Illinois expanded underwriter pool draws mixed buyer responses
Illinois doubled the number of firms qualified to serve as senior managers in its bond sales to 20. The state also implemented a rotation to determine who will manage each sale, with the order chosen randomly. Eight municipal-bond professionals discussed the impact of more underwriters on their investment decisions via telephone and e- mail for today's Bloomberg Brief: Municipal Market newsletter.
Gary Pollack, head of fixed-income trading at Deutsche Bank AG's Private Wealth Management unit in New York, which manages $12 billion in bonds:
“It's great to share the wealth from an underwriting perspective. I don't have any problems with this.
“When we decide to buy bonds, we look at the issuer. The creditworthiness of the underlying issuers is the driving focus on municipal bond investment, as opposed to the underwriter. It's not a factor at all.
“The fact that they diversify the underwriting team, I think it's good. It's better from the issuer's point of view to have a wider distribution system. They can sell their bonds to a wider audience and maybe get better execution. The more people who see it, the more people who might buy it, and that would be better for municipal governments.”
Timothy Pynchon, a senior vice president and portfolio manager at Boston-based Pioneer Investment Management Inc. He helps oversee $4 billion of municipal bonds:
“Everyone needs to ultimately be comfortable with the credit and has to do one's own homework. Whether or not there is a large team or small team underwriting issues, it's really a very little piece of the formula. Obviously, the quality of the team is important, but ultimately the underlying credit is what I'm most concerned with. So to the degree that I'm doing my homework well, I'm going to end up with good credits.
“If it starts off with a poor team and it's a poor credit, we're just not going to buy it. All of us vote with our pocketbooks, and if a team is doing a good job, and a municipality or state is doing a good job, we'll buy the credit. If they're not, then they're going to either not get their deal done or they're going to pay an increased cost of borrowing.”
Hugh McGuirk, who oversees $16 billion as head of municipal investments at T. Rowe Price Group Inc. in Baltimore:
“Rotating-underwriters aren't an issue. What matters to us is the quality of the underlying credit. Second of all, how is it priced and how is it structured? And how does that fit with what we're trying to do in our portfolios?
“It's irrespective of whether it's being offered by a big, bulge-bracket underwriter or a mid-level underwriter or a small regional one. If it fits our investment need, then that's what we make our decisions based on -- not who is selling them, but what's being sold.”
Richard Ciccarone, managing director and chief research officer at McDonnell Investment Management in Oak Brook, Illinois, which manages about $8 billion in municipals:
“There's a perception that it's healthy to have a rotation of the managers. From that standpoint even the borrower is better off from having the diversity of opinions that they get, the diligence that goes on, as well as the reading of the market.
“The other thing with the rotation is there's always the assumption that there's competency in those that they pick to be able to do the deal, and they have the capital to be able to do that as well. There's still some question of qualified rotations -- how qualified are the people you're rotating with?
“If you do have a rotation you have to expect that competent firms will be selected on the basis of their skills, their expertise and their capital, and not based upon political favoritism.”
David Madigan, chief investment officer at Boston-based Breckinridge Capital Advisors, which manages about $14.5 billion in municipal debt:
“The method of picking the lead manager is irrelevant to us. This method seems to ignore any value the underwriter adds to the process of distributing the deal. Why not just sell competitively?”
Stephen Winterstein, managing director and chief municipal strategist at Wilmington Trust Co., which manages about $4 billion of municipal assets:
“They can certainly distribute their deals more widely. But the potential downside is that you could end up with a group of these smaller dealers and a weak market, and they may not have sufficient capital to take the bonds. Therefore, they're going to need to sell them at market levels, which means the issuing authority may have to pay a higher rate. They won't be able to support the deal. That's the risk in general, not for a specific dealer.
“From our perspective, we decide what the right level is for an issuer and what we're willing to pay. If it's too expensive, we won't buy it. If it's what we perceive to be value, we will. In a case where you may have a weak market and you have a deal coming at extremely cheap levels because the smaller underwriters can't support it, that's good for the buy side.
“The underwriter is important, but it's also a combination of market conditions, absolute yield levels, and then you throw the underwriter in. It's not any one single thing. I'd be reluctant to assign a rating to the underwriter as to how important it is, but it's a confluence of all those things as to whether or not an issuer looks attractive.”
Peyton Studebaker, vice president of fixed-income trading at Caprin Asset Management LLC, a Richmond, Virginia-based company that oversees about $800 million in municipal securities:
“It makes it that much more important for us to have strong working relationships with a number of dealers, and not rely on just a few to provide us access to the primary market.
“As managers, we understand the importance of those relationships, and are always looking for new dealers that may be able to add value to our process by providing our clients access to new or different paper. If more issuers follow Illinois's lead, you may see managers having to reach out to dealers and establish trading relationships that previously were not there.”
James Cusser, former senior vice president and portfolio manager at Waddell & Reed Investment Management Co. in Overland Park, Kansas:
“It is a combination of marketing, public-finance expertise and politics. Depending on the type of issuer and sort of security, you need distributors who have a good sense of the institutions -- insurance, mutual funds, retail -- who ought to be buying the particular bonds you are hawking.
“Then there is politics. Some underwriters have better connections with certain issuers. Getting into Boston, Massachusetts, or say, Chicago, was a very political process. Some typical underwriting fees and/or maturity structures were designed for non-financial, non-economic reasons to ‘accommodate' political conditions.
“In the case of a large, frequent issuer like Illinois, they came to market enough to spread the wealth around to justify robust campaign contributions at election time, satisfy the demands of clearing the market, and as well satisfy various groups in the political/financial vortex of Chicago, Illinois, or Boston.
“Back when tombstones were more important and competition was greater among more numerous groups, more thought probably went into the typical historical rotations among underwriters. Nowadays, if the issue was large enough and complicated enough, then there is not much to discuss: Illinois would want the more the merrier, and they'd let the deepest underwriter decide all the details of who is who in the brackets.”