As 2011 drew to a close, all was not peaceful among those competing for top underwriter laurels.
Industry professionals say rankings are important for firms, boosting their standing among issuers, among other reasons. As a result, insiders claim some will go to extreme lengths to try to “game” the numbers, and as a result the official keeper of the statistics has decided to change the way it compiles them.
It appears that issuers in general have benefitted from the competition as underwriters sweeten deals to win business.
That doesn’t stop those competing for the business from pointing fingers at one another, even as none are willing to go on the record with accusations.
The controversy centers on efforts by some firms to influence rankings based on Thomson Reuters’ criteria for long-term issuance.
“We all make a big deal about ranking,” according to one underwriting professional. “It’s a big deal for marketability.”
Insiders said that in 2011, some of the larger underwriters convinced issuers to switch to long-term issues from short-term ones. Specifically, they said that starting in the summer, two large underwriters encouraged issuers to extend short-term maturities beyond 395 days.
Under Thomson’s Reuters’ current criteria, public securities with maturities of 396 days or longer are “long-term.”
Thomson Reuters plans to revise its criteria so that securities maturing under two years with a designation as revenue anticipation notes, tax anticipation notes, or tax and revenue anticipation notes will be counted as short term for ranking purposes.
This revision will be introduced in January and will apply retroactively to the 2011 rankings. On Tuesday, Thomson Reuters released its 2011 rankings based on the current criteria.
A JPMorgan official said that the firm has never done anything with the goal of improving its rank. The firm is focused on serving its clients, he said.
A different underwriter acknowledged that it encouraged a single issuer to issue a security just long enough to qualify it as long term.
However, it said that this was in response to competitors having initiated the practice of offering lower rates to issuers in exchange for gaining a barely long-term maturity.
On another topic, some underwriting professionals claimed Citigroup structured $3.3 billion of Michigan bonds at the end of December to boost its ranking on the long-term list. They noted that Citi supported it with a letter of credit from Citigroup and said it was essentially a “bridge loan.”
They added that the security has a two-and-a-half-year maturity but the state expects to convert it in early 2012 to other bonds with a much longer maturity.
Responding to this criticism, one insider said the bonds have a provision for an additional five-year extension, making their total potential maturity seven and a half years. This is in case no alternative financing is available.
“The idea that the state could refinance the debt somehow disqualifies this as long term would discredit many other deals issued by other banks,” the insider said. “I think there’s a bit of sour grapes here.”