Technical problems resulted in the failure of a $706 million competitive bond sale for Pennsylvania yesterday.
Against a backdrop of firmness in the municipal market, the state was slated to sell $706 million of new-money and refunding general obligation bonds via Grant Street Group’s MuniAuction electronic bidding system yesterday afternoon. However, due to technical problems, all bids were rejected, and the commonwealth must now go back to the drawing board and try to sell the bonds again before market conditions change.
“There were system problems with the MuniAuction platform as was customized for our sale,” said Rick Dreher, director of Pennsylvania’s Bureau of Revenue, Cash Flow and Debt.
It was originally reported shortly after noon Eastern Standard Time, when the auction was set to close, that Goldman, Sachs & Co. had won the deal with a true interest cost of 4.13%. However, Dreher said that there were a number of bidders that were unable to submit their bids on time as a result of the system problems at MuniAuction.
While Pennsylvania used MuniAuction for its spring 2007 sale without any problems, Dreher said that this bond issue — with three separate series and different maturity dates — was more complex, particularly because the deal was being sold as an “all or none” sale, where one TIC would encompass the entire deal.
Myles Harrington, president of Grant Street Group, said the company did “some customization of the software to handle this sale which had some unique characteristics. We tested it thoroughly — but apparently not thoroughly enough for the sale.”
Harrington said that when the sale went into overtime, they discovered after the fact that there was a bug in the code, as the testing they conducted did not include testing of what would happen if the sale went into overtime.
“When the auction went into overtime, the software malfunctioned, so it was our fault,” Harrington said. “There is not much more to it than that.”
“We tested it thoroughly and successfully, but we did not test it as we should have for when the deal goes into overtime,” he said. “We call it the two-minute rule, which means that when somebody submits a leading bid within the last two minutes of the scheduled auction it automatically extends the auction for two minutes from that time [since the last leading bid was submitted]. What happened was that the system miscalculated the TIC after the deal went into overtime. If it hadn’t gone into overtime, we wouldn’t have had a problem.”
Harrington said that while two bids came through successfully, “others that would have come in did not come in. And from what we can gather, they did not come in because the TIC calculation displayed on their screens was obviously not accurate.”
Goldman Sachs declined to comment. However, Michael Imhoff, managing director at Stifel, Nicolaus & Co., which was on the syndicate, said the result was disappointing.
“We were all working on the deal and we certainly had orders in there, so it is disappointing that we weren’t able to fill those orders, especially when you find out that you are the high bid,” he said. “But I guess we’ll have a chance to re-bid, but there is the risk that we won’t have the highest bid now.
Matt Fabian, managing director at Municipal Market Advisors, said it is in Pennsylvania’s best interests to bring the deal back to market as quickly as possible.
“Though there is a better tone [yesterday], I don’t know if it’s a lasting one,” Fabian said. “The negatives outweigh the positives for the market, in my view, through the end of the year.”
However, he said the market “thinks in a week-to-week fashion, so I think if they could bring it again this week, I don’t think there would be much of a problem.”
“Even next week might be okay, but then you are getting very close,” Fabian said. “It’s going to get more difficult to bring large deals through the end of the year, and it may not even recover fully in the first quarter of next year, depending on how the January reinvest goes. I’m not convinced the reinvest is going to be the big positive surge that people are expecting it to be.”
Pennsylvania has used Ipreo’s Parity electronic bidding system since it started taking GO bids electronically in about 2000, Dreher said. And now for the re-bid, the commonwealth is deciding whether or not it will stick with MuniAuction or go back to Parity.
“We’re making a determination right now in terms of the platform we’re going to use,” Dreher said.
Dreher said Pennsylvania hopes to re-bid the deal in the next couple of days or next week at the latest.
“The commonwealth’s position was that it was only fair to reject all the bids, and we’re going to re-bid the entire bond issue,” Dreher said.
Fabian, however, said that while this was a complicated transaction, “if you have a vendor who has caused you problems and there’s another one available, you should switch.”
“Issuers are at such an informational disadvantage that if they are made aware of a problem, they should change providers,” he said. “You can’t know that it will be better next time.”
Harrington, however, said MuniAuction has offered not to charge the commonwealth if they agree to use their service again.
“What else can you do? You have to take your lumps,” he said. “The fact is that we have run over a thousand auctions like this, with the overtime time feature, successfully saving issuers millions of dollars, but it is not a popular feature. The fact is this overtime feature tends to generate consternation. But the other fact is that it works, and this is unfortunate because it will be seized upon by some as an opportunity to criticize what is an obviously successful competitive sale methodology.”
As for the market as a whole, traders said tax-exempt yields were lower by about one or two basis points.
The Treasury market, however, showed mild losses yesterday. The yield on the benchmark 10-year Treasury note, which opened at 3.86%, finished at 3.88%. The yield on the two-year note was quoted near the end of the session at 2.86%, after opening at 2.85%.
Elsewhere in the new-issue market, Morgan Stanley priced for retail investors $411.4 million of aviation revenue refunding bonds for Miami-Dade County in two series. Bonds in the larger series — $367.7 million subject to the alternative minimum tax — mature in 2008 through 2026. Yields range from 3.59% with a 5% coupon in 2008 to 4.82% with a 5.25% coupon in 2026. Bonds maturing in 2008 were not formally re-offered. Bonds in the smaller series — $43.7 million not subject to the AMT — mature in 2008 through 2011, with a term bond in 2026.
Yields range from 3.33% with a 4% coupon in 2009 to 4.51% with a 5.25% coupon in 2026. Bonds maturing in 2008 were not formally re-offered. All bonds are callable at par in 2017. Financial Security Assurance Inc. insures the bonds, and the underlying credit is rated A2 by Moody’s Investors Service, A-minus by Standard & Poor’s, and A by Fitch Ratings.
Matthew Posner and Jonna Stark contributed to this column.