From the Bond Buyer – Atlanta, GA (October 12, 1999)
by Robert Whalen and David Hoffman
Pittsburgh may again rattle the status quo in the municipal bond market, this time by offering institutional investors the option to bid directly via the Internet on the city’s upcoming $55 million general obligation bond sale.
Over the weekend, Mayor Tom Murphy and City Controller Tom Flaherty mailed a “survey” letter to more than 700 investors to determine the level of buy-side interest in bidding directly on the bonds, scheduled to be sold Nov. 9, said Myles Harrington, president of Grant Street Advisors, Pittsburgh’s financial adviser.
Murphy said it made sense to survey potential investors before proceeding with the deal.
“This is a significant change in the culture of this business,” Murphy said. “By doing this we wanted to be sure our potential customers are willing to go along with this.”
Market sources could not be reached yesterday for comment on Pittsburgh’s plans. The municipal bond market was closed in honor of Columbus Day.
Bids on the issue’s individual maturities will be accepted through the city’s private- label Website – www.PGHauction.com, powered by software from MuniAuction Inc., Harrington’s Internet bond-bidding company – and will be open to the broker-dealer community too. Institutional investors must pre-register to bid on the issue.
Unlike previous Internet sales, all bidders would remain anonymous during and after the auction, Harrington said. This would allow institutional investors to bid with their broker-dealer of choice or to bypass the underwriter without jeopardizing relationships and secondary market liquidity, he said.
Pittsburgh, aware of many investors’ wish to foster continued dealer relationships, will permit any institutional investor that snares some paper on its own to “designate a broker-dealer to receive a commission as either a reward for service or research provided in the past or as a sort of advance compensation for secondary market support,” Harrington said.
As in all of its competitive deals, Pittsburgh will retain the right to reject any and all bids, Harrington said.
Murphy – who championed the first Internet bond sale in November 1997 – has received many telephone calls from institutional investors requesting this sort of opportunity, which he hopes will lower borrowing costs, Harrington said.
The city has saved about $6 million during its last seven Internet sales, which totaled $708 million , Murphy said. These savings came despite the leeriness of some in the financial community, he said.
“All along the way we have faced significant resistance,” Murphy said. “People said it’s going to cost you a lot more money and it’s not worth it. The end result was it worked and we saved money. It encourages us to keep going.”
According to Harrington, investors covet this type of auction because it affords the chance to select maturities and to retain the option of whether or not to seek insurance. Pittsburgh is planning to solicit bond insurance for the upcoming sale on a maturity-by-maturity basis, he said, adding that the enhancement premium will be listed on the Website during the auction.
“There are some very sophisticated investors out there, they’ve got their own research teams and credit analysts, and they rarely get to bid on paper without insurance. This will allow them to compete with the monoline insurers for that extra yield,” Harrington said.
Pittsburgh has secured a commitment from an underwriting firm to act as a clearing agent for the investor bids. Harrington declined to name the firm, but said that in exchange for a fee significantly less than a dollar per bond, the firm will handle the processing of regulatory fees and filings to the Municipal Securities Rulemaking Board, the National Association of Securities Dealers, and Depository Trust Co. That underwriter will be the purchaser of record in the competitive deal, allowing the investor to remain anonymous.
In another Steel City twist, Pittsburgh will permit institutional investors who have bid directly on its paper to use its private-label site to post and auction off bonds in the secondary market after the sale, Harrington said. This will allow investors to get secondary paper directly. In theory, there may be a fixed date and time – perhaps monthly or weekly – in which investors can post and sell bonds via the Internet, he added.