From the Bond Buyer – Wednesday, November 19, 1997
Pittsburgh Uses Internet for Pioneering GO Sale
Maturity-by-Maturity Auction Draws 26 Firms
By Robert Whalen
PITTSBURGH – Officials in this city yesterday took a bold step into the future when they became the first to auction municipal debt on a maturity- by-maturity basis exclusively through the Internet.
The 30-minute auction was held on the MuniAuction Website, operated by Grant Street Advisors, the city’s financial adviser. In the end, all maturities on the $70 million general obligation deal were sold, prompting Mayor Thomas Murphy to stake a claim for Pittsburgh’s page in history.
“This is on the cutting edge. We’re proud to be the first city in the country to solicit a competitive bid on the Internet,” Murphy said. “There have been a lot of doubting Thomases, and we hope to prove them wrong. This is different. This changes the rules.”
And according to Pittsburgh finance director Paul Hennigan, that’s what this is all about. The city typically has about five underwriting syndicates vying for its competitive offerings. But yesterday’s deal drew 26 firms, he said — of which eight garnered a piece of the issue.
The deal was split into 20 serial maturities running from 1999 through 2018. On the long end, the yield to maturity was 5.411% on a coupon of 5.25%. The yield on the 1991 maturity was 4.2% with a 4.5% coupon.
Chicago-based Hutchinson, Shockey, Erley & Co. was the big winner, taking six of the maturities for a $17.5 million total.
Morgan Stanley Dean Witter and William E. Simon & Sons each won three maturities worth $12.4 million and $15 million, respectively. B.T. Alex Brown, with $4.6 million, William R. Hough & Co., with $6.9 million, and Belle Haven Investments, with $8.4 million, each won two maturities. Finally, PNC Capital Markets and Gates Capital Corp. each won a single maturity worth $2.4 million and $2.9 million, respectively.
Meanwhile, Merrill Lynch & Co. bid on all the maturities and won none of them, according to Myles Harrington, Grant Street’s president. On Monday, Merrill Lynch reversed what had been staunch opposition to the idea of selling bonds by maturity, and said it would participate in the auction.
Pittsburgh’s hope that an elevated level of competition would equate to bigger savings seems to have paid off.
Harrington claimed that selling the bonds through the Website saved Pittsburgh approximately $150,000 in issuance costs, which he sees as a selling point for the idea.
There has been a great deal of interest in the Pittsburgh deal, especially from an issuer standpoint, he said. While no other issuers have made commitments to following Pittsburgh’s lead, there has been “considerable interest,” he added.
“The time for change is now. This is the proof,” Harrington said.
But some participating underwriters aren’t so sure.
“We bid it to be a participant in the new format, just to try it out,” said Scott G. Johnston, senior vice president of underwriting at William R. Hough, which won a total of $6.89 million of the deal. “The feelings are kind of mixed at this point. We really need to evaluate the underwriter responsibilities further.”
Donald A. Currie, vice president and manager of underwriting with PNC Capital Markets, which won $2.4 million, is on the same page.
“It seemed to go fine, but we haven’t had time to evaluate the process and we haven’t made up our minds on it,” he said.
But from Hennigan’s point of view as an issuer, the choice is simple.
“It’s a great accomplishment for issuers, and subsequently, the taxpayers,” he declared. “It’s all about the taxpayers and the issuers. It’s a big day for them.”
One of the reasons this product is so issuer-friendly is that it was designed with them in mind and involves them in the underwriting process, Harrington said.
He noted that under the traditional competitive bidding methodology, the issuer’s knowledge has been limited to knowing when bidding begins and when it ends. Using the MuniAuction product enables the issuer to monitor bidding as it happens, Harrington added.
“This brings the process out into the light of day — there’s no room for haggling or negotiation,” he said.
The issuer has the option, after the bidding is completed, to review the entire process, including who made what bid and when, Harrington said. The benefit of this dynamic, according to Harrington, is that it “opens the black box.”
Harrington said he expects that issuance costs, in general, could be cut in half. The competition can be so tough that the only way an underwriter can improve a bid is by reducing the commission.
“That’s what the big timers don’t like about this. They see where it will logically lead. People will wind up hacking away at each other, at each other’s commissions,” Harrington said. “They may all have the same order, but they’re working against each other on the commission side of the thing.”
And, as Pittsburgh had hoped, this bidding process opened the door for smaller firms to compete.
S. Curtiss Roach, a principal with Greenwich, Conn.-based Belle Haven Investments, said that despite initial doubts about the new process, he was impressed with its efficiency. And bidding by maturity allowed firms to fill specific needs without having to take unwanted maturities.
“I was impressed by the process,” Roach said, “though I’m not sure that this could be applied as effectively to a much larger deal.”