The fallout and confusion generated by the news of New York State's deteriorating finances will pulverize almost all the profits that firms were expecting to make on underwriting a $425 million Metropolitan Transportation Authority bond deal.
But the syndicate, led by Goldman Sachs & Co., braved the bad news, dropped the profits, and bough the MTA bonds, after hours of confusion and heated debate between the syndicate members, state and authority officials. One of the issues was whether the deal should be pulled from the market. In the end, Goldman officials told the authority they would go ahead with the purchase of the bonds.
Some syndicate members, however, argued among themselves that the deal should have been pulled.
Relationship bankingm politics, and power plays were all factors in the decision to complete the deal, even at the expected staggering losses the firms are expected to see, syndicate members said.
The 12 managers of the syndicates were each allocated about 8% of the bonds, or roughly between $20 million and $30 million. And five firms in a special selling group were allocated 2% each of the bonds, or about $9 million.
On Tuesday, the state's budget division announced that the state was facing a $3.6 billion budget gap in fiscal 1993. That caused tremendous turmoil in the municipal market for New York securities.
New York City was slated to sell $1.2 billion of refunding bonds that day, but delayed the sale until yesterday when it successfully sold the offering.
And a $225 million state general obligation deal priced competitively last week did close on schedule yesterday without the same disruption that rocked the MTA deal. However, dealers speculate that the firms in that group will also suffer from eroding profits because of the market and the slide in the prices of state bonds.
But the MTA was hardest hit. Although it was priced last week, Tuesday's burget news delayed the bond closing planned for that day. he MTA and Goldman Sachs decided to stall the closing until the budget information could be digested and investors could decide what to do. The deal could finally be closed today.
But some investora balked at buying the bonds at the agreed-upon levels, taking advantage of their right to walk away from the deal because of the "sticker" supplement to the MTA official statement on the state budget. Some dealers said investors turned back between $75 million to $100 million to the syndicate.
After the dust had cleaed somewhat yesterday, the MTA sold its bonds at the price agreed upon last week, but Goldman Sachs repriced serial bonds to raise yields by five to 15 basis points in 1995-2006. Term bonds were offered at the same level of last week. The repricing is where many of the dealers will lose their profits with many of the larger dealers in the syndicate losing the most money.
"This is gruesome," said one member of the MTA syndicate. "Basically, everybody in the account is facing a loss that is incalculable. I have identified five ways we have lost money."
Edward Armendariz, the MTA's finance director, said, "There were some buyers that walked on the initial news."
But he noted that other buyers stood pat and bought the bonds.
As for the underwriters, he said, "Underwriters run a risk between the sale and the closing -- that is what they are compensated for."
"In reprising it, the syndicate will lose money. How much I don't how. That is the cost of doing business," Mr. Armendariz said.
He noted the underwritiers had the opportunity to walk away. They had the option, but they stayed in the deal. One reason for staying was "relationship banking. The MTA is "an ongoing market player as is the state of New York."
Indeed, this relationship banking was one of the reasons the syndicate held together.
David C. Clapp, a general partner and head of municipal securities at Goldman, said, "I think that the MTA and the state have a large financing program and two underwriting groups that are willing to meet their commitment to buy the bonds and I said lets go forward."
"Obviously, the situation had some difficulties," Mr. Clapp said. "The sticker introduced a very serious element in a declining market."
"I think the MTA did a great job. We worked with them to sort it all out, and told them the best thing to do was reprice in the secondary to reflect current market conditions," he said.
But dealers said that Goldman should have "dug in its heels" and argued with the MTA and the state to pull the deal.
Some felt that Goldman pushed for getting the deal done because they were also going to handle the reinvestment of the MTA bond sale proceeds with Bears Stearns & co. a co-senior manager of the deal.
Others said they thought that Goldman, one of the leading underwriters of negotiated deals in the state, wanted to be a "hero" and "fall on the sword."
Other dealers blamed the state and said they felt the state was concealing the information. "That state should get its act together. They should have given us the numbers before" the official statement, one dealer in the syndicate said.
Not only is the MTA deal an example of what is at stake for underwriters when they commit to a deal, but it also indicates how sensitive the municipal market has become to financial news disclosed by states and municipalities suffering budget problems, some dealers noted.
Mr. Armendariz said, that the release of the state's notice on the budget gap "was an unfortunate aberration in this market."
But dealers in the syndicate also pointed out how they managed to hang in there.
"To be honest with you, once you make a commitment like this you have to take the good with the bad. It will work out all right. If the market had been up it would not have been as bad," one dealer said.