Although gross underwriting spreads on municipal bond deals remain slim, it appears that spread trends have once again been reversed in the second quarter.
In the first quarter of this year, the average spread garnered from a negotiated bond deal was $10.40 per $1,000 par value, while the spread on a competitive offering was $11.44. In general, the underwriting spreads that have been earned on negotiated bond deals were always much higher.
During the first half of the year, the average gross underwriting spread earned on a negotiated bond deal edged upward, widening to $10.77. On competitive offerings, the spread actually slipped to $10.51.
The average gross underwriting spread on a municipal deal was $10.77 per bond, up from $10.49 in the first quarter. In 1990, the average underwriting spread was $11.40 per bond. At its peak in 1982, the average gross underwriting spread was $23.25 per bond.
Revenue Bond Spreads
Perhaps the most dramatic surge in fees was found in underwriting spreads earned on competitive revenue bond offerings, to $12.23 per bond from $10.67 in the first quarter. On negotiated revenue bond deals in the first half of the year, the spread was $10.90, up from $10.77 per bond in the first quarter.
Increased spreads for revenue bond deals in the competitive sector are most likely the result of buffering the fees and incorporating credit and market risk into the fees included in bids for deals.
On a competitive general obligation bond sale, the average spread was $9.87, down from $11.80 in the first quarter. In the negotiated GO sector, the spread widened to $10.30 from $9.21 in the first quarter.
Municipal bond professionals attribute tight spreads and slim profit margins to continued competition for deals, credit concerns, and market conditions--the same forces of doom they described during the first quarter.
The widening of spreads in the negotiated sector indicates a slight improvement in the fees being paid to dealers for these types of offerings. Dealers had said they were concerned issuers would continue to pressure underwriters to work for smaller and smaller fees.
While dealers acknowledge that issuers can get bargain basement prices from firms that would gladly sell their bonds, they also noted that issuers appear to be letting up on pressuring for smaller fees. Some issuers, a number of dealers noted, have become familiar with the scenario whereby a dealer underwrites an offering for a small fee but reoffers the bonds at high yields to make money, costing the issuer more in debt service costs.
Large and small dealers, whether on Wall Street or Main Street, are learning to adjust to tighter spreads.
"I tend to look at it as one of the changes that has taken place in our industry, and you have to learn to live with lower spreads," said Thomas W. Masterson, chairman of Masterson Moreland Sauer Whisman Inc., a regional municipal bond firm in Houston, Tex. He noted that his firm had to be more disciplined on costs, and to keep costs under to control, it had to "make do with fewer people."
But "I am not singing the blues, we had our best six months ever," he said, adding that his firm has had some big transactions this year, and "everybody is working hard.
"There is another factor too: The economy is beginning to recover," he continued. The Texas economy has turned around, and that "translates into bond deals."