The average gross underwriting spread on all tax-exempts declined 75 cents, to $8.62 per $1, 000 par value in the first half of 1993 from $9.37 in the same period in 1992, according to preliminary statistics from Securities Data Co.
The average gross spread for all of 1992 was $9.25.
Spreads on negotiated issues narrowed by 81 cents, to $8.62 from $9.43 for the first two quarters of 1992. On competitive deals, spreads declined 38 cents, to $8.65 from $9.03.
The gross underwriting spread is the income earned by a dealer. It is the difference between the price the dealer pays an issuer for new bonds and the price the public pays for the bonds.
Generally, the spread incorporates four elements: the management fee; the underwriting fee; expenses; and the average takedown, which is the largest component of the spread and represents the discount from list price allowed to a member of an underwriting group on any bonds bought from a syndicate for retail sale.
New Issues Sap Spreads
"The amount of new issues over the last two years has severely depressed spreads, " a market analyst commented. "This is especially true when you track how far spreads of competitive deals have fallen. "
Continuing a trend seen in the previous quarter, refunding spreads narrowed by 94 cents in the first two quarters, to $8.29 from $9.23 in the year-ago period. During the first quarter, refunding spreads declined by 66 cents to $8.30.
Meanwhile, spreads on new money issues widened slightly, to $9.71 from $9.53.
Refundings accounted for 65.5%, or $96.26 billion, of the $146.71 billion of total long-term volume, including private placements, for the first half.
"As the refundings start to dry up, within the next few years, we may see spreads move a little higher," the analyst said. "Personally, I'd rather see deals sold into the market than trying to undercut with every pricing."
On a new money issue, the investment bankers can receive higher fees because a lot of work is involved in securing a credit rating, marking the bonds, and preparing bond documents such as the official statement.
In comparison, on a refunding, most of the work involved in structuring the deal and originating the documents was already done in the original bond sale. Also, less time is required to prepare for a refunding.
Refundings Less Work
"The municipal market has grown so large that we are starting to mirror the Treasury market," said Glen Rauch, president of Glen Rauch Securities. "While we used to do deals for $15 or $17, we now are thinking in 32nds, like the government market does."
Rauch said that while the reduced spreads and the fierce competition has been beneficial to issuers, it has been disastrous for smaller firms.
"Big firms have the ability to do a deal for less spread," he said. "Lower spreads have really hurt small firms."
While spreads in most sectors declined, those on housing and industrial development bond issues rose during the first half.
The gross spread on housing financings increased by 83 cents, to $9.41 from $8.58 last year. Industrial development bond spreads leaped $1.13, to $12.71 from $11.58 in the first six months of 1993.
Rauch said that as long as volume remains high, spreads will stay down.
"The strength of the municipal market comes from an economy that is still growing at a sluggish rate and no immediate threat of inflation," he said. "As long as the consumer and producer price indexes stay low, the market can work through any temporary obstacles. such as supply."
Rauch also said that the nation's jobs picture and capacity utilization indicators were also a boon for municipal prices.
Private placements, short-term notes maturing in 12 months or less, and remarketings of variable-rate securities are excluded in calculating the spread data.