five state issues before the pools were formed.
Roberts & Ryan "was technically qualified," Geiogue acknowledged. But, he said, "It was too small in [capitalization] to take a liability risk [required of co-managers] in the pool."
Great Pacific Securities and Roberts & Ryan plan to apply again when the next pools are selected. Geiogue said the current pools will expire at the end of this year. The state will solicit requests for qualifications, asking underwriting firms to bid for positions for the next two-year period.
"We will probably change the pools to some degree," Geiogue said. He said Great Pacific Securities "would be given a chance to compete [for a co-manager slot], but nobody has made any promises."
Yaap confirmed that "we want to be part of a co-manager group" for state financings. "That is our goal because you have more control than in the selling group," he said. "Being a part of a selling group is better than nothing but our ultimate objective is to be a co-manager."
Yaap noted Great Pacific Securities' inclusion in the selling groups is based on legislation signed by former Gov. George Deukmejian in August 1989. The measure, authored by Sen. Ralph C. Dills, D-Gardena, added disabled veteran businesses to the list of targeted business enterprises that the state is encouraged to include in State underwriting business.
California law targets 15% participation by minority firms, 5% by women, and 3% by disabled veterans in state-negotiated issues. The women and minority goal was set in 1988 legislation.
The 3% goal for disabled veteran firms is not expected to be achieved in the short term, Geiogue said. "Three percent is a huge amount of money compared to the volume of bonds we sell," he explained. "If we sell $1 billion of public works bonds a year, 3%% of $1 billion is $30 million. That's a lot of bucks and liability to these small firms.
"Our intent is to comply with the law to the degree that it is feasible," Geiogue said. Rather than elevate the disabled veteran firms to the co-manager slots, which brings liability risk, "we have to put them in selling groups," he said.
"When we [began forming] pools two years ago we were aware these firms were not ready to take this liability," Geiogue said. "Putting them in selling groups is a much more realistic approach."
The compromise apparently works because underwriters in the senior-managing slots are monitored to assure they allocate bonds to selling group firms.
Geiogue said he tells selling group members, "'You put in a good order and we will do our best to fill it.' But disabled veteran groups can't do 3% of $1 billion."
However, for the goal of 15% minority and 5% women participation, the state "has exceeded both those amounts," Geiogue said.
John K. Lopez, chairman of the nonprofit Association for Service Disabled Veterans based in Stanford, said the group helped write the Dills legislation that created the 3% goal for disabled veterans firms.
Lopez said legislation being prepared for introduction in the U.S. Congress will require every state to provide economic participation for service-disabled veterans who operate their own businesses.
As a result, Lopez predicted, the 3% guideline for California "will become a moot issue because the federal legislation will tell states to make maximum efforts to assist such firms." States that do not follow the proposed federal guidelines would suffer unspecified penalties, he said.
Brad Altman is a reporter for California Public Finance, a weekly Bond Buyer newsletter.