LOS ANGELES -- A Los Angeles County transit agency will push syndicates to include minority- and women-owned firms at significant levels for an upcoming competitive deal after scrapping a negotiated financing.
The Los Angeles County Metropolitan Transportation Authority has a strong record of encouraging underwriting work by minority- and women-owned firms.
But those levels of participation occurred on negotiated financings, and authority officials acknowledge it can be more difficult to achieve similar results on competitive deals.
"That's certainly a major concern," said Leslie V. Porter, interim treasurer of the authority.
In response, the authority plans a two-stage process to encourage minority and women participation in the $350 million offering planned for mid-November.
First, the authority plans to send request for qualifications proposals "out to the world," Porter said, which means firms that are not in the authority's regular negotiated pool can participate as well, Porter said.
Second, the authority hopes to prequalify syndicates on the basis of capital strength and capacity to handle the transaction, Porter said. As part of this process, the authority hopes to identify both the composition of the syndicate and the tentative plans for bond allocations to each firm.
A key factor for consideration is whether each syndicate makes "a good faith effort" to satisfy the authority's targets for minority- and women-owned participation, Porter said. That overall target is 35%, with 25% aimed at minority-owned firms and 10% at women-owned firms.
Syndicates failing to make such an effort will not be permitted to submit a bid, Porter said.
The authority and one of its predecessors prior to a merger, the Los Angeles County Transportation Commission, have provided numerous underwriting opportunities for minority- and women-owned firms.
"We have done it on very sizable transactions," Porter noted, adding that officials know what can be accomplished.
Staffers initially had not contemplated a competitive sale for the upcoming offering, which will be secured by the authority's Proposition C sales tax revenues.
On Aug. 25, the staff recommended that the authority sell the bonds on a negotiated basis, with PaineWebber Inc. as senior manager and Artemis Capital Group Inc. and Pryor, McClendon, Counts & Co. as co-senior managers.
The team was selected from a pool of underwriters that was established in August 1992. Six of the nine recommended firms were either minority- or women-owned firms.
But the authority's board put off an underwriting decision at the Aug. 25 meeting and rescheduled it for a Sept. 15 meeting.
That mid-September meeting, however, ended up, featuring a chain of events that led to a competitive sale instead.
Evan Braude, a board representative from Long Beach, Calif., started the discussion by expressing concern about "rumors" involving the recommendation process.
"There is some concern as to whether or not everyone received a fair shake," Braude said. Accordingly, Braude suggested it might be appropriate to go out for another request for proposals from underwriters.
But staff members responded that they had reviewed the entire selection process in depth and failed to find any impropriety. Both the procurement process and the methodology were carried out appropriately, they said.
Porter said the underwriting review panel consisted of himself; Mike Smith, the assistant treasurer; and officials from the authority's co-financial advisers, Lazard Freres & Co. and Charles A. Bell Securities Corp.
The authority's internal review of the panel's work and scoring revealed "no irregularity," Porter said this week. He said, "I'd rather not comment further" on the focus of the rumors.
After Braude's comments at the Sept. 15 meeting, the board voted on the recommended negotiated team.
Another problem developed, however, because so many board members said they were "conflicted out" of voting.
This occurs, Porter explained, because of the authority's strict conflict-of-interest rules. Political contributions exceeding $250 are considered gifts, he said. As a result, he said, many elected officials on the board are prohibited from voting on matters when they have received such gifts from underwriting firms within the last year.
The conflicts meant that the board could only muster six votes -- one short -- for the recommended team.
Under state law, however, a board can use a random drawing process to let one of the "conflicted" members vote to achieve a quorum.
The process led to the selection of Zev Yaroslavsky, a Los Angeles city councilman who recently played a pivotal role in the dispute over the underwriter selection for a recent Los Angeles Convention and Exhibition Center Authority financing.
Yaroslavsky abstained from voting on the recommended negotiated team, effectively killing that proposal, and then suggested that the authority sell the deal on a competitive basis instead.
"I think it takes away whatever suspicions that various people in the audience have and others may have" about the integrity of the selection process, Yaroslavsky said at the meeting.
Yaroslavsky had also recommended a competitive approach for the city's convention center financing, but his colleagues on the City Council overruled him. PaineWebber Inc. had been at odds with Yaroslavsky during that controversy and pushed for a negotiated deal instead. The firm eventually served as a co-senior manager on the transaction.
A few market participants found it ironic that some of the same players were again featured in the authority's recent underwriting decision making.
Intense lobbying by some underwriters, who jockeyed for position after the review panel made its recommendation, also apparently irked some board members.
"I don't discourage" underwriters from talking with board members, Porter said. "On the other hand, [the authority has] a fairly clearly defined process."
Accordingly, aggressive lobbying can backfire if it occurs "after the fact" of a recommendation, Porter said, unless an "egregious" problem can be demonstrated with the choices.
Staff members generally have not favored competitive sales because they can limit market timing, restrict use of derivatives or more complex structures, and make it more difficult to meet targets for minority- and women-owned firms, Porter said.
In the upcoming deal, derivatives may be downplayed because of "the marginal benefit at these rate levels," Porter said. The deal's timing also is "not quite as sensitive" because it involves new money rather than a refinancing, he said, though the loss of flexibility can be more of a problem in a down market.
But Porter stressed, "We expect people to sharpen their pencils and price aggressively."
