Massachusetts Saves as JPMorgan Beats Bank of America on Bond-Sale Bidding
The competition between JPMorgan Chase & Co. (JPM) and Bank of America Merrill Lynch to be the top underwriter of municipal bonds offered by auction helped Massachusetts save $880,000 on a $400 million borrowing.
JPMorgan won the bid Dec. 20 for the general-obligation debt maturing from 2015 to 2027, offering an overall interest cost of 2.57 percent, according to state Treasurer Steven Grossman. Bank of America Merrill Lynch was the second-lowest bidder, offering 2.79 percent. With the Massachusetts deal, JPMorgan vaulted ahead of Bank of America for the top underwriter of competitive municipal bonds issued in 2011 by $141 million, according to data compiled by Bloomberg.
“There’s always a certain amount of competition going on out there,” Grossman said in a telephone interview yesterday. “That’s good. We like competition. It didn’t surprise us to see Massachusetts trading so well, given the fact that we made a lot of promises in 2011, early in the year, and we kept the promises,” such as boosting the state’s rainy-day fund and raising the retirement age for employees.
Nationwide, about 20 percent of debt issued by states and local governments is sold through competitive bids. Issuers post public notices asking banks to make proposals and award the debt to the bidder offering the lowest interest cost. The other 80 percent are done through negotiated underwriting, where municipalities select a bank to price and sell the bonds.
Some academics, including University of Connecticut professors Mark Robbins and William Simonsen, have found competitive bond-issues result in lower borrowing costs than negotiated deals.
Wall Street pays close attention to the rankings in so- called league tables because top standing confers bragging rights. Massachusetts’ bond issue was the biggest competitive municipal-bond deal scheduled before year-end.
“We thought we had to be aggressive to win it,” said Jeffrey Bosland, JPMorgan’s head of public finance. “Massachusetts is important to us.”
JPMorgan structured its bid using coupons of 3 percent and 4 percent to attract individual investors because the debt was priced closer to par and allowed the bank to lower yields, Bosland said. The bonds had an eight-year call.
Kerrie McHugh, a Bank of America Merrill Lynch (BAC) spokeswoman, declined to comment.
Bank of America won an auction for $500 million of Massachusetts general-obligation debt in September. The Bay State plans to use the money from this week’s bond sale to pay for infrastructure projects.
JPMorgan won auction on $11.46 billion of bonds with a “dated date” through year-end, according to data compiled by Bloomberg. The dated date is the point at which interest begins to accrue on a fixed-income security. Bank of America won $11.32 billion.
Standard & Poor’s raised Massachusetts’ general-obligation debt to AA+, its second-highest investment grade, from AA on Sept. 20. The rating company cited the state’s improving financial, debt and budget-management practices.
Pension legislation signed by Governor Deval Patrick in November will raise the retirement age for most state workers and crack down on pension “spiking,” which inflates future retirement payments by manipulating overtime, unused vacation and special compensation. The change is projected to save Massachusetts more than $5 billion over 30 years.
The state has also boosted its rainy-day fund to almost $1.5 billion, Grossman said.
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