To avoid the disclosure turmoil that rocked a state authority bond deal last month, New York City officials are protecting their $985 million offering today by making sure they have provided adequate information on the city's latest budget news to investors.
The reason for disclosing as much as possible in the bond documents is because the city plans to close the deal on Jan. 7, which gives ample time for material changes to occur in the budget.
Such a gap between the pricing of a deal and closing is uncommon on city deals, but officials say they are structuring it this way as a marketing strategy. In early January, many investors receive interest and principal payments from their bond investments, and officials hope they will reinvest that money in city bonds.
Last month, the last-minute disclosure that New York State was running a $3.6 billion budget gap forced the syndicate that brought to market $450 Metropolitan Transportation Authority state appropriation bonds to delay the closing while buyers were apprised of the situation.
Some investors, seeing a material change in the bond documents and also watching the municipal market erode, balked at buying the bonds. The syndicate finally decided to buy the bonds from the MTA at the agreed upon price, but had to raise yields in the secondary to keep some investors on board and attract others. As a result, the syndicate was hit with staggering profit losses.
The city deal presents a somewhat different situation.
Members of the city bond syndicate and investors said they were not too concerned about a major disclosure flap this time out. They noted that the city has maintained very good disclosure polices since its fiscal crisis in the mid 1970s.
And they said they were comforted by the fact that most of the deal is insured. Only about $160 million of the offering is expected to go unenhanced.
Susan G. Peabody, vice president and manager of the municipal bond group at Alliance Capital Management Corp., said, "I would use my right not to pick up the bonds if it was dramatically different scenario from when I purchased the bonds."
But she said, "I think the state and the city are different issues. I believe that people who invest in city bonds are aware of that issue," she noted. "And people investing in [city bonds] have been compensated for that risk." She added that she was not worried about serious disclosure issues erupting between the pricing and closing of the city deal.
One veteran firm of the MTA deal, Bear, Stearns & Co., is also serving as senior manager and bookrunner for the city deal. Robert E. Foran, a senior managing director of public finance at the firm, said, "They always take great pains to provide full disclosure. I really can't say that they are doing anything different except using the same standard of care."
For the city's part, its strict reporting policies and the presence of a number of fiscal monitors mean that it is constantly providing omre than enough information to investors.
Mark Page, deputy director and counsel to the city's Office of Management and Budget, said, "I think we do a careful job on city disclosure, and have been doing it for a long time, and we will do so here."
Michael Geffrard, deputy executive director of the city's Department of Economic Development, said, "The MTA situation was very different because you had an exogenous shock to the system, because of the state budget news."
"I think really your best defense against that is to do your work up front," he said. "There is a lot more information out in the market on the city than the state. We have the monitors we have to report to, and the information about our budget is pretty widely known."
"People here always care about giving good disclosure," said Roger Anderson of the city Comptroller's Office. "The difference here is that we are going to be exposed longer. It is not like the MTA deal was a new lesson for us." He noted that the consequences of the MTA offering were not lost on city officials.