It is a Tuesday in late October at a major Wall Street law firm. A young woman arrives and is shown to a room with a conference table and telephones. She represents one of only two firms bidding on a $1.17 million sale of a New York town's bonds.
Under the state's strict local finance laws, New York cities and towns have to use competitive bidding for any bond sale of $1 million or more. And the offerings, like this one, are not attracting many bidders these days, some market sources say.
"The reality is that despite the perception to the contrary, the competition for this kind of local product is not high in New York," said Joseph C. Bosch, a senior vice president at Fleet/Norstar Securities Inc., the bank-owned successor to the regional brokerage of Adams, McEntee & Co. The firm is concentrating its municipal bond underwriting business on a region that ranges from Providence, R.I., to Rochester, N.Y.
"What we've seen in the competitive New York marketplace is that the number of bids being received on deals is de minimis. There's not a hell of a lot a real competition for the Shenendehowa [Central] School District or something of that nature," he said.
The Two Players
The lawyer who opened the two envelopes at the auction last month observed that most local bond sales recently have attracted emissaries from only two firms: Roosevelt & Cross Cross Inc., a New York regional brokerage, and Fleet/Norstar.
"From time to time, an oddball will show up" at a New York local deal, the lawyer said, recalling recent auctions at which PaineWebber Inc., Glickenhaus & Co., and Marine Midland Capital Markets Corp. entered bids.
Despite the New York local finance law's intent to ensure competitiveness by requiring bidding on deals over $1 million, the current domination by two firms "almost becomes noncompetitive," one banker said.
In the deal last month at which Roosevelt & Cross and Fleet/Norstar were the lone bidders, Roosevelt & Cross won with a net interest cost of 6.77% compared to Fleet/Norstar's 7.08%.
Such wide spreads are not the rule, though, according to market participants. Competition between the small number of bidders can be fierce.
As Roosevelt & Cross Vice President F. Gregory Finn pointed out, bids from firms such as his and Fleet/Norstar could represent syndicates comprising 35 firms.
"Even though on some sales there are only two bids, that's no indication of how competitive it is," Mr. Finn said. "There are a lot of firms involved in those two bids. It's a very competitive market."
And the small gross spreads prove that the paucity of bidders is not hurting issuers, one source said. "When I got into the business," the banker recalled, "the spreads were around two points. We're now less than a point."
Municipal finance professionals are divided as to how long the two firms have dominated the New York local bond market.
According to John P. O'Brien, president of Fleet/Norstar Securities, two bids per deal has been the norm for the last 15 years. "Before that, there were more bidders -- there might have been three or four. Over time those syndicates have consolidated.
Indeed, consolidation has continued even as Wall Street's business has begun to rebound this year. Marine Midland Capital Markets, once a frequent bidder at New York local debt auctions, is no longer in the public finance business.
"As Wall Street has consolidated, there's been a need to consolidate your capital and put your capital to work in the best possible spots," said William L. Hyman, a vice president of underwriting at Tucker Anthony Inc., a Northeast regional firm headquartered in New York. As a result, bidding groups have become larger in size and fewer in number. "It used to be that there were a lot of groups" bidding on deals, he said.
If the field of bidders at New York local debt offerings has thinned out, it may be because of the shake out in the financial services industry overall. Mr. Hyman said. But for some time, it has been the Roosevelt & Cross account versus an account headed by another regional underwriter, sources said.
In this peculiar indigenous market, relationships and traditions have evolved. For example, Roosevelt & Cross automatically heads the account on deals under $10 million.
It local deals exceed that, then the books rotate among four firms including Roosevelt & Cross, Merrill Lynch & Co., Prudential Securities, and Chemical Securities. The larger firms are generally part of the account on smaller deals but only consider serving a senior manager when the deals reach $10 million.
Why Large Firms Don't Bid
"Why don't the national firms care more? There's no apple here. Nobody's hanging out in the future the possibility of negotiated deals," said one source, who asked not to be named.
"Suppose the town of Mount Pleasant sells a $7 million bond issue," said the banker. "Merrill Lynch is never concerned about doing a negotiated deal in Mount Pleasant because they know they can't, so they never really care about whether they're the book-running manager" on the town's competitive deals.
The possibility of an issuer putting together negotiated deals would change the face of New York local finance, giving national firms incentive to participate, the banker added. "You'd have more bidders and more syndicates, and you can bet that you'd have more national firms trying to be the lead manager."
The small deals that typify the New York local debt market offer little of value to big firms. They do not provide an entree to more lucrative deals, such as state agency deals and negotiated financings.
Another factor is that underwriters of the illiquid local bonds often end up holding on to them, Mr. Bosch asserted. "You have to develop the patience to buy and hold relatively odd lots," he said. For the large firms, "the patience is not there. They're going for high volume and liquidity."
One source said that after the deal in October, Roosevelt & Cross was able only to sell about $770,000 of bonds, leaving an unsold balance of $400,000. "If the banks don't come in for these, we're looking at a pretty good adjustment to get them to a level where retain will care. We need to hang with it for a week or two." He said that the difference between the bids by Roosevelt & Cross and Fleet/Norstar resulted from questions over whether the bank-qualified issue would find ready buyers among banks. Roosevelt & Cross thought it would.
For the firm, holding on to bonds is all part of its role as a niche-feeder in the municipal market.
Mr. Finn described the firm's niche position in the New York market this way: "Twenty million Nassau Countries mean more to us than $200 million Hawaiis, you know?"
Specialization Is Vital
According to Mr. Finn, Roosevelt & Cross offers something that larger brokerages don't: specialization. That's why Roosevelt & Cross, for the past 30 years, has focused its energies on hollowing out its niche in Northeastern municipal securities.
If Roosevelt & Cross outperforms larger firms, he says, it's because of assets such as its research department and a sales force that understands municipal bonds better than those who are "trying to sell a limited partnership one day, stocks the next day, and maybe once in a while a municipal bond."
At larger firms, he said, "you get people who aren't as proficient in munis as people who sell them all the time." And compared to larger firms' municipal bond departments, Roosevelt & Cross is large, employing three researchers and 50 municipal finance professionals, Mr. Finn said.
If big securities firms have steered clear of New York's small competitive deals, it is because disposing of those deals does not call for heavy financial artillery such as sophisticated financing techniques, high-technology computer hardware, and relationships with institutional buyers.
Instead, it requires contacts with retail investors, which firms such as Roosevelt & Cross possess in abundance, an executive at the firm said. That, perhaps, is the only similarity between Merrill, the international securities and investment concern, and "Rosie," as the New York-based bond house is known to Wall Street.
As a result, the big firms train their heavy artillery on the negotiated New York bond sector, which offers the larger, more structured deals and wider profit margins they seek.
Through September of this year, Goldman Sachs led the pack in negotiated offerings, serving as lead manager on 18 deals worth $3.2 billion, according to the most recent Securities Data Co./Bond Buyer figures.
The pack is rounded out by other large national investment banks -- Lehman Brothers is second in the senior managing spot with 10 deals totaling $2.31 billion, and Smith Barney, Harris Upham & Co. is third with six deals worth $1.06 billion.
Other top-10 firms include Dillon, Read & Co.; Merrill Lynch; and Bear, Stearns & Co. Not until number 12 does a regional investment bank make an appearance in the rankings.
Twelfth-ranking First Albany earned its spot by serving as senior manager on nine small negotiated bond deals totaling $106.2 million. It is followed by Fleet/Norstar with eight negotiated deals worth $74.5 million and Roosevelt & Cross with two negotiated offerings worth $50.3 million.
The rankings for competitive New York deals, however, tell a different story. According to figures from Securities Data Co./Bond Buyer, Roosevelt & Cross outperformed all other senior managers in New York competitive biddings for the first three quarters of this year. The regional brokerage won 11 deals, totaling nearly $500 million.
Fleet/Norstar placed third, after Merrill Lynch's 12 deals worth $312.6 million, by winning 57 deals worth $272.6 million.
The New York competitive market of smaller issuers -- such as counties, cities, towns, villages, districts, and local authorities -- could be in the midst of a record year. Through September, the local bodies not including New York City and state authorities tapped the market for $1.45 billion, with 249 bond issues.
Role of Competitive Bidding
Competitive bidding has played an important role in meeting the needs of New York's roughly 1,000 local bodies, many of which borrow in small amounts. From 1980 through this year's third quarter, 1,533 of the total 1,690 general obligation deals that came to market did so competitively, according to the Securities Data Co./Bond Buyer figures.
But because the larger issuers, such as state authorities and the state itself, do not have to abide by the local finance laws, 59% of the dollar value of the GOs, or $22.82 billion, came to market through negotiation.
It is time, local finance underwriters say, for state officials awarding hefty negotiated deals to start taking into account what firms do for local units on the competitive side.
Bidding on small local deals is almost a public service in a business dedicated to making money by moving large quantities of it around.
"I'm not sure the officials at the state level fully appreciate how illiquid the New York market is," said Mr. Bosch. "Firms like Fleet/Norstar do provide a significant percentage of the liquidity, and that percentage is going to increase."
Another regional banker, who requested he not be named, said he had tried to show his firm's commitment at the local level in an attempt to win a more lucrative negotiated underwriting slot with a state agency.
"We went up to LGAC [the state's Local Government Assistance Corp.], and we showed them how many deals we bid in notes and bonds," said the banker. "They couldn't care less. The state agencies do not care. There are other considerations, but who supports the local municipalities, that is not a consideration.