Buying the top spot in the muni league table
Bloomberg ran an excellent story recently about JP Morgan making a very low bid to win the underwriting role for Massachusetts’ latest general obligation bond offering. The bid reduced the interest rate the state will pay for the borrowed funds and vaulted JP Morgan to the top of the league table to finish the year. Slashing fees to move up league tables happens all the time in financial markets, but it’s unusual to hear the particulars:
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.
The lower rate JP Morgan offered to Massachusetts doesn’t necessarily mean that the bank will be paid less to bring the deal to market. It just means they believe they can rustle up better demand for the Massachusetts bonds among their clients and sell the bonds at a higher price (hence the lower interest rate for the issuer). The Official Statement for the bond offering says (page 6) that JP Morgan will earn approximately $1,895,000 for bringing the deal:
If all of the Bonds were resold to the public at such yields, the purchaser of the Bonds has informed the Commonwealth that its total compensation is expected to be 0.4738%.
If JP Morgan is unable to sell the bonds at the projected price, then they will absorb the difference between what they paid Massachusetts to buy the bonds and what they are able to sell them for. But the municipal market is very robust and they are likely to find strong demand. If demand was weak for some reason it would be reasonable for JP Morgan to hold these bonds on their balance sheet or pledge them for borrowing. For a bank with a strong balance sheet, there are a lot of ways to play this deal. Both Massachusetts and JP Morgan won in this transaction.
Table source: MSRB’s EMMA for Massachusetts 2011 General Obligation Consolidated Loan of 2011, Series E (MA)