Investment bankers are heeding advice from long ago and heading west - to the Midwest - to seek their fortunes in the municipal bond business.
Lured by Chicago's central location, Wall Street, regional, and other firms have opened offices in the city to tap the public finance business in Illinois and to use the offices as a base for chasing deals throughout the Midwest.
"Chicago is a major city, so virtually every investment banking firm has a presence in Chicago," said John Gilchrist, chairman and president of First Chicago Capital Markets. "There are probably more public finance bankers in Chicago today than five or ten year ago."
During the last year, several firms, including J.P. Morgan Morgan Securities Inc.; Dougherty, Dawkins, Strand & Bigelow; Merrill Lynch & Co.; and Alex. Brown & Sons, have opened offices in Chicago's downtown "Loop," or have placed public finance professionals in their existing offices.
Last October, Fidelity Capital Markets opened a municipal trading and underwriting department in the city.
"There's no question that most of the firms realize you have to have local representation," said John Glennon, managing director of Lehman Brothers' Chicago office. "It really is difficult to swoop in from out of state and hold yourself up as an expert." For example, Merrill Lynch last summer moved Eric Rockhold, a vice president in public finance, from its New York office to Chicago, when the firm didn't have a local banker.
"Primarily, we wanted to be a little bit closer to our clients geographically and cover them even more efficiently." Rockhold said. "We felt in the long term it was the right move to make."
With a base in Chicago, bankers use the region's extensive transportation system to serve clients in nearby states such as Indiana, Iowa, Michigan, Missouri, and Wisconsin.
Competing With the Locals
But the real battles occur in Illinois, where Wall Street heavyweights compete with local firms for deals.
Illinois offers some attractive and lucrative prospects for investment bankers.
With $11.7 billion of debt sold in 672 issues last year, Illinois ranked sixth in terms of total state bond issuance, according to Securities Data Co.
Chicago alone issued $2.1 billion of debt, followed by the Illinois Health Facilities Authority with $1.192 billion, the state of Illinois with $1.190 billion, Cook County with $495 million, and the Greater Chicago Metropolitan Water Reclamation District with $477 million.
Some of the larger firms only go after the bigger deals in the state.
"Lehman and other firms don't to after a transaction under a certain amount of money," Glennon at Lehman said. "It's not economical to work on smaller transactions."
Bear, Stearns & Co., on the other hand, will "pursue almost anything," according to Peter Fox, senior managing director for the firm.
"We have a good sales and trading effort in Chicago, so we can purchase $5 million to $10 million deals," Fox said.
For local firms, large or small deals are welcome. James McKinney, a partner at Chicago-based William Blair & Co., said the firm has underwritten deals as small as $400,000.
"We can make a good living when $150 million deals are not there," McKinney said.
Others, like Chicago-based John Nuveen & Co., have carved out niches of expertise. David Atchison, a vice president at Nuveen, said the firm focuses on health care, education, and public power. In terms of its health care business in Illinois, Nuveen has served as senior manager on more debt since 1981 than any other firm, according to Securities Data statistics.
For First Chicago Capital Markets, which last year ranked first for both senior and co-managers in Illinois, the winning combination has been skill and the fact that parent First Chicago Corp., with about 16,000 employees is a major player in the state's economy, Gilchrist said.
"We find the combination of good investment banking and a local presence are key to our success in the Illinois market," he said.
With 20 investment bankers, First Chicago has expanded beyond large government issuers and nonprofit organizations, such as colleges and hospitals. Gilchrist said the firm last year did "a substantial number" of deals for middle-sized municipalities and school districts.
"I think Illinois is a very competitive environment, but I also believe issuers approach the selection of underwriters in good faith, with the intent of obtaining high-quality investment banking advice for the appropriate compensation," Gilchrist said.
But some other local firms feel shut out from competing for the top spots on municipal bond deals.
"I think that there's a disproportionate use by issuers in Illinois of New York firms, when in fact we feel the capital and talent are right here and available," said Robert Beh, managing director at Chicago-based Clayton Brown & Associates Inc.
Beh said that sometimes "the perceived usefulness" of having a Wall Street firm manage a deal "is far greater than the real usefulness."
"I think them is quite a bit of bias for the wizards from afar that some people are enamored with," said Walter Filkin, a senior vice president at Chicago Corp., referring to Wall Street firm.
The National Market
Both Beh and Filkin contended that their firms have adequate capital and skills to serve as senior managers on sizable deals. In addition, they said their firms are closer to the local market for the debt.
But some issuers may have the national market for debt in mind when they choose firm. Rick Ollett, assistant executive director for finance and administration for the Regional Transportation Authority in northeastern Illinois, said that a request for proposals was sent out late last year mainly to national firms.
Ollett said the $237 million new money bond issue for capital projects that the authority plans to sell next month requires senior underwriters that know the national market because "our bonds are marketed throughout the nation." Morgan Stanley & Co. was chosen as the bookrunner for the deal, he said.
Meanwhile, some major issuers in the state have taken the initiative to reach out to more firms interested in working on bond deals rather than face proposals that would mandate such policies.
In December, Cook County sent out its first-ever request for proposals for underwriters, as required under a new ordinance. Woods Bowman, the county's chief financial officer, said the ordinance "ritualized" the county's policy of inclusiveness for bond deals. However, he said, given rising interest rates and no immediate need for cash by the county's capital program, the county has not yet selected any firms.
Cook County had anticipated issuing $200 million to $400 million of new long-term general obligation debt this year, as well as a possible advance refunding.
Although Illinois Gov. Jim Edgar failed last year to get legislation passed that would have required a request for qualifications process for negotiated state bond deals, his administration has used that process to select firms over the last three years.
Chicago's practices of selecting firms and issuing bonds have recently come under attack. Robert Shaw, a Chicago alderman, has called on the city council's finance committee to investigate the relationship between members of Mayor Richard Daley's family and Smith Barney Shearson official. Shaw introduced his resolution after learning that Smith Barney uses the mayor's brother, Michael Daley, as a public finance consultant and that Smith Barney served as senior manager on nearly $800 million of city-related debt since Richard Daley took office in 1989.
Chicago finance officials have denied any influence by Michael Daley on the underwriter selection process.
Meanwhile, another alderman has introduced an ordinance that would require a request for qualifications process for underwriter selection and would also mandate competitive bidding on some city bond issues. Shaw's resolution and the proposed ordinance are currently pending before the finance committee.
Efforts by major issuers to include minority- and woman-owned firms in deals have made Chicago a magnet for those firms. Several firms have opened offices or moved to the city since the early 1990s to take advantage of the opportunities.
In 1989, Chicago became one of the first large bond issuers in the country to put together an all-minority financing team. The following year, an attempt to require 25% minority firm and 5% woman-owned firm participation in professional services, including bond-related services, failed to pass the Chicago city council. However, Mayor Daley has instituted a policy to subject city bond contracts to that participation goal.
Last October, the Cook County board of commissioners increased its goal for participation by woman-owned firms in bond deals to 10% from 5%. The county also has a goal of 25% participation by minority-owned firms.
"I think everyone is making an effort to be as inclusive as they can," said Courtney Shea, a vice president at Artemis Capital Group, a woman-owned firm.
C. Courtney Knight, a managing director at Pryor, McClendon, Counts & Co., a minority-owned firm, said that issuers in the Chicago area, as well as the state of Illinois and its bond-issuing authorities, have followed a policy of inclusion.
"Areas where a policy of inclusion is promoted, such as in Chicago, are areas we want to do business in," Knight said.
Elizabeth Gallagher Coolidge, a vice president at Smith Mitchell Investment Group Inc., a woman-owned firm, said that besides being included by major issuers in the state, her firm has made inroads with suburban Chicago issuers, which have tapped the firm as senior manager for deals.
Competition is bound to get even fiercer among all the firms this year, now that the refunding boom has passed and interest rates are creeping up.
Gilchrist said that 1994 should be "a challenging year for a lot of firms."
Mark Florian, a vice-president and co-manager of Goldman, Sachs & Co.'s Chicago office, agreed that 1994 will be even more competitive for the firm, which ranked second as a senior manager in Illinois last year.
"It's going to be hit or miss in terms of our relative standing," Florian said. "Our focal point is the three or four major issuers in the state. It's tough out there."