After declaring that most state debt will be sold competitively, Massachusetts Treasurer Joseph D. Malone issued a request for qualifications from investment banking and underwriting firms.
The request, which is an initial step in negotiated sales, comes after Malone and Gov. William F. Weld released a joint statement last week saying that, except on rare occasions, the state will seek to sell bonds competitively.
Although state officials said the request for qualifications does not signal a change of heart, they said the state must be prepared for the times it does offer negotiated issues. The decision to sell bonds through negotiation often needs to be made quickly to take advantage of market conditions.
"Noncompetitive bids will be the exception for the state's new-money issuance," said Kenneth Olshansky, deputy state treasurer for debt management. "We felt it was merely time to update our selling group."
The last time Massachusetts reviewed its underwriters was two years ago, after Weld and Malone were inaugurated. At that time, three different selling groups were set up: one for general obligations, one for transportation-related issuance, and one for the state's Water Pollution Abatement Trust Fund.
The state recently reviewed its Water Pollution Abatement Trust selling group, and it will be left alone for the remainder of Malone's and Weld's terms, according to Thomas Trimarco, the state's first deputy treasurer.
The other two groups will be replaced by one to handle all other types of negotiated sales through the treasurer's office.
The state employs several firms as bond counsel and is expected to continue that practice.
Trimarco said the timing of the review of the state's underwriters and the declaration from. the governor and treasurer was coincidental.
"We have been in office for almost three years now and we feel we have gained a lot of experience in how to choose a good firm for the state," Trimarco said. "We are going to use this opportunity to evaluate and compare the past performance of firms that want to do business in Massachusetts."
Many municipal sources in Boston said it is unreasonable to expect the state to be able to switch to competitive sales for all of its bonds.
During 1992, 97% of state and state authority bonds were sold through negotiation, according to Securities Data Co. Because of record-low interest rates, a good portion of 1992's and 1993's issuance has been in refundings.
"Old habits are hard to break, and the state still has several bond issues that are candidates for refunding," said a senior member of a Boston underwriting firm.
The executive, speaking on the condition of anonymity, said the state could save tens of millions of dollars by setting up a syndicate ready to take advantage of rapidly changing market conditions.
The state is scheduled to sell competitively an issue of $200 million of GO bonds later this month. Olshansky said the office has begun looking at selling a note issue in November for the Massachusetts Bay Transportation Authority, but that would also be done competitively.
Olshansky said there are no negotiated sales in the works presently.
"We really don't have a target level for the percentage of competitive sale we will sell," Olshansky said. "Choosing an artificial percentage is too binding."
Negotiated sales allow an issuer to better choose a structure and time that will allow them to realize the greatest savings and avoid the possibility of negative arbitrage.
The same is true for deals that involve pre-selling. Complex structures and the use of derivatives often require that potential investors be prepared for the issue far in advance of the actual sale. Negotiation allows that.
Although complex deals almost always require negotiation, Massachusetts got a further incentive to sell bonds competitively on Wednesday, when Standard & Poor's Corp. and Fitch Investors Service Inc. upgraded the state's GO rating to A-plus from single-A. "We have wanted to sell bonds competitively since Joe Malone took office," Trimarco said. "Our ability to do this is an enhancement of our position as an issuer."
Malone's and Weld's offices are in the final stages of preparation for their joint debt reform statement.
"We are finishing up a joint presentation that will reiterate the state's need for a competitive selection process and sealed competitive bidding for all tax-supported debt," said C. Christopher Alberti, director of debt finance for the state. "There will be certain exceptions, but for the most part the state will lean towards competitive sales."
Albeti said that to ban negotiated sales would severely hinder the state's ability to tap into derivative, refunding, or complex structure deals.
"If you throw too many bans into the air, you're likely to drop one," he said. "If that ball is a large state refunding deal, it could be very expensive for the people in the state."
Alberti said he expects the presentation to be finished before the end of the month.