(Bloomberg) -- Wall Street is charging Main Street the least since 2009 to sell its bonds, giving U.S. states and cities an added boost as they borrow at the lowest yields in more than four decades.
The average fee for municipalities to issue debt in the $3.7 trillion local market fell last year to $5.84 per $1,000 of bonds, from $6.82 in 2009 during the financial crisis, data compiled by Bloomberg show. The debut of Build America Bonds that year also drove up underwriting costs.
The shrinking commissions reflect rising demand for munis amid a two-year rally, said Bart Mosley, co-president of Trident Municipal Research in New York. The drop also signals the increasing dominance of the largest banks wielding their balance sheets to win business, he said. Bank of America Corp. and JPMorgan Chase & Co., the two biggest U.S. banks by assets, led underwriter rankings, Bloomberg data show.
“When that extra muscle is combined with a market where it’s much easier to sell bonds, it’s very tempting to go after” a higher ranking by lowering fees, said Mosley, a former head of municipal arbitrage trading at UBS AG.
Refunding Wave
Savings on bond sales are helping states and localities that are still mending their finances after the 18-month recession that ended in 2009. Last year, municipalities took advantage of the lowest borrowing costs since 1965 to refinance about $200 billion of higher-cost debt, more than half the $345 billion of long-term debt issued through competitive and negotiated sales, according to data compiled by Bloomberg.
Refinancing will fuel bond sales again this year as interest rates remain depressed and as public officials decline to take on new debt, Michael Zezas, a muni strategist at Morgan Stanley in New York, wrote in his 2013 outlook.
Municipalities disclose underwriting costs in the official statements that outline details of their bond sales.
In September, the Port Authority of New York and New Jersey paid $3.87 million to firms led by the Royal Bank of Canada to manage a $2 billion bond sale, the largest in the agency’s 91- year history. The fees amounted to about $2 per $1,000 of bonds. A year earlier, the agency sold $1 billion of bonds for a fee of $6.3 million, or $6.30 per $1,000.
Agency’s Boon
“The result with respect to the underwriting spread is extraordinary,” Executive Director Pat Foye said at a meeting last year where the agency unveiled expected fees on the deal. “This result is significantly lower than the prior experience with the Port Authority and also significantly lower than public issuers around the country have achieved over the last 12 months.”
A push into the market by banks that traditionally haven’t been major muni underwriters, such as RBC, Canada’s biggest lender, has also helped lower fees, said Mosley.
RBC ranked fifth among underwriters of U.S. state and local government debt last year, up from seventh in 2011, data compiled by Bloomberg show.
“The current industry cycle we are seeing is mainly due to a robust fixed-income environment, and to a far lesser degree, the enhanced competition,” Elisa Barsotti, a spokeswoman for RBC Capital in New York, said in an e-mail.
In a departure from the previous three years, negotiated sales, in which municipalities select a bank in advance to price bonds, cost issuers less in fees than auctioning debt competitively.
Negotiated Cheaper
The average cost of issuance for negotiated offerings in 2012 was $5.76 per $1,000 of debt, compared with $6.37 for competitive offers, Bloomberg data show.
Negotiated deals tend to be bigger than competitive sales, reducing the relative expense of fixed underwriting costs, said Michael Decker, co-head of the Securities Industry and Financial Markets Association’s municipal securities division.
There are also more firms chasing the business, allowing issuers to squeeze pricing, said Decker, who’s based in Washington.
“It’s a very competitive environment in terms of underwriting spreads, especially on negotiated deals,” he said.
After peaking in 2009, issuance costs fell to $6.40 per $1,000 in 2010 and $6.08 in 2011, data compiled by Bloomberg show.
The runup in costs during the financial crisis came after Lehman Brothers Holdings Inc. filed the biggest U.S. bankruptcy in September 2008, leading banks to charge more to find buyers for bonds, Mosley said.
Bloomberg
