City First in Nation to Use Internet to Market, Sell Municipal Bonds
By Johnna A. Pro
Just minutes into a bond sale yesterday, Mayor Murphy leaned over to two attorneys sitting in his conference room.
"What time is it? I'm so nervous," he whispered in between sips on a soft drink. The mayor paced back and forth between his office and the conference room where computers and video screens were set up.
He had good reason to be fidgety.
Pittsburgh wasn't just selling $70 million worth of bonds yesterday.
It was also selling progress to the normally staid financial types who typically vie for municipal bond issues via the fax machine or phone, getting just one chance to bid.
The 30-minute sale yesterday, the first of its kind in the country, according to the firm that arranged it, was conducted over the Internet. This allowed 23 investors to bid on the bond issue. It also allowed them to rebid as they saw the bids of others appear on computer screens.
The bonds that sold ranged from $2.23 million maturing in 1999 to $5.32 million maturing in 2018. When it was over, eight firms had purchased parts of the bond issue.
Under the old system, there were two ways to sell bonds: The city could negotiate a deal with an underwriter for a predetermined interest rate. Or the city could arrange a competitive sale, where financial syndicates made up of four or five firms could bid on the bonds; the syndicate offering the lowest interest rate would get the bonds.
During yesterday's sale, bidders logged into the MuniAuction web page on the Internet. At precisely 11:30 a.m., they were given access that allowed them to begin bidding. From their screens in cities across the country, they could see their own bids and determine whether they were leading in the bidding. If they were not, they could enter another bid with a lower interest rate.
The process, Murphy said, opened bidding to smaller firms that otherwise couldn't afford to buy an entire block of bonds and lowered the cost of the bonds for the city, both in terms of administrative fees and interest rates.
"It changes the rules of how this is done," Murphy said. "The whole focus of this is to drive the competitive opportunities."
It did that.
Despite the mayor's nervousness, all the bonds were sold within 24 minutes. In the final tally, the average interest rate the city will pay is 5.1 percent.
"That is fantastic," said Controller Tom Flaherty, whose office monitored the sale, which has been in the planning stages for a year and a half. "Usually you're up around 6 or 7 percent."
City Finance Director Paul Hennigan said the new system saved the city at least $300,000.
Money raised by the bond sale will be used to pay for projects in the city's capital budget.
"People speculate whether the time is now for this sort of thing in our industry. I think the time was months ago," said Myles Harrington, president of Grant Street Advisors, the city's financial advisory firm and developer of the software used during the sale. A patent is pending.
In her New York City office, Amy Ball, vice president of the municipal department for BT Alex.Brown Inc., said she was fascinated by the new technology. So were a handful of co-workers who gathered around her as she bid successfully on city bonds that mature in 1999 and 2000.
"We were very excited about it. There was an opportunity as early as last week to participate with trial bidding, so there were no surprises," Ball said. "I think it's a very innovative process and it's exciting for the municipal industry. I imagine more issuers will consider the process."