Bond advisor discounts competitive process for bond financing

What Greg Nieto had to say Tuesday during a Fort Smith Board of Directors study session might not have been what some Fort Smith city directors wanted to hear.

The city of Fort Smith has issued a little more than $276 million in bonds through seven different issuances since 2004. During the next five years, it’s likely the city will issue another $75 million bonds for projects.

With that type of money in the mix, at least two city directors have questioned the fact that Little Rock-based Stephens Inc. handles most of the bond transactions.

In response to the criticisms of City Directors Bill Maddox and Kevin Settle, the board adopted a rule that set the bond underwriting services percentages to 80 percent for Stephens and 20 percent for Morgan Keegan, a subsidiary of Birmingham, Ala.-based Regions Financial Corp. In fact, Morgan Keegan, in an inferior role to Stephens, began selling bonds for the city in 2006.

Several citizens spoke in support of Stephens remaining the principal bond writer. They cited the company’s decades long investments in the community, including millions of dollars in support of The Fort Smith Classic — a professional golf touring event held each year at Hardscrabble Country Club.

But on Aug. 19, Directors Maddox and Settle attempted to increase the percentage for Morgan Keegan to 40 percent. That attempt failed. But there was a request to bring in a consultant who could help explain the pros and cons of a competitive bidding process versus a negotiated seller of city bonds.

On Tuesday (Nov. 25), Nieto, a financial advisor with Oklahoma City-based The Baker Group, opined that using a “negotiated seller,” as the city of Fort Smith has done for years with Stephens Inc., is most often the best way for a city to get the best deal.

Why? Nieto listed several reasons. Those included:

• A deal with a negotiated seller is easier to alter if last minute, pre-issuance problems arise, such as interest rate changes, credit rating changes, etc.  It is for this reason that Nieto said negotiated bids are significantly more preferable during times of market volatility.

• Terms of a negotiated deal are easier to change during the life of the bond issuance than from bonds issued using a competitive process. For example, bonds called early could carry a “call provision” that could be costly. A negotiated deal with a bond company would likely mitigate such costs, Nieto said.

• A negotiated deal not only allows better bond-structure flexibility, but it often allows for better market timing, according to Nieto.

• Overall, “a city is better able to pick and choose bond terms” under a negotiated bond deal than through a competitive process in which a bond company is selected, Nieto said.

Nieto said with most products and services, competition will deliver a lower price for the same products or services. But he likened bond financing to brain surgery. When in need of a brain surgeon, “(D)o you go to the phone book … and look for the lowest price?”

Nieto said in the past five to 10 years that more cities and other local and state governments are choosing a negotiated bond deal because of the flexibility, market time and potential for long-term savings.