Do you know exactly where you will be and what you will be doing five years from now? All right, do you know what the municipal industry will be doing in five years?
If you do, there are some senior municipal executives who would like to buy you lunch.
With 1993 drawing to a close, executives at some of the largest bond underwriting firms are looking to the future with a bit of optimism and a lot of uncertainty.
The consensus is for a slight dip in overall issuance but a temporary boost in competitive sales and more deals by states that have pretty much stayed on the sidelines for the last few years.
And, as an unsettling year winds down, executives expect to see some serious changes in the market.
With record issuance in 1992, and that record surpassed this year, market players expected that 1993 would stay focused on surging volume in the primary sector.
Instead, the focus has been on Washington, D.C., the Securities and Exchange Commission, the Municipal Securities Rulemaking Board, and the front page of most major newspapers.
And the topic has been scandal.
New Jersey, Louisiana. Massachusetts, Kentucky, New York City, and Puerto Rico have all been in the headlines for their dealings with underwriters, financial advisers, or both.
Almost uniformly, municipal executives said the events of 1993 will have a long-lasting on the municipal market.
"It looks like the municipal market is facing some major systemic changes in the next couple of years," said Vincent A. Matrone, senior vice president and managing director of Rauscher Pierce Refsnes Inc. "In order for firms to keep their, market share, they are going to have to roll with the punches for the next few years."
It is widely accepted that the MSRB and the SEC will be floating quite a few trial balloons to find the best course for the market.
Although the hot topic this month is campaign contributions, most industry officials said the biggest change promises to be pressure for municipal issuers to increase their disclosure.
One official said that until municipal issuers adopt corpoate-style disclosure, a slew of questions will go unanswered - especially those pitting competitive versus negotiated financings as a way to head off corruption.
"There are a huge number of corporate issuers registered with the SEC," said Marvin Markus, managing director at Kidder, Peabody & Co. "But there are a hundred times the amount of municipal issuers that are not registered and have been exempt for years."
Markus said that once disclosure is improved, there will be less emphasis on the need for competitive sales.
Indeed, the emergence of derivatives, the glut of refundings, and the importance of preselling other complicated deals may have created an indispensable demand for negotiated sales.
"It behooves the issuer to access the market either way," said Edward Sheridan, manager of Merrill Lynch & Co.'s municipal markets group. "Over time, issuers will gravitate toward what method will give them the best value from their bond sale."
One thing most pundits expect to stay the same for the next five years is heavy supply in the primary sector.
During 1992,there were over $235 billion worth of bonds sold. That figure was $29 million higher than the previous high of $206 billion in 1985.
This year will set another record. Through Nov. 22, note and bond volume was at $300.52 billion, up 21% from the $249.17 billion for the same period last year. For all of 1992, total municipal volume was $277.33 billion.
Of the year-to-date volume, $172.18 billion, or 57%, is refundings. The average size of a municipal deal is about 20 million, compared with $17 million in 1992, according, to Securities Data Co.
Most industry executive expect that starting in 1994, there will be a fairly sharp drop-off in issuance of refundings.
"Issuance may be dramatically lower," said David Clapp, managing director at Goldman, Sachs & Co. "We are almost out of advance refundings and the kind of economic growth we are seeing now does not bode too well for voters approving new large capital projects."
Clapp, who is also the head of the MSRB, said most communities are not eager to go into more debt when the economy is sluggish.
But, he said, there are also U.S. representatives and senators who realize that there are, "hundreds of millions of dollars" in potential savings for communities if regulations are changed to allow second refundings by municipalities that have already been to the well once.
"There are a lot of congressmen and more than a few people in the White House that realize what this could mean," Clapp said, "This could also be used to help finance a portion of the President's health-care reform."
Sheridan of Merrill Lynch said he expects 1994 bond volume to hover around the 200 billion level, after this year's projected $270 billion of issuance.
As far as the demand for new-money projects, several market sources point to trends that could encourage issuance of municipal bonds.
Demographics plays a part. Over the last five years, a large number of people have moved away from the major metropolitan areas of New York City, Los Angeles, and Chicago. Those cities will continue to be major issuers, but most of the executives said there will be more infrastructure demands from communities in Oregon. Utah. Colorado. Wyoming, and other states that are picking up residents.
"Different states are going to demand new schools, better road, and new public facilities." said Glen Rauch, president of Glen Rauch Securities. "A lot of the new-money deals are going to come from these sources."
Rauch also said the decline in refundings will allow some firms to concentrate on structuring the more complex deals that are cheap enough for smaller issuers to enter the municipal market.
"Essential projects are going to start to get done again." he said.
As issuers become more familiar with derivaties and their intricacies. these deals will start to appear more often, Marcus said.
Most executives atireed that the pre-sale marketing needed bv derivatives makes negotiated syndicates a necessity. That could make today's trend towards competitive sales little more than a fad.
Rauch also said that if - as expected interest rates more higher, firms will be looking more toward emerging markets, not the less lucrative world of municipal finance.
Demand for tax-exempt investments has started to spring up ill India, China, and a number of Latin American countries. These new markets have firms chomping at the bit for their lucrative business.
Sheridan of Merrill Lynch said that emerging markets, research analysis, and other specialty banking areas are crucial if firms want to keep employment at current levels.
"I think we will see some systemic changes in the industry," Matrone said. "In order for firms to keep a market share, they are going to have to expand into new products and into new areas of the country."
Matrone said it will become increasingly important for firms to have regional offices in states that have grown in population over the past 10 years and that will mark the most noticeable expansion of large firms business.
