By Joel Thurtell
If you want the best price, bid the work out.
That’s a no-brainer, right?
Well, the people who love high-interest Capital Appreciation Bonds also love making their deals behind the scenes. Why allow competitive bidding when you alone can set the price?
Nineteen years ago, after the Detroit Free Press ran my CAB scam stories, Michigan banned CABs and required competitive bidding on municipal bonds.
California still allows CABs with gigantic interest payments, and they’re always “negotiated.”
Here, reprinted with permission of the Detroit Free Press, is why “negotiated” deals are bad:
Headline: FEWER DISTRICTS OPEN UP THEIR BOND SALES TO BIDDING
Sub-Head:
Byline: JOEL THURTELL FREE PRESS STAFF WRITER
Pub-Date: 4/5/1993
Memo: ; BUYING NOW, BUT PAYING LATER ; SEE CHART IN MICROFILM
Correction:
Text: Since capital appreciation bonds were authorized in Michigan in 1986, a
majority of school bond sales, including all the CABs, have been negotiated
with one underwriter rather than put out to competitive bids.
Underwriters, who buy bonds wholesale and sell them retail, say deals
mixing delay-pay CABs with conventional bonds and spread over 20-30 years are
too complex to sell at auction. They say negotiating also gives them more
flexibility to pounce on favorable market conditions, benefiting sellers and
investors.
But critics say negotiated deals end up costing more, with most of that
money profiting underwriters.
“Many of us in the investment business don’t think that the size of these
issues is so horrendous they have to be negotiated,” Louis Schimmel, director
of the Municipal Advisory Council of Michigan, told the Bond Buyer, the
industry newspaper.
Local governments “might just be surprised at what the interest rates are
compared to a negotiated basis,” Schimmel said.
The River Rouge School District was surprised recently when it saved $1
million in interest on a $47-million conventional bond issue by rejecting a
pitch from Kemper Securities, leading CAB underwriter in Michigan, to be sole
underwriter on a negotiated deal.
The salesman was none other than Philip Runkel, the former state school
superintendent who is now employed by Kemper.
“It seemed like the more we got into it, the more the proceeds would be
eaten up by these various fees in a negotiated deal,” said River Rouge
business official Brian Jones. “We didn’t see how we could justify the extra
fees.”
The district opted for bids that were unsealed two weeks ago. The New
York firm of Goldman, Sachs was the lowest, bidding $1 million less in
interest than Kemper, which submitted a bid that was fourth-lowest.
Detroit bond attorney John Axe said underwriters have brainwashed
Michigan school officials into believing they can’t take competitive bids to
sell CABs or bonds to refund old debt, which is done in other states.
In 1991, $225.6 million of CABs were sold competitively in other states;
in 1992, $484.4 million, according to Securities Data Co., a securities
tracking firm.
One bond attorney, George Stevenson of the Detroit firm of Miller,
Canfield, Paddock & Stone, said in a recent deposition that underwriters
prefer negotiated sales because “they have much assurance that they have a
deal.”
“They have an advantage in pricing that they don’t have in a competitive
transaction,” he added.
In an April 1991 column, Bond Buyer editor Joe Mysak called the rising
tide of negotiated bond deals “a perversion.”
“More than three-quarters of the market should not be going negotiated,”
he wrote. “The municipal market needs less politics. It needs more smart
issuers. And it needs closer scrutiny of deals that are negotiated.”
Caption:
Illustration: CHART
Edition: METRO FINAL
Section: NWS
Page: 9A
Keywords: ; SCHOOL; FINANCE
