Wells Fargo is back in the mix for negotiated California bonds

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Nearly a year after California State Treasurer Fiona Ma lifted a ban on using Wells Fargo for negotiated transactions, the bank has been named lead manager on a state bond deal.

Wells Fargo Securities will be joint senior manager with Raymond James & Associates when the state prices up to $1.4 billion in State Public Works Board lease revenue bonds this spring. Stifel, Nicolaus & Co. is co-manager.

“We’re honored to serve as underwriter for such an important transaction — and more importantly — to have earned the state of California’s trust,” Julia Kim, a director for public finance at Wells Fargo Securities and the lead banker on the deal, said in an emailed response. “Our commitment to providing best-in-class service, value and ideas to the state has never wavered, and we’re eager to get back to business.”

In September 2016, the state treasurer at the time, John Chiang, blocked Wells Fargo from bond underwriting and other business relationships with the state as shockwaves from a fake accounts scandal in the company’s retail bank bled into the then fifth-largest underwriter’s public finance business. The scandal still continues to reverberate; last week former Wells Fargo CEO John Stumpf agreed to a $17.5 million federal penalty and a banking industry ban.

Chiang originally suspended the bank for a year as a managing underwriter on negotiated state bond sales where the treasurer picks the underwriter, as a broker-dealer buying investments for the treasurer’s office, and the office suspended investments in Wells Fargo securities. He later extended the ban.

New York, Illinois and other states took similar steps.

When Chiang made the announcement, his office also removed the bank from a $527.54 million lease revenue refunding bond deal set to price for the California State Public Works Board. Loop Capital Markets and Raymond James replaced Wells Fargo as co-senior managers on that deal.

Ma lifted the ban in February 2019, but Wells Fargo hasn't been in the syndicate for any California state negotiated deals until this week's announcement. Wells Fargo is in the syndicate on the $812 million California State University taxable revenue bond deal pricing Feb. 5 and a deal of an unknown amount being priced for the Regents of the University of California Medical Center Feb. 27.

“The company’s management has had a complete turnover and the board of directors is now being headed by an experienced financial professional who, importantly, is a former bank regulator,” said Tim Schaefer, the state’s deputy treasurer for public finance.

"In order to stimulate competition and promote an atmosphere that fosters the best financial results for California taxpayers, I need to encourage the participation of the deepest bench possible,” Ma said as she announced a spring slate that included more than 20 underwriters participating in the state’s spring bond sales.

"Among the considerations I use in making appointments such as these, are thoughtful acknowledgments of which firms have supported California consistently and over time,” Ma said. “In a recent example, when the Oroville dam spillway needed immediate — and expensive — repairs to the spillway, numerous banks stepped up and offered to lend California the funds needed to complete repairs swiftly to protect public safety."

According to Ma, there are multiple ways that financial partners can show their respective commitments to California, "but the important takeaway is that financial partners seeking to do business with my office must be able to demonstrate that they are capable, reliable, and committed to the state and its financial success over long periods of time and to a measurable extent."

She cited three reasons why Wells Fargo made the cut, including that it has been a long-time letter of credit provider for the state’s general obligation bond program with LOCs totaling $647 million. It also provided $800 million in LOCs for Oroville Dam repairs.

Secondly, Wells Fargo routinely bids on, and wins, the state’s competitive bond sales. Even when the negotiated underwriting ban was in effect, open-bidding rules allowed Wells Fargo to compete for California bonds that were sold in auctions.

For instance, on April 4, 2019, the state sold $842 million in federally taxable GO bonds competitively. The bonds priced on March 26, 2019 were bid in two separate groups. Wells Fargo beat out ten firms and was awarded Bid Group A, $420 million of bonds maturing in 2022 and 2029. The winning bid by Wells Fargo resulted in a true interest cost of 2.9%, four basis points better than the cover bid and 22 basis points better than the next highest bidding firm. Wells Fargo’s bid saved the state approximately $850,000 in interest costs over the life of the bonds as compared to the cover bid, according to the treasurer's office.

And finally, Ma said that Wells Fargo is a significant secondary market maker for the state’s bonds. Of the more than 50 firms in the state treasurer's underwriter pool, Wells Fargo traded the second highest amount of GO bonds and the second highest amount of State Public Works Board lease revenue bonds in 2018-19, the office said.

Citi, RBC Capital Markets and Ramirez & Co. will be the team managing on the first of California's two general obligation offerings this spring; BofA Securities, JPMorgan and Siebert, Williams Shank & Co. will manage the second. Sale amounts and dates will be announced later, the treasurer's office said.

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