New York City officials are examining ways to speed up allocation of securities to syndicate members following complaints over distrtbution during a recent water authority refunding.
Darey Bradbury, the city's deputy comptroller for finance, said New York City is considering a new allotment policy that would include keeping the city informed about the timing of the allocation of bonds.
The policy also would require the lead manager of a deal to keep other members of the better informed about the deal's progress.
"If people lose money [because of delivery delays], the don't have a great taste in their mouths about city bonds," Ms. Bradbury said. "Waiting almost two days later [for allocations] is significant. We may make this part of,our policy."
The city's review comes in response to a $l billion refunding by the New York City Municipal Water Finance Authority that was priced Aug. 4 and senior managed by Smith Barney, Harris Upham & Co.
The deal, which closed Aug.13, was heralded by city officials and fiscal monitors as a big saver for the water authority and water rate payers in the City. The issue reflected a simple "high-low" refunding Strategy, in which higher-coupon debt is replaced by lower-coupon securities reflecting the current interestrate environment.
What Delays Mean for City
But the bond deal left a sour note with city officials and several syndicate members, who complained that Smith Barney had waited too long - more than a day after pricing the issue on Tuesday - before distributing the bonds to the underwriting group Thursday afternoon. Underwriters lost money as prices in the municipal market dropped during the delay, underwriters and city officials said.
Officials said they are concerned that Smith Barney's delivery of bond allotments to other syndicate members may affect the city's relationship with other firms. When allotments are delivered late, Wall Street firms that bid on the deal risk losing money bef6re the bonds are placed with customers.
In addition, delays may scare potential institutional investors away from city deals.
A Smith Barney underwriting official would not comment on the firm's delivery of bonds to the underwriting group during the water authority deal.
Late allocation of bonds is a frequent complaint of syndicate members. The tactic is often used by lead managers when prices are falling and the market has a difficult time absorbing bonds.
In the water authority's case, the size of the deal made it difficult for Smith Barney to place bonds with its customers quickly, one syndicate source said.
"So if [Smith Barney] can't sell, they, as lead manager, can just 'put it' to the other syndicate members," the source said. A put option gives the holder of securities the right to sell securities to another party at a predetermined price.
Mark Page, executive director of the authority and deputy director and general counsel of the city's budget office. said the city now will be "more sensitive" to the issue of delivery time of bonds from the lead manager to other members of the syndicate group.
"If allocations don't go out on time, we will want the underwriter to let us know," Mr. Page said. I'm not sure we will do anything to speed up the process. but it's an issue we are likely to be more aware of."
At issue for city officials is the market perception of city bonds. In recent months, many institutional investors believe New York City is no longer a troubled credit. In fiscal year 1992, for example, the city produced a near $500 million surplus to help plug gaps in its fiscal 1993 budget, which began July 1.
Although the city's fiscal monitors expect large budget gaps starting in fiscal 1994, most agree the city's financial health is improving. And the growing consensus among bond buyers is that New York City will always make good on its debt despite what budget problems may crop up.
On the surface. the water authority deal made the city look very good. Mr. Page said the refunding achieved a present value savings of $66 million. Yields on the serial bonds ranged from 3.10% in 1993 to 6.15% in 2011. Underwriters priced the deal's term bonds maturing in 2020 to yield 6.25%.
But many in the deal's syndicate group complained to city officials that lead manager Smith, Barney handled the deal poorly. They noted, for example, a lack of communication between the lead manager and its subordinates in the syndicate group concerning the repricing of the deal, a city official said. Smith Barney priced the deal on a Tuesday morning and repriced the bonds that evening after the market closed, a firm official said.
What troubled several city officials was how the bond sale was conducted, and what this process might portend for the city's stature in the municipal credit markets. If Wall Street investment banks lose money on city deals, they may be less willing to bid aggressively on city bonds in the future. One city finance official termed the delivery of allotments "24 hours late." The late delivery reduced the profits for underwriters substantially, the official said. The official was unable, to quantify the losses, but said many firms had lost their profit on the deal.
Several of the deal's underwriters, for their part, said they did not make as much money as they would have if they had received their bonds Thursday morning instead of later that afternoon.
The official noted that allotments should have been made "one or two hours" after city officials approved the deal Wednesday afternoon. Other city officials said allotments should have been delivered Thursday morning, rather than Thursday afternoon.
City officials said New York City is concerned that delivering allotments late is becoming a trend. They said First Boston Corp. had delivered bonds late during a city general obligation refunding in March.
"As an industry, allotments are handed out too slow," said one syndicate manager involved in the March deal. "This deal was not unusual. Senior managers should get the bonds out as soon as possible. This shouldn't happen."
Following the pricing of $1.2 billion refunding of city general obligation bonds last week, Mr. Page said lead manager Lehman Brothers allocated bonds on Thursday, partially because the city was more sensitive to the matter. "We told Lehman that if bonds don't go out by early [Thursday] afternoon, tell us about it," Mr. Page said.
But Mr. Page said that in underwriting the water authority deal, Smith Barney faced other concerns that forced it to take more time in delivering allotments than underwriters normally encounter during city GO sales.
All city bond deals are subject to final approval by city officials, followed by the signing of a purchase contract. In the case of city GOs, city officials must approve the deal before the purchase contract is signed by Ms. Bradbury and Mr. Page.
The water authority debt sales, however, also need approval from a six-member board, comprised of several officials from outside city government. The independent nature of the board caused Smith Barney to allot the bonds only after the deal was approved by the board Thursday morning, even though city officials had recommended approval of the terms of the sale and the allotments on Wednesday, a city source said.
In restating Smith Barney's response to the charges of late delivery, Mr. Page, said the investment bank waited for official approval by the water authority's board. "The actions of this board are something more than a rubber stamp," Mr. Page said. "Smith Barney is aware of this process and did not want to go out on a limb."
Mr. Page said he will now try to schedule a board meeting closer to the pricing of the deal, which may take place during the water authority's next new money sale in September or October.
But others do not buy Smith Barney's response. "There was never an instance when the board has overturned what the city officials approved," the city official said. "Their response seemed phony."
Sean Monsarrat contributed to this article.
