NEW ORLEANS -- Using qualified bidders or subscription bids offers issuers two viable alternatives to the uncertainty of selling bonds through a pure competitive financing, two prominent investment bankers said this weekend.
Speaking Sunday at the fourth annual State Debt Management Network conference here, W. Boyd London, a managing director at First Southwest Co., and Patrick P. Born, a senior vice president at Evensen Dodge Inc., said that issuers need to examine many different methods of sale before they bring their issue to market.
Born discussed the qualified bidder method of establishing a syndicate.
He said that using a selected number of qualified bidders can be beneficial to an issuer when constant communication is needed before a competitive sale.
Pre-qualifying bidders limits the number of underwriters like a negotiated sale while allowing the issuer the possible lower rates afforded by a competitive sale.
Before selecting a group of bidders, Born said it is important to determine the structure of the deal and the bidding rules.
"This will help firms decide whether or not they will even be able to compete for the bonds," he said.
Born said that once an issuer has decided to employ this method of sale, a group of bidders is chosen based on performance in past sales, experience with whatever sort of structure is chosen for the issue, and earlier pricing performance.
One of the added benefits of pre-selecting a group of prospective bidders is that after the group is established, an issuer can get input from those firms on how to best sell the issue.
"This gives the issuer a good idea about the demands of the market," Born said. "You don't always get that in just a plain sale."
Monitoring a changing market is one of the largest benefits of this type of sale, he said.
After the group is constructed and the shape of the sale has been finalized, Born said, the sale proceeds as a regular competitive sale would.
London's presentation dealt with using the subscription bid method of offering bonds. Here the issuer sells the bonds directly to firms, not through an underwriting syndicate.
He used the example of two Lewisville, Tex., deals that were priced in February 1993.
The city invited the 50 to 60 under-writers who normally participate in Texas financings to participate in the sales and sent them a preliminary offering statement giving them the information needed to decide whether to bid on the bonds.
First Southwest acted as financial adviser for the city and also acted as subscription agent, removing the need for a senior manager, London said.
The city received bids from a total of 24 firms on the two issues. London said he thinks there would have been more bidders except that firms given bonds were obliged to produce a good- faith cashier's check of 2% of the purchase price of their allocation.
"Some of the minority and emerging firms felt that the 2% cashier's check was a hardship," London said. "They also said they preferred a standard negotiated sale."
London said that issuers may want to waive the 2% cashier's check if they are interested in increasing minority participation.
He said that Lewisville decided to sell the issues directly because it allowed the city more say in the pricing, saved money by eliminating some management fees, and gave all underwriters the equal right to compete for the city's bond business.
"Overall, the city viewed the transactions as successful" London said, "But during periods of high market volatility, the issuer may be best suited to use a conventional negotiated financing."
He said that volatility is harmful for the subscription bid method because all bonds must be sold before the transaction.
The State Debt Managment Network met on Friday, Saturday, and Sunday in New Orleans. The city is also playing host to the 19th annual meeting of the National Association of State Treasurers, which got underway on Saturday and is scheduled to
run through this Wednesday.
