The Bond Buying Business
A municipal bond refunding, like the offering for New York City, can be a complicated process, but it usually boils down to replacing higher interest rate (old) debt with lower interest rate (new) debt. When a municipality wants to finance anything from construction of roads to schools or anything with a price tag attached to it, it may decide to issue bonds to fund the project. Hypothetically, an investor would purchase $5,000 of a particular muni bond, let’s say a 15-year bond that pays 5% annually. After 15 years have passed, the bond matures and the investor can redeem it for $5,000, having pocketed the interest it accrued over the life of the note (in this case $3,750).
Investment banks are the buyers and sellers of those bonds. They structure and purchase bonds from municipalities and, in turn, sell them to investors. In most cases, sales are done by a syndicate—a group of investment banks working together for a bond sale. The syndicate recommends pricing for the bonds as well as which investors they plan to sell them to. The lead manager (also called book-runner or main underwriter) is responsible for coordinating the transaction in return for a higher percentage of the profits than the other syndicate members.
Historically, it’s rare for an African American firm to be named book-runner on a major municipal bond underwriting deal. A familiarity with big-name global behemoths by municipal decision makers, an exclusionary selection process, and a degree of institutional biases against smaller firms combine to relegate even be 100s firms to supporting roles. So when New York City Comptroller John C. Liu invited all firms to structure a bond issuance, Loop Capital’s management jumped at the opportunity.
Typically the city would cycle through large global investment banks, but Liu decided to open the process to include smaller minority-owned firms. “In this particular bond sale was a potential opportunity, which my office seized upon, to go off of this regular rotation,” Liu stated. “And instead of having the next company in line lead the sale—and leading the sale means the biggest profits—we invited all the companies out there to make their best proposal to sell our bonds.” The general obligation bonds would be used to repurchase old bonds that paid higher interest rates—rates paid by city taxpayers.
Big Deal in the Big Apple
The comptroller’s message was clear: Firms that had not been in the city’s traditional pool of senior managers would now be on equal footing with the Wall Street elite. “His going away from the standard rotation, which would have resulted [in the selection of] a big firm, opening it up. And including minority firms in that open competition—I certainly was impressed with that,” says Reynolds. Though based in Chicago, much of Loop’s municipal bond sales team operates out of the firm’s 23,000-square-foot trading facility in lower Manhattan.
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