New York City finance officials will tell underwriters to give retail orders top priority during the city's next general obligation sale, repeating a strategy that vastly expanded the number of retail orders the city attracted during its previous GO sale.
With municipal prices falling, and major bond funds reeling from outflows of cash, municipal market analysts say that big issuers like New York City will be forced to diversify into the retail sector to make up for a reduction in demand from institutional investors.
During the city's most recent bond deal, which closed earlier this month, officials gave retail orders top priority. The move gave underwriters, led by senior manager Merrill Lynch & Co., four additional days to market the securities to their retail clients before the city priced the issue and began looking for institutional help.
As a result, the city placed $300 million of the deal's $700 million in fixedrate bonds directly to retail customers, much more than any previous issue, city officials say.
In the past, retail buyers often picked up securities from Wall Street brokers, and usually after institutional investor sold their unwanted securities.
But city officials say the direct-placement effort helped them achieve a savings of five to 10 basis points on several maturities of bonds, largely because retail investors are less concerned than institutional buyers about squeezing additional yield from the city.
City officials say their next GO issue, scheduled for February through senior manager Goldman, Sachs & Co., will follow the same approach.
"I think we will continue this approach as a matter of policy," said Patrice Mitchell, the city's deputy comptroller for finance. "The first three or four days will go retail, while institutional investors will receive priority when the deal is priced."
Officials from Mayor Rudolph Giuliani's office of management and budget, who work with the comptroller's office on city financings, could not be reached for comment.
Wooing retail investors does have its downside, underwriters said. The city stands the chance of alienating institutional investors if it puts too much emphasis on the retail side.
In addition, the city will find it difficult to achieve the same solid results every time. Underwriters and market pundits say the $300 million in advanced retail orders are the result of a confluence of factors, including a spike in interest rates, and a withdraw of money from mutual funds.
The same environment, observers said, may not exist in February, making future efforts less successful.
While finance officials work on the city's next bond deal, Giuliani and the city council remain at odds over the mayor's plan to plug a $1.1 billion to $1.4 billion gap in his fiscal 1995 budget.
City Comptroller Alan G. Hevesi said the impasse could have serious implications for the city's bond rating, and Hevesi said yesterday he will certify the council's version of the budget if the council overrides the mayor's veto. The comptroller is one of three officials who must certify a budget change, according to the city charter.
But the inability to agree on a single plan, Hevesi says, could have credit implications for the city. City bonds are rated A-minus with negative implications by Standard & Poor's Corp., and Baal by Moody's Investors Service.
Richard Larkin, a managing director at Standard & Poor's, said the company has no plans to downgrade the city because of the turmoil. Larkin said the two sides are at odds over what amounts to a small percentage of the city budget. Only if this disagreement resulted in a protracted budget impasse, would Standard & Poor's take note, he said.
Peter J. Wamsteker contributed to this article.