DALLAS -- Texas is offering a unique set-aside program to encourage minority firm participation today when it is scheduled to sell competitively $1.7 billion in tax and revenue anticipation notes.
"To my knowledge, I haven't heard of anyone else doing this," said John Bell, assistant deputy state treasurer. "Its an interesting concept."
Under the program, the state is setting aside $200 million in the one-year notes for historically underutilized businesses. The companies can bid singly or as a syndicate for $1 million or more of the notes, which would be purchased at a price equal to the weighted average interest cost of all regular bids.
In addition, the Texas Treasury added some safeguards. "Some firms complained it-was too risky because they wouldn't know what their interest rate would be," Bell said. "So we allowed them to specify a minimum interest rate for participation."
He said that the program was initiated within the last few months to comply with a state legislative goal to increase the participation of historically underutilized businesses to about 30% for state contracts.
The goal has been difficult to achieve in competitive sales where minority firms were part of larger syndicates dominated by large Wall Street firms and where limited capital prevented them from full participation in many syndicates.
Larry Jordan, managing director at First Southwest Co. and financial adviser to the state treasury, said minority firms often can't compete because they have smaller orders and are not given preference in the allotment process. In addition, "they have less developed relationships with other firms in the syndicate and institutional investors," he said.
Jordan said that the reception has been good among minority firms and others. "Several firms told me that it was the best and cleanest way they have-seen to encourage minority participation," he said. "It creates preference for minority finns that is fair and not intrusive and it also provides the lowest interest cost to the state."
Jordan said that by selling the notes at the average price.rather than the next best bid, the most favorable interest rate is obtained..
Jordan and Texas Treasury officials said they expect substantial minority firm participation.
Bell said he expects the note sale to be oversubscribed by $8 billion and minority firm subscriptions to be oversubscribed by $200 million.
If the sale works out as expected today, Jordan and Bell said other competitive sales for state agencies and other types of governmental entities could use the concept.
"Any number of our clients are interested in encouraging minority participation," Jordan said. "If it works, it could he used in other places."
Suzanne Hickey, a vice president at Artemis Capital, said her firm planned to bid in today's minority set-aside program. "It's a great idea," she said. 'It's going to be easier for HUB firms to participate and know there is a strong likelihood they will get bonds."
