LOS ANGELES -- The Los Angeles City Council Finance Committee on Tuesday voted to sell competitively a large convention center certificate of participation issue despite concern and criticism from some underwriters.
Tuesday's vote, which caps a months-long process in which the city initially pursued assembling a negotiated underwriting team, came at a contentious hearing marked by tense talk between committee members and municipal market representatives.
On Friday, the city administrative officer reversed an earlier recommendation and said market conditions now favor a competitive bidding approach. Various underwriters challenged the city's reasoning at Tuesday's committee hearing.
Among other-things, they argued there was no empirical evidence to support contentions by the city's financial adviser that a competitive sale will produce equal or more savings than a negotiated deal.
But their arguments failed to convince the two committee members who attended Tuesday's meeting. The third member, Richard Alatorre, was absent.
The two councilmen at the meeting -- Zev Yaroslavsky and Joel Wachs -- focused much of their attention on a Los Angeles charter requirement stipulating competitive debt sales unless it can be demonstrated it is in the city's financial interests to sell on a negotiated basis.
Public Resources Advisory Group, the city's co-financial adviser along with Connell and Associates, said in a July 15 memorandum that the complexity and size of the proposed certificate of participation refunding prompted the firm to recommend a negotiated financing last November.
The memo says Public Resources continued to take that position through last month, partly because of volatile and increasing interest rates.
But Public Resources said several factors, in conjunction with a recent rally in the tax-exempt market, caused the firm "to review its recommendation" for a negotiated sale.
Those factors included significant bond redemptions that increased demand for new tax-exempt debt, declining concern about rekindled inflation, and a projected decrease in new tax-exempt offerings.
Based on such factors combined with current market conditions, Public Resources said it now believes the city could undertake a $400 million refinancing "on a competitive basis at no additional cost when compared to a negotiated sale." As a result, the memo recommends pursuing competitive bids as long as the city can complete the process within 60 days.
Pete Echeverrhia, a representative of the city attorney's office, told the committee there is a "policy bias in favor of competitive bidding" under the city charter. The city could face legal action if it could be shown there was "no basis for going to negotiated rather than competitive," he said.
Wachs said in response that "you may have shortened this whole discussion" under that line of reasoning.
A Contentious Tone
Meanwhile, various underwriters at Tuesday's three-hour hearing challenged Public Resources', reasoning. Some speakers also hinted the city charter provision was simply an ostensible reason to justify a competitive sale, when in fact there might be a desire by some in the city to sidestep an underwriter selection process that has become contentious and highly publicized.
The Los Angeles Convention and Exhibition Center Authority on May 12 overrode a review committee's recommendation to appoint Goldman, Sachs & Co. as the book-running manager for a negotiated deal.
The authority instead voted to put Grigsby Brandford & Co. in that slot, with Goldman Sachs as a co-senior manager.
The committee also recommended Bank of America as another co-senior manager, but the authority chose PaineWebber Inc. for that post and put Bank of America in the co-manager's bracket.
The review committee comprised city staff members, outside financial advisers, and two authority commissioners.
Officials at Grigsby Brandford and PaineWebber had raised questions about some of the criteria used by the committee, saying the data failed to capture the firm's strength. Their arguments persuaded the convention authority, but Keith Comrie -- the city administrative officer -- stood by the review committee's initial underwriting recommendation when the matter was brought to the city council.
The city and authority are separate legal entities. As a result, both must concur in the selection of the underwriting team. Furthermore, if the city council adopts the finance committee's recommendation for a competitive sale, the convention authority must also agree to that change.
Tuesday's meeting featured sharp exchanges at times between the committee members and municipal market representatives. Yaroslavsky, for example, sparred with certain underwriters, complaining that he was tired of the accusations and counter-accusations as various firms jockeyed to obtain coveted underwriting positions.
Wachs, meanwhile, scolded Public Resources on grounds the firm failed to catch or clarify certain information in the review committee's reports. Wachs believed some of the information was misleading or confusing.
Finally, the councilmen said they believed the city's request for proposal criteria and methodology for underwriters helped compound problems with the process.
The format "needed a whole lot more structure than it had," Yaroslavsky said. "We concede that we could have done a better job."
J. David Rush, president of Public Resources, responded to questions throughout the meeting, often in regard to the reasoning behind the new recommendation to pursue a competitive sale.
Under grilling by Wachs, Rush also acknowledged his firm would have done certain things differently if it had to do the underwriter review process over again.
For one thing, Rush said he would have provided "a series of verbal comments" on what each firm did right or wrong in its presentation, rather than simply summarizing certain quantitative data.
Wachs was especially critical of the way underwriters' proposed present value savings were presented.
Rush said selection of the book-runner was especially important, noting that "Goldman Sachs has substantially more experience at this than Grigsby Brandford." However, Rush also observed the actual sale might turn out the same using either firm, though he said there would be "more risk" using Grigsby Brandford.
Wachs complained the committee's written presentation on present value savings painted "a very different picture" than the chance that either firm might produce the same result.
Rush admitted the presentation could have been better, but stressed no information was "fabricated to make Grigsby Brandford look bad." Later in the meeting, however, Yaroslavsky also clashed with Grigsby Brandford officials when he accused the firm of using subsequent correspondence to present numbers that cast Grigsby in a better light than other firms on a present savings basis. "This is just an outrage," Yaroslavsky said at one point.
Calvin Grigsby, the firm's president, said he took offense at Yaroslavsky's choice of words, particularly those hinting that numbers were "falsified."
Yaroslavsky retorted that "you can dish it out, but you can't take it," adding that "you're impugning your own reputation."
Such heated exchanges, while rare, illustrated the tension and differences of opinion that arose at Tuesday's meeting. From time to time, some investment bankers in the audience also snickered sarcastically, especially when Rush and city officials explained their rationale for recommending a competitive sale at this point.
But the councilmen also acknowledged that officials at Grigsby Brandford and other underwriting firms raised certain valid points that merited responses from Rush and Comrie.
For example, Grigsby Brandford officials wondered why Public Resources favored a competitive sale in this case, but not for upcoming lease-revenue bond sales by the California, another of the financial adviser's clients.
Initial work on one of those sales was done last November "in a different market" that favored a negotiated sale, Rush explained. He said the "state has not asked us" how to sell the other upcoming issues, partly because it does not have to make the same kind of finding as the one required by the city's charter for negotiated sales.
Underwriters also argued it was rare for a large certificate of participation refunding to be sold competitively.
Kevin Scott, a vice president of Goldman Sachs, sent Yaroslavsky a letter listing his firm's reasons for disagreeing with Public Resources' stance on the competitive bidding approach.
Among other things, Scott wrote that the level of refunding savings is "critically dependent on the escrow investment of the refunding proceeds." But he argued that "PRAG's report neglects to address the volatility of the potential returns in the escrow," a point that was also pressed by Grigsby Brandford.
Rush, however, disagreed with some of the underwriters' claims about recent volatility. He said at one point in the meeting that "you can't just isolate one factor. It is a package."
Stephen Hicks, a managing director at PaineWebber Inc., said he was concerned there was "a little bit of a new standard being created" by the city's interpretation of its charter requirement. Hicks said market conditions were not much different now than they were three or four years ago, when the city chose to sell previous convention financings on a negotiated basis.
As a result, Hicks expressed concern that the driving motivation for a competitive sale now was to "move this contentious issue out of this arena" because of the controversy over the selection process.
Prior to the vote, Wachs admitted "I have mixed feelings here" about such a possibility. However, "that said and done, it is a mess," said Wachs, who expressed reservations about selecting a negotiated team given the current information available.
Yaroslavsky characterized the competitive approach as "saving the city's reputation," saying that "I don't want to be the laughing-stock of the financial community."
He also favored the competitive approach "to try to keep my city out of that mess" that has spurred investigations of underwriting practices in states such as New Jersey and Louisiana.
Bank of America, which recommended selling the certificates through a competitive bidding process after the authority's May 12 vote, made a brief presentation Tuesday to support the city's newest recommendation.
Bank of America in May sent a letter to Comrie and expressed concern over lobbyists' influence during the selection process and "a previously undisclosed agreement" involving an underwriting arrangement between Grigsby Brandford and PaineWebber that was discussed during the authority's May 12 meeting.