Minority- and women-owned firms would like a bigger piece of New York's underwriting pie as these so-called smaller firms yesterday weighed in on the roadblocks and misconceptions that hinder their ability to serve in senior and co-senior banking positions.
More than 20 minority- and women-owned business enterprises, or MWBEs, including a few larger banks, testified in a public hearing in New York City before a state's task force to add their suggestions on how changes in state policy could facilitate more senior underwriting opportunities for the firms.
Gov. David Paterson formed the panel in late June to evaluate how the state can bring more MWBEs into its underwriting pools, with the goal of cultivating smaller firms to serve as sole book runner on future transactions.
The task force will establish new guidelines for the procurement process of underwriters. In addition, the panel is considering having a large underwriting bank partner with a MWBE firm so that both companies share book running duties in a co-senior manager relationship. That could allow smaller underwriters to grow and eventually graduate to senior-level status on their own. Paul Williams, executive director for the Dormitory Authority of the State of New York chairs the task force.
Bankers darted in and out of the hearing as recent events on Wall Street and disruptions in the municipal-bond market limited underwriters' ability to stay for the full six-hour meeting.
"I think the circumstances in front of us today really justify more than ever having this hearing and pursuing the goals of the executive order," Williams said in his opening remarks. "I think it's critically important that this state support growing businesses and make sure that the opportunities that are afforded here in this state are available on an equitable basis and we hope through this proceeding and through the work of the task force that we get to those ends."
One of the biggest obstacles for MWBEs in New York is the classic catch-22. To get New York bond business, a firm needs New York underwriting experience, yet to get that experience a bank needs to work on New York deals.
Many MWBEs stressed that New York issuers need to consider a company's experience throughout the U.S. In addition, recent hires at many small firms include bankers who previously worked at UBS Securities LLC, Bear Stearns, Lehman Brothers, and other large Wall Street firms. Look past a MWBE's "small" name and you'll find talent that used to work at the "brand-name" firms, participants said.
Capital is king in the financial industry, and participants addressed the issue of MWBEs' capacity for taking on book-running business. Many of the smaller firms said the idea that MWBEs' lack the proper capital to serve as co-senior or senior managers is a myth, pointing to bond deals that they have priced in other jurisdictions that have ranged from more than $200 million to as high as $2 billion.
"We've just concluded the largest deal we think ever done by a minority-owned firm at any particular point and time," said Jim Reynolds, chief executive officer at Loop Capital Markets LLC. "We were joint book runner, manager with Morgan Stanley on a $2 billion transaction for the Chicago Transit Authority. We've increased our capital and continue to increase our capital to the point where we are very comfortable senior managing a $1 billion transaction. It's my expectation that a great deal of growth will be had by the smaller firms as we move forward."
Other participants mentioned that most smaller firms are not as highly leveraged as the major Wall Street players and that many MWBE have no subprime exposure.
MWBE participants also addressed pricing issues and stressed to the task force that because smaller firms work, on average, on two or three deals a week as opposed to two or three transactions a day, as in the case with the larger banks, MWBEs can give the attention necessary at pricing. That added focus has generated tighter spreads and lower rates for issuers, participants said.
"For a firm like ours, public finance is our only business," said Suzanne Shank, president and chief executive officer of Siebert Brandford Shank & Co. LLC. "We can't afford to fail on this and think we're going to make it up somewhere else, this is it."
Current market conditions may help facilitate more MWBE participation as bankers from small firms and larger companies said large competitive deals are harder to price now, giving way potentially for smaller, negotiated deals in the future.
In general, the larger firms expressed their interest in sharing book running responsibilities with smaller firms. Of the participants, Banc of America Securities LLC, Morgan Stanley, Citi, Goldman Sachs & Co., JP Morgan, RBC Capital Markets, Merrill Lynch & Co., and Wachovia Securities NA gave presentations.
"Bank of America I would say to you is clearly prepared and ready to partner with firms," said managing director Joseph Branca. "We have partnered in the past and we will continue to partner in the future with MWBE firms around the country and we will continue to advance that in New York."
In looking at designation policies that other jurisdictions have implemented, Stratford Shields, managing director at Morgan Stanley said that Chicago has a policy where MWBEs must receive a 30% minimum of bond transactions, one of the higher designation rules, yet Wall Street firms "are still flocking to do deals with the city of Chicago," he said. Yet Shields recommended that the task force look at rewarding co-senior managers rather than implementing a more general reward system.
"I would encourage you to reward the people that work for you," Shields told the panel. "If you have a minority firm that's co-senior, to have a special designation policy for each of the co-seniors so they're working for you rather than having a more blanket-type rule that may not necessarily reward those who are doing work for you."
Williams said there is room for improvement in how New York issuers select underwriters. Since 2004, the state and state authorities have sold $22 billion of bonds, of which, MWBEs senior managed or co-senior managed only 4%. And in 2007, there was not a single deal that was led by a MWBE firm.
Williams said he anticipates the task force will draft preliminary recommendations by the end of November. The panel will meet again on Sept. 29 to discuss issues raised at yesterday's meeting.
The task force includes Williams, along with the executive directors of the Environmental Facilities Corp., the New York State Housing Finance Agency, the New York State Thruway Authority and three gubernatorial appointees.
