A Lehman Brothers syndicate edged out five other bidders to underwrite the Tennessee Valley Authority's $500 million offering, but some questioned at what price that win came.
"I just don't get it. What are you getting for only 27 basis points over Treasuries," Michael Bassett, a vice president at Stone & McCarthy Research said. "This is just total fantasy land to me," Mr. Bassett said. "Lehman is historically a very realistic bunch of people."
The deal, the largest competitively bid offering ever by an American electric utility, marks the agency's first competitive deal since 1974.
Between 1974 and 1989 TVA borrowed all of its money from the Federal Financing Bank. In 1989, it sold $8 billion through two negotiated offerings. The term "museum piece" has been used to describe the offering, but most traders and others said they do not agree with that label.
One trader, citing the 1989 issue, said the offering was definitely not a museum piece, but was "extremely aggressively bid."
"So its another example of Lehman buying market share through a competitive bid," he said.
But John B. Griff, an executive vice president at Lehman Brothers replied: "Well I think that's a little silly. The bidding was very aggressive by everybody, not just us."
TVA's issue offered a large amount of a high quality security, he said, adding that by 5 p.m., the deal was two-thirds sold.
"The market is very credit conscious," Mr. Griff said.
Lehman vied with syndicates headed by Morgan Stanley & Co. and First Boston Corp., as well as Goldman Sachs & Co. and Salomon Brothers bidding alone. Lehman's syndicate included First Tennessee Bank and WR Lazard Laidlaw & Mead Inc.
The 7.450% bonds were priced at 99.278 to yield 7.70%, or 27 basis points over 10-year Treasuries. The 1991 series A bonds, noncallable for three years, mature in 2001. TVA can call the bonds in the fourth year at a price of 106. That declines 1% a year to par in the last year.
One trader estimated that the spread should have been 35 to 40 basis points over 10-year Treasuries. He said he thought that possibly Lehman could market the bonds to "relatively unsophisticated accounts who will be happy to buy that paper."
Mr. Griff called such allegations "ridiculous."
Other traders said while pricing was tight, it wasn't outrageously so. "To me it's tight," another trader said, but added that Lehman must have had the buyers. He said the spread should have stayed in the low 30s.
"It's tight, but they really are a special piece of paper," he said. As a government agency, TVA is exempt from state and local taxes, he said.
Even William F. Malec, TVA's chief financial officer, agreed pricing was tight.
"It's wonderful," he said of the sale. The TVA will use proceeds from the sale to refinance a $500 million bond held by the Federal Financing Bank at a 9.195% interest rate. The new issue is expected to reduce TVA's interest expense by $3.7 million annually for the next 10 years. That topped the agency's $2 million interest-reduction goal by $1.7 million. The deal's large size and call premium contributed to its appeal, he said.
"It has a call premium that is attractive to the agency market," he said, adding that the premium was slightly higher than usual. He added that he also didn't really consider the offering a museum piece, and said that TVA expects to tap the public market about once a year from now on.
But the pricing shocked Stone & McCarthy's Mr. Bassett. "It's just totally byond me. It's not like their isn't 10-year paper around."
He warned of the consequences of being mesmerized by "display case" offerings. The market jumped when Eastman Kodak Co. came to market with a long-term deal in the mid-1980s, he said. "Then a year later when Kodak was piling issue on top of issue they weren't such a display case item anymore."
Overall, the investment grade market was quiet and unchanged. The high-yield market logged a good day in general, climbing 1 1/2 points.