Sell Side

Corporate-Like Spreads

In order to sell their new Build America Bonds, some issuers have had to adopt corporate-style debt techniques such as bullet maturities and make-whole call provisions.

And in some cases, the issuers are also paying corporate-like underwriting spreads.

California, the New Jersey Turnpike Authority, and New York's Metropolitan Transportation Authority - the three biggest issuers to come to market with BABs - have all paid underwriting spreads of $8.75 per $1000 on their BAB issues. The price is consistent with typical large issues of corporate debt.

California priced $5.23 billion of BABs amid a total of $6.85 billion of taxable general obligation bonds Wednesday, marking the fourth-largest deal in municipal history.

Underwriting spreads were $3.50 on the 2013 bonds, $3.75 on the 2014 bonds, $4 on the 2015 bonds, and $4.25 on the 2016 bonds. The 2034 and 2039 maturities - which included the BABs - were priced at underwriting spreads of $8.75 per $1,000.

Also last week, the New Jersey Turnpike Authority came to market with $1.375 billion of BAB revenue bonds, and the MTA came to market with $750 million of BABs.

Goldman, Sachs & Co., JPMorgan, Citi, Barclays, Morgan Stanley, and M.R. Beal have all served as at least senior co-managers on the deals. Representatives from the banks did not return calls or e-mails seeking comment or declined to comment.

It's too early to tell if the spread levels will remain, said Robert Lamb, president of financial adviser Lamont Financial Services.

"If 60 days from now they're all the same, then it's going to get locked in at that sort of spread," Lamb said. "But I don't know the answer yet, it's a little too early."

Smaller BAB deals have not had underwriting spreads at that $8.75 level. The University of Minnesota paid just $3.75 per $1,000 on its $35 million BAB issue, and De Pere, Wis., competitively sold $2.7 million of GO BABs that had underwriting spreads of 8%. These deals also have shorter maturities than the bigger BAB deals.

Underwriting spreads on all bonds have increased amid the market turmoil. Municipals' weighted average underwriting spread of $6.08 per $1,000 this year represents a 26% increase from the weighted average of $4.83 per $1,000 for all of 2008.

The increase comes after years of almost uninterrupted declines in underwriting spreads.

Since 1981 - the furthest back data is available - spreads have increased year-over-year just once, in 2006. By the end of last year, average spreads had fallen nearly 80% since the average of $23.93 per $1,000 in 1981.

Four major factors over the past few decades have played a role in helping to bring underwriting spreads down, according to J. Chester Johnson, chairman of Government Finance Associates Inc. The dramatic decline in compensation for underwriting risks, an increased used of requests for proposals, increased use of independent financial advisers, and greater scrutiny from FAs and issuers all played a role, he said.

The competitive pressures that led underwriting spreads to fall meant tough times for a number of dealers, past articles from The Bond Buyer show. Banks trimmed staffs and in some cases exited the market as compensation fell. Revenues were aided by increased volume in the municipal market and the sales of products such as swaps.


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