NEW YORK -- Wall Street investment bankers frustrated with cheap spreads may want to heed the century-old advice to go west.
But they should stop in Oklahoma. a recent survey of gross spreads shows the state had the highest average spread in the nation: $15.25 per $1,000 par value of bonds on 47 deals in the 12-month period ended May 29, according to Securities Data Co./Bond Buyer.
That was nearly 50% higher than the national average of $ 10.66 during the same period and nearly 2 1/2 times that of bottom-ranked Nevada, which reported 26 deals with an average gross spread of $6.34.
The weighted gross spread averages are based on a survey of 5,334 long-term deals sold between June 1, 1991, and May 29, 1992, and gross spread data reported to Securities Data.
The 5,334 issues represent about 48.5% of the 11,005 issues sold during that time, and their dollar total of $145.01 billion represents 73.1% of the $198.34 billion long-term volume. The percentage of each state's issues represented in the average gross spread varies greatly.
Though spreads -- both for underwriters and other costs of issuance -- have dropped from their zenith of $ 23.25 in 1982, the survey provides fresh proof that there are still places in the municipal market where healthy fees can be found.
"Competition is one of the factors here," said J.B. Kurish, director of the research division of the Government Finance Officers Association. "In certain states there may be more competitive interest in going after an issue."
An inspection of Oklahoma and other states confirms that competitive factors have as much influence on the cost of issuance as the size, complexity, and familiarity of the issuers.
"We don't sell much debt out here," said a Wyoming state official after being told the state had an average spread of $13.14 on 16 deals, all sold negotiated. "I think our costs may be higher because of that."'
Certainly, some firms were surprised that the total numbers -- and their averages -- were so high or low in many cases. Usually, an underwriter only focuses on the share of the spread they are paid, not the total costs, which include printing, ratings, bond counsel, and other fees.
Quick to Defend Fees
Many state officials were quick to defend their cost of issuance, saying they work hard to ensure low interest rates and cheap up-front costs.
"I can only assume there aren't many state deals in those costs or it would have drawn the costs down," said Jim Joseph, Oklahoma's bond adviser.
As in many states, the largest issuers in Oklahoma have average total spreads of $10, he said. Many issuers, such as the Oklahoma Turnpike Authority, whose pending $606 million refunding was not included in the survey, have a policy of limiting costs to 1% of the issue.
Asked to speculate on why Oklahoma had the highest average, Mr. Joseph responded, "I would guess that some of the local governments aren't setting very good deals ... I'm sure the lack of competition in some ways does hurt."
Several Oklahoma underwriters who were contracted declined to discuss the findings, other than to defend the state as highly competitive.
Rick Smith, president of Municipal Finance Services Inc. in Edmond, Okla., a financial adviser to many small issuers, said his clients are sensitive to the cost of issuing bonds.
"I would say they probably pay more attention to it than some large issuers," he said. "There's no rhyme or reason to these spreads."
However, a review of the 47 Oklahoma issues in the survey is telling, even though the group represents less than one-third of the 152 issues sold in the state.
Not surprisingly, the deals with the lowest gross spreads were among Oklahoma's best credits. However, three series of bonds totaling $101.9 million last June for the Oklahoma County Home Finance Authority had a total gross spread of $26.02, one of the single largest factors in making the state's weighted average number one in the nation.
Robert B. Lewis, chairman of Oklahoma City-based Leo Oppenheim & Co., said there were several reasons for the disparity in spreads nationwide.
"Smaller cities and deals, especially in Oklahoma, have a very difficult time structuring an attractive debt package," said Mr. Lewis, whose firm underwrote the home finance authority deal. "One some issues, a financial adviser, a bond counsel, and an aggressive underwriter are all needed for the bonds to perform well.
"All those factors can bolster a spread significantly."
Mr. Lewis also said the recent slump in the oil and agricultural industries have affected the market-ability of state debt.
"The sate of the economy has just made it tougher to sell a small deal," he said.
Mr. Lewis is involved in the structuring of many hospital and health-care financings, and said that to sell bonds for any hospital in the state with fewer than 200 beds is nearly impossible. He added, however, that all deals from Oklahoma issuers do not necessitate a high spread.
One deal that Oppenheim recently handled, $8.3 million of Oklahoma Baptist University Refunding bonds, had an underwriting spread of $7.80 per $1,000. The remainder of the $20 total fee the issuer paid went to financial advisers and attorneys.
Another factor that can "significantly" increase the overall spread is bond insurance, Mr. Lewis said.
"I can't think of any large deal in the last couple of years that did not carry insurance for some portion of the debt," he said. "How much that adds to the spread, though, is dependent on the size of each issue."
Mr. Lewis said that because of the proliferation of insurance in the largest of the Oklahoma deals, many investors are investing in a deal on the basis of an issuer's underlying credit rating.
According to Mr. Lewis, it is difficult to get one of the three major rating agencies to assign a rating on a small issue or issuer. The increased risk shouldered by the underwriter causes the spread to rise, he said.
High spreads in Oklahoma deals were not limited to any one firm. St. Louis-based Stifel, Nicolaus & Co., the state's leading underwriter, had the richest deal with a $30 spread for a $1.75 million deal sold Dec. 23, 1991, for the Tulsa County Industrial Authority.
The Role of Politics
Of the 14 deals underwritten by Stifel in the state, 11 had spreads exceeding the national average, four of which topped $20.
Ironically, Stifel also had the state's lowest spread with $3.84 per $1,000 of bonds on $300 million of cash management notes sold last year for Oklahoma schools and other local governments. Notes were not included in the calculation of gross average underwriting spread information for this story.
Officials at Stifel did not return telephone calls seeking comment.
At least one competitor believes a reason spreads are high in the Sooner state is that politics plays a bigger part than economics when underwriters are selected there.
"There's very little competition in the state because of the political environment there," said Spencer Burke, principal and head of investment banking at Edward D. Jones & Co. in St. Louis. "Based on the politics in Oklahoma and the way contributions are paid at all levels, the high spreads seem to make sense."
The great majority of states in the survey fall near the national average. Others, such as Nevada and New York, which had an average gross spread of $8.39 per $1,000 of bonds, are below that benchmark.
Paul Howarth, president of Howarth & Associates, which serves as financial adviser for Nevada, said two factors work in the state's favor with regard to spreads.
"First, the bulk of the large debt that the state undertakes is sold through competitive sale, and second, most of those deals are general obligations," Mr. Howarth said, adding that states with those components in their debt structure will tend to have smaller spreads.
New York also benefits by relying on competitive deals, according to the state comptroller's office.
"By offering the majority of the state's debt via competitive sale, we have been able to control spreads," said Robert Hinckley, a spokesman for New York State Comptroller Edward V. Regan, a key player in state deals. "In a competitive sale, you get what you pay for."
A Wall Street financial analyst said the size of deals brought by issuers such as New York City, the state, and their authorities better absorbs the fixed costs of selling debt.
"It takes just about as much time to put together a small deal as it does a large one," the analyst said. "So, many underwriters will bid more aggressively for an issue that will earn them more money."