New York City finance and legal officials met Friday with nearly a dozen investment banks to discuss how the city could make better use of derivative products during its next general obligation bond sale, investment bankers and city officials said.
Although details of the sale are not yet available, city officials say they are planning a $1 billion bond sale on Oct. 20 comprising about $800 million in fixed-rate debt, about $200 million in floating-rate securities, and about $75 million of zero coupon bonds sold under the city's NYC Bonds program and some taxable debt.
The apparent wild card in the deal's structure could be the use of derivative products. On Friday, city officials met with representatives from 10 investment banks, who responded to a request earlier in the week by Public Resources Advisory Group, the city's financial adviser, to discuss the legal and cost savings associated with using derivative products in the deal. The bond sale will be underwritten by a syndicate headed by Lehman Brothers.
Darcy Bradbury, deputy city comptroller for finance, said Friday's meeting came about because of problems during the pricing of past city bond deals when underwriters pitched ideas for derivative products late in the game. She said the meeting is also part of a wider push by city officials to capitalize in the primary market on products dealers use to make money in the secondary market.
Underwriters have often suggested financing techniques to tailor a portion of a bond issue to the needs of an institutional investor and to help reduce yields the city pays on its securities.
However, the city found little time to analyze the potential savings or the legal considerations of the derivative techniques, Bradbury added.
"During the last couple of transactions, we received ideas late in the process that became disruptive," Bradbury said. "We don't want a billion dollar deal to be wagged by a $50 million idea."
The Friday meeting included officials from the Office of Management and Budget, the New York City comptroller's office, and the city's Office of Public Finance, as well as the city's bond counsel, Brown & Wood, and its disclosure counsel, Lord Day & Lord, Barrett Smith.
Investment banks and other firms scheduled to meet with the city are: First Boston Corp.; Lehman Brothers; Merrill Lynch & Co.; Morgan Stanley & Co.; William E. Simon & Sons Municipal Securities; Smith Barney, Harris Upham & Co.; Paine Webber Inc.; Packerkane & Co.; Bear, Stearns & Co.; and Artemis Capital Group Inc.
Bradbury would not comment on the derivative proposals submitted to the city. She said the city would make its choice public when it publishes the deal's preliminary official statement. The city will distribute this public document Wednesday.
One source with knowledge of the municipal derivative market said the firms proposed the sale of a number of products, including derivative interest rate swaps, and inverse floaters.
With interest rate swaps, the city would exchange the interest rate payment on its bonds from fixed rates to floating rates.
The city, however, has not been given authority by the state Legislature to enter into swaps. Investment bankers must therefore develop a synthetic swap product in which the city would establish a special-purpose corporation with the authority to exchange interest rates.
The city will use this structure for a planned yen-denominated deal when market conditions improve.